Fannie & Freddie: The Mother of All Bailouts

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Subprime Scandal: The taxpayer cost of bailing out Fannie Mae and Freddie Mac could be as high as $1 trillion. Yet Democrats still refuse to reform the toxic twins, making reform meaningless.

Already their $160 billion government rescue has surpassed the amount spent on AIG, Citigroup and other poster boys of the financial crisis, making their liability "the mother of all bailouts," as one analyst put it.

The failed Washington-based mortgage giants were more exposed to subprime and other junk home loans than any of Washington's favorite Wall Street whipping boys. And they commanded a much larger share of the mortgage market. Together they owned or guaranteed more than half the mortgages and mortgage-backed securities when they collapsed in 2008.

Thanks to their politically mandated lending goals, congressionally chartered Fannie and Freddie were at the heart of the subprime scandal. We can't think of two companies more deserving of overhaul. Only, Congress doesn't even attempt to rein them in. Fannie and Freddie are conspicuously absent from the financial reform bills House and Senate Democrats are cobbling together.

Their private piggy bank for "social justice" - which they used to give high-risk loans to constituents who couldn't otherwise qualify for them or afford them - is safe from Obama's promised "sweeping" overhaul. Overhauling the banking system without fixing Fannie and Freddie is like fighting terrorists without attacking the jihadi ideology motivating them.

This regime intends to broaden the "affordable housing" mission that led to the recent wave of defaults, by creating a Consumer Financial Protection Agency that will see to it that banks and independent mortgage companies alike meet new fair-lending standards. That means even more sloppy underwriting to get the government off their backs.

It's instructive to go back to when this subprime scandal really began. Starting in 2000, HUD required Fannie and Freddie to position fully half their mortgage portfolios in high-risk, low-income loans - despite a spike in subprime foreclosures at the time. The "affirmative action" credit quotas, raised higher still by Bush's two Hispanic HUD secretaries, drove Fannie and Freddie into the subprime market - and eventually into financial insolvency.

The quotas "forced us to go into that (riskier subprime) market to serve the targeted (uncreditworthy) populations that HUD wanted us to serve," said Freddie Mac spokeswoman Sharon McHale.

The administration, with help from the media, is trying to blur that picture by saying that factors other than housing policy played a more fundamental role in creating the crisis. Team Obama fingers the "excesses" of the private sector - namely, lightly regulated derivatives and other complex instruments.

The New York Times recently editorialized that they were "at the heart of the crisis." In fact, they were secondary to the role Fannie and Freddie played. Wall Street simply sliced and diced the bad debt Fannie and Freddie guaranteed - at the behest of HUD and other federal regulators.

The Times went on to argue for passage of the Consumer Financial Protection Agency to expand politically mandated lending to the car industry under a strengthened Community Reinvestment Act. This echoes lobbying by CRA boosters like the Center for Responsible Lending.

"The foreclosure crisis - and the resulting economic crisis - was caused by reckless and predatory lending practices and toxic financial products, not by the Community Reinvestment Act, Fannie Mae and Freddie Mac, or any other policy goal aimed at increasing homeownership," a center spokesman recently testified in arguing for a beefed-up CRA.

Here we go again.

"Flexible underwriting" was codified as part of a 1995 CRA overhaul. Banks that didn't bend their rules to qualify poor and minority loan applicants with bad credit didn't pass the stricter CRA lending test enforced by bank examiners. Fannie and Freddie became models of underwriting "flexibility." True reform should start here.

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