(This is a continuation of a lengthy review of James R. Hagerty's book, The Fateful History of Fannie Mae.)
The inflationary 1970s came close to destroying Fannie Mae, as the rising interest rates for the short term money that it needed (under its business model) to fund its fixed rate long term (30 year) home loans made it technically insolvent by something like $11 billion. But, the election of Ronald Reagan in 1980 provided Paul Volcker with the cover to arrest double digit inflation, and after a couple of years interest rates began to decline. Fannie was home free (for awhile).
One measure of its newfound health was that its return on equity jumped from under 10% in 1986 to 33% by 1990. It had attained that figure by high leverage, under the standard that it made the least risky home loans. But, that standard wouldn't last.
When Fannie's CEO, David Maxwell retired in 1991, he took a lump sum pension distribution of $20 million. Which caught the attention of a lot of people, including the 'housing activists' (one of whom, in a very minor role, being Barack Obama). Those activists' argument that Fannie and Freddie should be serving low income borrowers, not the well-heeled who could fend for themselves, had new resonance politically.
In short order, the country saw the GSE Act of 1992, which increased the goals of 'affordable home loans' from the 30% that had been compromised on with the Carter Administration, to eventually over half of the FM's lending in the 21st century. In addition, after Bill Clinton assumed the Presidency, we got his 'housing initiative' to increase the percent of Americans who owned their own homes. Most notoriously, under HUD Sec'y Henry Cisneros (himself later to make millions of dollars as a housing entrepreneur), the Best Practices Initiative.
The BPI was, in all but name, the Community Reinvestment Act of 1977. That act hadn't applied to non-bank lenders. Now, with Democrats in control of both houses of congress as well as the Presidency, Cisneros had a talk with the President of the Mortgage Bankers' Assn, Angelo Mozillo and gave him the option of either 'voluntarily' signing on to HUD's program, or having the CRA extended to them. An astute reader can guess what Mozillo and his group decided to do.
The stage was set for the housing bubble.