Freddie Finances Scarier than Bad Slasher Flick

Freddie Mac's disclosure that it lost $6.7 billion of taxpayer dollars in the first quarter of 2010, and that bigger losses may follow, suggests the Congressional Budget Office may have been kind in estimating that Freddie and Fannie Mae could gobble up $389 billion in U.S. aid by 2019.

The carnage of America's government-sponsored housing agencies continues. It's a remake of "A Nightmare on Elm Street," only Freddy Krueger now goes by Freddie. The hapless victims are played by taxpayers.

The two mortgage giants that largely created this mess chug along enthusiastically, not even bothering to change key practices that led to the worst real-estate crisis in U.S. history.

The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors.

Given that lenders didn't have to keep skin in the game, they made loans that were as big as possible as fast as possible to people who, in some cases, were as unqualified as possible. That lending frenzy created the housing bubble, leaving us all holding the check.

At least we know that now. Given everything that happened, surely Fannie and Freddie have stopped adding to the problem, right?

Think again. Even after all of the bailouts, those idiotic loans are continuing.

Worst Practices

The two mortgage giants that largely created this mess chug along enthusiastically, not even bothering to change key practices that led to the worst real-estate crisis in U.S. history. Not only have Democrats failed to address Fannie and Freddie in their financial reform, they are standing back and allowing the worst practices to go on.

And while the rest of the economy has turned the corner, the bleeding is getting worse at the government housing agencies.

How did so much of our money get wasted? Peter Wallison, my colleague at the American Enterprise Institute, recapped the plot in gory detail in a November 2008 article.

The housing crisis built up gradually, accelerating to an outright calamity near the end of the last decade. It began when do-gooders figured out that they could subsidize the purchases of low-income housing by requiring Fannie and Freddie to make risky loans to low-income individuals.

Too Creative

Wallison cites the 1994 National Homeownership Strategy developed by President Bill Clinton's administration that pushed "financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments."

Over time, with housing prices rising year after year, it looked like a free lunch. Taxpayers increasingly were placed on the hook for questionable loans, with low- and very low-income individuals accounting for a whopping 25 percent of loans purchased by Fannie and Freddie in 2007.

Incredibly, the Obama administration has done nothing to stop Fannie and Freddie from engaging in these dangerous practices. Quite the opposite.

In February, the Federal Housing Finance Agency proposed a rule setting goals for Fannie and Freddie for 2010 and 2011. One goal is that 27 percent of mortgages acquired by Fannie and Freddie "meet the low-income standard."

Horror Continues

In other words, not only are your tax dollars going to bail out the horrifying loans that Fannie and Freddie encouraged during the real-estate bubble, they are also being used to guarantee new loans to borrowers who would not qualify absent government intervention.

The Democrats have put off dealing with Fannie and Freddie for a simple reason: Reform will require a conversation on how the two organizations contributed to the financial crisis.

Such a discussion is inconsistent with the Democratic story that Republican deregulation created the mess. It's especially painful for President Barack Obama, who was a strong advocate for the two mortgage giants and helped obstruct efforts to rein them in. As of 2008, Obama trailed only Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, in collecting political donations from Fannie and Freddie's employees and political action committees.

My guess is that Democrats will continue to avoid doing anything about Fannie and Freddie. The two leaking organizations will be cut into pieces and sent to the bottom of the ocean only after Republicans recapture Congress. Dire financial reports, such as Freddie's last week, may hasten that transfer of power.

Kevin A. Hassett is a senior fellow and the director of education policy studies at AEI.

Photo Credit: iStockphoto/dra_schwartz

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About the Author


Kevin A.
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.

    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

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