Covering Their Fannie

April 12, 2010 05:31


Former officials with the mortgage giants testified that they loaded up on subprime loans and securities to meet “government-mandated housing goals” for low-income borrowers with typically weak credit.

IBD Editorials:

Financial Crisis: The Angelides Commission finally asked Fannie Mae and Freddie Mac what drove them to overinvest in risky subprime loans. But it didn’t like the answer and changed the subject.

Former officials with the mortgage giants testified that they loaded up on subprime loans and securities to meet “government-mandated housing goals” for low-income borrowers with typically weak credit.

“We were balancing against our HUD housing goals,” former Freddie CEO Daniel Mudd told the panel. And as a result, the agency’s underwriting “standards slipped.” Added former Fannie official Robert Levin: “HUD increased their goals,” and the billions in subprime securities “contributed greatly to affordable housing objectives.”

Of course, that was the last thing the Democrat-led panel hand-picked by Nancy Pelosi to investigate the financial crisis wanted to hear. So it quickly steered the focus back on Wall Street and the “desire to increase profitability.”

Phil Angelides, the panel’s Democrat chair, even tried to put words in witnesses’ mouths by suggesting that what they really were worried about was competing with Wall Street for a share of the mortgage-backed securities market.

He also got a federal regulator to say that “arrogance and greed” pushed them into higher-risk products. Another regulator did not fully cooperate, however.

Former Federal Housing Finance Agency Director James Lockhart said that the HUD credit quotas had “increased so rapidly” that it was almost “mathematically impossible” for Fannie and Freddie to comply with them. But they had no choice. “They would have incurred the wrath of Congress if they missed those goals,” he noted, not to mention penalties by HUD.

Now taxpayers are on the hook for their collapse. Their bailout is expected to cost at least $400 billion — more than double the 1990s bailout of the entire savings and loan industry.

Who put them up to such risky investments? The Clinton administration.

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 the mortgage giants into the subprime market — and eventually into financial insolvency.

“HUD was pressing you to continue to make more investments in these affordable housing loans,” former Reagan Treasury official Peter Wallison, the one panel member who dared to raise the issue, quizzed the Fannie and Freddie witnesses.

For the Angelides Commission to insist on blaming the private sector is intellectual dishonesty at its worst. The evidence is clear that the subprime bubble was fueled by government-mandated overinvestment in high-risk, low-income areas greenlined by Washington social engineers and bank regulators.

FULL STORY



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