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Democrats ignore causes of housing crisis, refuse to rein in Fannie & Freddie (Sen. Jim DeMint)

True financial reform must include Freddie Mac and Fannie Mae. Congress cannot pretend to have ended “too big to fail” without ending these out of control institutions.

Over the years Congress used quotas to achieve liberal social policy goals by increasingly pressuring Fannie and Freddie to buy more mortgages with lower down payments and lower credit score requirements.

According to an analysis presented to the House Oversight & Government Reform Committee, between 2002 and 2007, more than half of all the mortgages Fannie and Freddie purchased were to borrowers with credit scores below 660—one of the definitions of “subprime” used by federal banking regulators.
Fannie and Freddie’s poor standards spread the practice of risky lending throughout the economy. As Freddie and Fannie grew their share in the mortgage market, largely by buying up bad mortgages from the likes of failed lender Countrywide Financial, regulators were reluctant to question the risky loans being made.

Think of it like this: Fannie and Freddie are dumpsters for reckless lenders to get rid of their bad assets. And taxpayer money is being spent to handle all the garbage.
Democrats demonize Wall Street for recklessly overleveraging their books 30-1, but they couldn’t have done it without Fannie and Freddie and their government backing that allowed the mortgage giants to operate on leverage ratios twice as high, at 70-1 or more.
Fannie and Freddie are a bottomless pit for taxpayer dollars. Last week Freddie announced that after repeated quarterly losses, it would need another $10 billion. On Monday, Fannie reported $13 billion in losses and asked for $8.4 billion more. Freddie and Fannie have costs taxpayers at least $140 billion to date, with no limit on future bailouts.

Democrats say it’s too late to add Freddie and Fannie to this bill, but we’ve been examining this problem for a long time. The Senate Banking Committee had a hearing last October about the future of the Fannie and Freddie, and the Senate has considered GSE reform twice before, both in 2004 and 2005

The Democrats have offered an alternative that would have Treasury perform a study on how to reform Fannie and Freddie; the nonpartisan GAO already did an exhaustive study on just this topic in Sept. 2009.
What’s really lacking is the political willpower to accomplish reform, to remove the government distortions in the housing market and begin winding down Fannie and Freddie. If we did this, the private market would reassert itself and home prices would again be rationally related to American income levels
Senator McCain’s amendment would accomplish real reform through re-imposing limits on Fannie and Freddie, repealing the liberal housing goals that undermined good mortgage underwriting, and providing an end to their dominance over the mortgage market, and I support his effort.


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