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The Fannie and Freddie debacle: An autopsy

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By Michelle Malkin  •  July 7, 2009 09:57 AM

GOP members of the House Oversight Committee have put out a report analyzing Fannie Mae and Freddie Mac’s role in the housing meltdown.

The Hill summarizes:

“The housing bubble that burst in 2007 and led to a financial crisis can be traced back to the federal government intervention in the U.S. housing market intended to help provide home ownership opportunities for more Americans,” declares the first sentence of the GOP Oversight and Government Reform report.

The report tries to center debate on government involvement, rather than Wall Street.

“In recent months, it has been impossible to watch a television news program without seeing a Member of Congress or an Administration official put forward a new recovery proposal or engage in a public flogging of a financial company official whose poor decisions, and perhaps greed, resulted in huge losses and great suffering,” the report states.

“Ironically, some of these same Washington officials were, all too recently, advocates of the very mortgage lending policies that led to the economic turmoil.”

The report continues the theme of Republicans seeking to pin the housing crisis on Fannie and Freddie, now completely owned by the government. The GOP sees the two mortgage giants as having pumped air into the housing bubble by offering and subsidizing high-risk loans in an effort driven by Democrats and the Clinton administration to increase homeownership, particularly among minorities and low-income households.

Democrats have defended Fannie and Freddie for trying to increase homeownership, while criticizing various polices at the two firms. They’ve put more of the blame for the housing crisis on poorly regulated Wall Street banks.

House Financial Services Committee Chairman Barney Frank (D-Mass.), who comes under some criticism in the GOP report, has said more foreclosures were caused by unregulated entities rather than Fannie and Freddie. He has also noted that Republicans were in control of Congress from 1995 to 2007, when the housing bubble was created.

The GOP staff report ties the Obama administration to Fannie and Freddie by noting its connections to former Fannie Mae President Jim Johnson, who was involved in President Obama’s search for a vice president, as well as White House Chief of Staff Rahm Emanuel’s appointment to Freddie Mac’s board.

You can find the whole report here. Key facts and conclusions:

* Political pressure led to the erosion of responsible lending practices:

In the early 1990s, Fannie and Freddie began to come under considerable political pressure to lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers. (p.6)

* Lower down payments led to housing prices that outpaced income growth: Once government-sponsored efforts to decrease down payments spread to the wider market, home prices became increasingly untethered from any kind of demand limited by borrowers’ ability to pay. Instead, borrowers could just make smaller down payments and take on higher debt, allowing home prices to continue their unrestrained rise. Some statistics help illustrate how this occurred. Between 2001 and 2006, median home prices increased by an inflation-adjusted 50 percent, yet at the same time Americans’ income failed to keep up. (p. 11)

* Members of an “affordable housing” coalition shared profits with political allies to help legitimize their business practices: Fannie Mae created and used The Fannie Mae Foundation to spread millions of dollars around to politically-connected organizations like the Congressional Hispanic Caucus Institute. It also hired well-known academics to give an aura of academic rigor to policy positions favorable to Fannie Mae. One paper coauthored by now-Director of the Office of Management and Budget Peter Orszag, concluded that the chance was minimal that the GSEs were not holding sufficient capital to cover their losses in the event of a severe economic shock. The authors suggested that “the risk to the government from a potential default on GSE debt is effectively zero,” and that “the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.” (p.7)

* The Government Sponsored Enterprises led the way into the housing crisis: Fannie Mae and Freddie Mac were leaders in risky mortgage lending. According to an analysis presented to the Committee, between 2002 and 2007, Fannie and Freddie purchased $1.9 trillion of mortgages made to borrowers with credit scores below 660, one of the definitions of “subprime” used by federal banking regulators. This represents over 54% of all such mortgages purchased during those years. (p.24)

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Barney Frank says let’s do it again!

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