Thus, securitization also enabled declining lending standards. This was not only a problem of the GSEs—private label securitizations also helped to enable lower underwriting standards. Over time, the system’s bad incentives caused the two GSEs to change their behavior and take on ever greater risks.
The GSEs became powerful advocates for their own bottom lines, providing substantial financial support for political candidates who supported the GSE agenda. Legislative reforms in the 1990s and the public/private structure led managements to expand the GSEs’ balance sheets to enormous size, underpinned by wafer-thin slivers of capital, driving high shareholder returns and very high compensation for management.