What led to latest mortgage crisis?

As the Bush administration scrambles to address the sudden decline of the country's two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who argued in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

Lots of perks came with Fannie and Freddie's charters and government backing: exemptions from state and federal taxes, relatively meager capital reserve requirements, and an ability to borrow money at rock-bottom rates.

Today they own or guarantee about half of the country's $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has sent Wall Street and Washington into a tizzy.

The dominant role Fannie Mae and Freddie Mac play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by extensive lobbying efforts and campaign contributions.

In Washington, Fannie Mae's and Freddie Mac's sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

From 1990 to 2000, each company's stock grew more than 500 percent and top executives earned tens of millions of dollars. Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Of course, foes of Fannie Mae and Freddie Mac began their own lobbying efforts, the most muscular of which had the backing of banks eager to get their own piece of the companies' lucrative mortgage business.

Supporters of Fannie Mae and Freddie Mac say much of the companies' lobbying machines have been taken apart in the wake of the accounting scandals, which resulted in billions of dollars of financial restatements and the ouster of major executives.

Critics say that current legislation before Congress could, if passed, give even more power to Fannie Mae and Freddie Mac by allowing them to venture into new mortgage-related businesses. That, they say, is evidence enough that the companies have not been fully defanged.

“For sure, the political machine has not been dismantled,” said Thomas Stanton, a finance professor at Johns Hopkins University. “For every interest that might lose if Fannie and Freddie expands into what it does, you have someone else who wants to do business with them.”