If the government owns Fannie and Freddie, politicians will run it for their political clients, not shareholders, like their own personal piggy banks. They’ll remain wholly owned subsidiaries of the Democratic Party.

IBD Editorials

Mortgage Mess: Washington vowed its takeover of Fannie Mae and Freddie Mac would be temporary. But remarks by their new regulator suggest they’ll remain tools of the government.

A bigger public role in the mortgage market will only lead to the very problems that caused the current crisis.

The government used the congressionally chartered mortgage giants — who together control over half of all mortgages — for political purposes, such as helping questionable low-income borrowers and boosting minority homeownership.

As a result, they made bad economic decisions that sank the entire mortgage industry, destroyed homeowner equity and cost taxpayers $400 billion (and counting).

If the government owns Fannie and Freddie, politicians will run it for their political clients, not shareholders, like their own personal piggy banks.

The Obama administration says it wants to “reform” Fannie and Freddie. But it won’t propose legislation to revamp the mortgage companies until next year, if even then. And in testimony last week, HUD Secretary Shaun Donovan circled the wagons around the “affordable housing mandates” that pushed Fannie and Freddie into the risky subprime market.

“As we work to reform our housing finance system, it is essential to keep in mind our broader housing policy goals,” he said. “A reformed housing finance system should ensure broad access to mortgage credit for minorities.” Here we go again.

Fannie and Freddie over the decades have facilitated “an important democratization of credit,” Donovan said. Yes, and they’re now hit hardest by foreclosures from this failed social experiment.

Never mind that. Donovan asserted that “ensuring that homeownership opportunities are available to members of these communities should remain a priority.”

It’s plain that Donovan, like other housing-rights activists, has not learned any lessons from the subprime scandal. He’s also in denial about HUD’s role in it, arguing that the affordable housing goals it foisted on Fannie and Freddie were not the cause of their collapse.

Rather, he claims, the mortgage giants underwrote risky subprime loans and securities simply to increase profits.

But officials with both firms swear their hands were forced by HUD. They testified they had to lower their underwriting standards and absorb substantial costs to meet HUD’s political mandates. That, of course, is no way to make a profit.

In fact, HUD in 2000 required Fannie and Freddie to underwrite fully half of their mortgages for lower-income, higher-risk borrowers — a quota that remained in effect for the rest of the decade.

Starting in 1997, Fannie began offering a 97% loan-to-value mortgage — well above the standard 80% LTV. And by 2001, it was offering mortgages with no down payment at all, along with other deficiencies.

The promised reforms of these failed government-sponsored enterprises are a farce. Democrats are not going to relinquish control of Fannie and Freddie. They’ll remain wholly owned subsidiaries of the Democratic Party.

FULL STORY

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