EDITORIAL: Democratic house party

Zero-down deals mean more Freddie and Fannie bailouts on the way

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A play about homelessness entitled “The Good Neighbor” debuts today in Northeast Washington, courtesy of the generous support of Fannie Mae - and, by extension, the U.S. taxpayer. Given the mortgage giant’s prominent role in spreading misery and homelessness throughout the country, it’s hard to think of a less appropriate corporate benefactor.

The lax lending standards promoted by Fannie Mae and its twin Freddie Mac enticed millions into buying homes they couldn’t afford. The resulting collapse of the housing market brought the rest of the economy down with it, leaving one out of every 10 workers without a job. While some aspects of the economy have stabilized, housing remains troubled. In the third quarter of 2010, default notices, scheduled auctions and bank repossessions were reported on 930,437 properties, according to RealtyTrac. Expect that number, and the cost to taxpayers, to remain high.

To date, the Freddie and Fannie bailout has consumed $148 billion, a figure that could rise as high as $363 billion by 2013, the Federal Housing Finance Agency (FHFA) said last week. The housing regulator projected the likely credit losses based on a number of economic scenarios - the rosiest of which, a strong near-term recovery, still shows a total loss of $221 billion. Under the worst circumstance, a deeper second recession, Fannie would extract a cumulative total of $257 billion and Freddie $106 billion from the Treasury.

In remarks delivered Monday, Federal Deposit Insurance Corporation Chairman Sheila C. Bair accurately pinned the blame for this situation on the feds. “Whenever investors are led to believe that policymakers will not allow a company to fail, market discipline is weakened,” she explained. “The inevitable result is more risk taking that only raises the value of the implicit government backing. Shareholders and company insiders capture most of the upside gains over time, while taxpayers get stuck with potentially catastrophic losses in a time of crisis. Clearly, any such arrangement can only be regarded as a failure of government policy.”

Seeing hundreds ofbillions go up in flames ought to serve as avaluable lesson, but it hasn’t been learned. Under the new “Affordable Advantage” program, Fannie will buy zero-downpayment mortgages offered to people with bad credit - no mortgage insurance necessary. Although it sounds like a pre-bubble offering, the program started this year and will run through March 2011. “This one got away from us,” FHFA Acting Director Edward J. DeMarco admitted to a House subcommittee in September. “It was a miscommunication, and this agreement with these [state housing finance agencies] was signed without my knowledge.”

Regulators and regulation are not the solution to the government-sponsored-enterprise problem. The enterprises themselves are the problem. So long as government is involved, politicians will push to loosen standards because their constituents don’t like it when they are told “no.” That Fannie Mae wants to do the job of the National Endowment for the Arts is further evidence that the entity is fundamentally incapable of spending our money wisely. It’s time to cancel the blank bailout check the Obama administration gave to the mortgage giants and phase out taxpayer involvement and backing of these bad neighbors.

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