The government was guaranteeing a significant fraction of subprime mortgages. This meant risk-free gains for corporations that bought the securities backed by them.
That in turned guaranteed a rise in the market demand for MBSs backed by subprime mortgages, and with it, systemic risk. It was an inevitable consequence of the policy:
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
That in turned guaranteed a rise in the market demand for MBSs backed by subprime mortgages, and with it, systemic risk. It was an inevitable consequence of the policy:
https://www.nytimes.com/1999/09/30/business/fannie-mae-eases...
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.