Fannie And Freddie: Just Another Symptom

Fannie and Freddie - now federally owned companies since the feds just took them over - are the two largest players in the real estate mortgage lending industry with a $5 trillion debt/ liability that has more default risk than all other U.S. corporations combined.
The collapse of the scandalous Fannie and Freddie has triggered a global financial crisis, because far too many foreign banks were suckered into our secondary mortgage mess. This is a valuable case study in ethics and morality for Americans because it a microcosm of what ails our democratic socialist country.
Fannie was created in 1938 as another piece of Franklin Delano Roosevelt's New Deal. At the time, it was a good thing as the housing market had collapsed during the Great Depression. Banks were afraid to finance mortgages, so Fannie Mae stepped in to provide them with federal money for FHA insured loans. Fannie was privatized during the 1960s Lyndon Johnson administration, when the Democrat Congress had bulletproof majorities in both houses. It became shareholder-owned and exempt from taxation; had lines of credit from the feds at lower interest rates than those paid by private lenders and little oversight.
So Fannie, along with Freddie, soon dominated the market and made a bundle for its stockholders, its officers and the creative crooks on Wall Street who packaged mortgages through sophisticated investment instruments for investors worldwide. What most people don't know is that, initially, Fannie Mae really didn't make much difference. Homeownership rose from 44 percent in 1940 to 64 percent in 1965, with Fannie only having 6 percent of the pie. Fannie's piece of the mortgage market then jumped to 48 percent in 1990, yet the homeownership rate was virtually the same.
In 1995 the implementing regulations for the Community Reinvestment Act (CRA), enacted during the Jimmie Carter administration, were tweaked to promote home ownership in "underserved" communities. Andrew Cuomo, Bill Clinton's HUD secretary, then set ambitious goals to increase home ownership for low income people - a noble goal - which resulted in the subprime lending boom and homeownership rates reaching nearly 69 percent in early 2007. HUD now reports that 5 million mortgages are in the hands of illegal aliens. Banks were forced to give these subprime mortgages without confirming Social Security numbers or borrower identification. (How many are also registered to vote?)
All attempts - and there were many by Republicans - to reform this mess were denounced by the National Association of Home Builders and Congressional Democrats who felt committed to their "subprime" constituency. (A viewer of C-SPAN called in the other day passionately defending the "right" of low-income citizens to own a home, just as they have a "right" to health care. Whether they can afford it should never be an issue.)
Here's my point: This is what happens when well-intentioned governmental social programs become incrementally more financially unstable - usually the result of interest group lobbying. It is understandable why Democratic politicians ignored the warnings. Lower income people deserve to have a shot at homeownership, and they are a huge part of the Democratic coalition. But surely they should qualify. (The other two programs still being ignored - Social Security and Medicare - which are also proudly seen as Democrat initiatives. Reform efforts of these programs are also being denounced by Democrats and their constituents.)
Fannie and Freddie are but a microcosm of what ails us as a society. It was tainted by fraud and abuse by all socioeconomic classes. Predatory real estate agents, appraisers, loan officers, real estate investors and Wall Street brokers all looking for jackpot commissions or fees combined to take advantage of the naïve borrower. Yet predatory marginal "over their head" buyers also proliferated, and "flippers" looking to make a quick real estate buck, were all using what were called "liar loans" or "ninja" loans. (No income, no job, no assets.) The point being that - as I've said before in other columns: We are a nation of crooks at all levels of our society. We need to prosecute a whole lot of people from the little "liar loan" applicant to the Democratic fat cats in Fannie and Freddie and those on Wall Street if they are guilty of crimes.
At the apex of this scheme were three highly placed Democrats, who made multi-millions, but because of accounting fraud were ordered to pay back $31.4 million for manipulating earnings to trigger bonuses. (As early as 2003, 749 of the Fannie Mae management team received a whopping $65.3 million in bonuses.) And while the top recipients of campaign contributions were Democrats, Fannie and Freddie's political contacts go deep into the presidential campaigns of both Obama and John McCain, having spent $200 million during the past decade for lobbying and campaign contributions.
Nevertheless, Republicans still are demanding that Fannie and Freddie be investigated. Chairman of the Senate Banking, Housing and Urban Affairs Committee, Chris Dodd, D-Conn., who was the top recipient of their campaign contributions, has finally agreed, but it looks as though he will keep parading Wall Street crooks before the camera as witnesses - at least until after the election.
With the election of Sen. Barack Obama a certainty, along with a Democratic House and a bulletproof majority in the Senate, Democrats will again enact whatever laws they please. Our concern should be that we will go back to the heady days of the 1930s and the 1960s once more, with costly social spending, with its predictable escalating incremental cost (as we experienced with Medicare and Social Security), when these programs get massaged with more tax dollars by politicians seeking votes.
It is worth remembering that our mortgage foreclosure and financial crisis, which is affecting everyone, is the direct result of the unraveling of Fannie and Freddie, which Democrats - including Obama - refused to reform.
And we've got to straighten out the moral mess we've tolerated as a society at all socioeconomic levels. If we enlist the help of parents and the schools, perhaps we can reduce the number of Mafia-like foot soldiers, who are a necessary part of these schemes at the "entry" level, which starts the dollar ball rolling for Wall Street, lobbyists and politicians, who then make the big bucks.