Fannie's And Freddie's Fakeover

Fannie's And Freddie's Fakeover
Posted 08/17/2010 06:56 PM ET
Subprime Scandal: You can't talk about the housing crisis or reforms without talking about the affordable-housing goals HUD slapped on Fannie and Freddie. That is, unless you're Tim Geithner.
The Treasury secretary hosted a summit Tuesday to discuss redesigning the mortgage-finance system — 75% of which is still controlled by Fannie and Freddie, which are still bleeding billions at taxpayer expense.
Geithner vowed to fundamentally "change" the failed government-sponsored mortgage giants. Yet, suspiciously, he didn't offer how. Nor did he explain why they lowered their underwriting standards and collapsed under the weight of subprime loans and securities. So here's a refresher:
• In 1996, as part of Clinton housing policy, HUD required that 42% of Fannie's and Freddie's mortgage financing go to "underserved" borrowers with unproven or damaged credit.
• To help them meet that goal, HUD, their regulator, authorized them to relax their lending criteria.
• HUD also authorized them to buy subprime securities that included loans to uncreditworthy borrowers.
• Unhappy with the results — despite Fannie and Freddie committing trillions in risky low-income loans — HUD in 2000 raised its affordable-housing target again, this time to 50%.
• By 2008, HUD's target had topped out at 56%. And Fannie and Freddie had drowned in a toxic soup of bad subprime paper.
HUD Secretary Shaun Donovan insists that affordable-housing goals aren't to blame. "We should be careful not to learn the wrong lesson from this experience," he said, "and sacrifice an important feature of the current system: wide access to mortgage credit."
This is revisionist history. Fannie and Freddie e-mails confirm that executives then were under huge pressure to meet "HUD goals."
But as Orwell warned, whoever controls the present controls the past. And right now, the people who pushed Fannie and Freddie — along with our entire financial system — off the cliff in the name of "affordable housing" are running the show.
Just look at some of the experts Geithner invited to his Potemkin summit. Like ex-Clinton aide Ellen Seidman, who became head of the Office of Thrift Supervision. She aggressively enforced Clinton's beefed-up Community Reinvestment Act, which codified the "flexible" underwriting that Fannie and Freddie adopted.
Seidman argued that Fannie's and Freddie's support for "low-income and minority communities" — especially now amid a wave of foreclosures — is "absolutely critical." She wants government to take an even larger role in pushing housing for "underserved markets."
"The private sector will not do it on its own," Seidman said, "and we should just stop having that debate."
Excuse us, but homes aren't a right. People who lost their homes can go back to renting. There's no shame in that. The shame came when government pushed them into homes they couldn't afford. And the housing bubble it created hurt everybody in the end.
Echoing Seidman, Geithner asserted that whatever replaces Fannie and Freddie must continue to "provide access to affordable housing for lower-income Americans" and to guarantee loans.
In other words, Fannie and Freddie aren't going anywhere. They'll just be absorbed into the government, most likely Treasury or HUD, or both.
Why must taxpayers continue subsidizing homeownership through a government-guaranteed secondary mortgage market run by a government-protected duopoly?
Within the proper framework, we're confident that private firms can originate and securitize mortgages more efficiently — and do so without the politically injected risk or taxpayer liability.
Wells Fargo, for one, would gradually replace Freddie and Fannie with private "mortgage conduits" that buy loans on the primary market and roll them into a common mortgage-backed security.
They'd assume the risk on the underlying mortgages, while the government would guarantee only the MBSes. To protect taxpayers, the conduits would pay into an insurance fund.
The plan maximizes the use of private capital while limiting Washington's role to assuming catastrophic risk.
Other charter privileges enjoyed by Fannie and Freddie would be eliminated, including their Treasury line of credit, state and local tax exemptions, and weak capital requirements.
Above all, the plan would curb HUD's interference in the mortgage market. No more unrealistically high affordable-housing goals. No more NINJA — no income, no job or assets — loans.

I don't know who authored this piece or even if the suggestions are practical but they make a great case of what caused the financial meltdown. cynthea