The Heritage Foundation - Leadership for America

Jim Johnson, the man recently chosen by Sen. Barack Obama to search for a VP candidate, is under fire for receiving millions of dollars in below-market loans from Countrywide Financial Corp. chief executive Angelo Mozilo. Private entities like Countrywide are free to give generous loan agreements to whomever they want, so there is nothing technically illegal about what Johnson did. Just like there is nothing technically illegal about the $21 million that the government-sponsored entity Fannie Mae paid Johnson for his work as CEO of Fannie in 1998. However, the Wall Street Journal also reports that Johnson personally worked closely with Mozilo to streamline the underwriting process making transactions between Countrywide and Fannie more efficient. That is what should concern the American taxpayer.

Countrywide is the largest loan servicer in the nation. It has been accused by bankruptcy judges of using dubious tactics to issue mortgages to unqualified borrowers, and has been at the center of the nation’s still-unfolding mortgage crisis. In the last three quarters, Countrywide has lost $2.5 billion, and has $6 billion in nonperforming assets. Did Countrywide get into all this financial trouble by itself? No. The federal government was key in enabling Countrywide’s blatantly irresponsible behavior. Fannie Mae is the biggest buyer of Countrywide loans.

Fannie Mae and Freddie Mac do not actually lend money to borrowers. Instead, they make their money by purchasing loans, bundling them together and then selling them as mortgaged back securities. Due to their quasi-government status, Freddie and Fannie are exempt from state and local taxes and can borrow money at lower rates than their competitors. With these advantages, Freddie and Fannie have cornered the market on mortgage securitization. Most years, Freddie and Fannie help finance 40% of all U.S. mortgages. In the first quarter of 2008, they handled 80% of the market. If Fannie and Freddie were private entities, they would be a considered a monopoly by Department of Justice anti-trust guidelines.

Fannie and Freddie are neck deep in the subprime industry as well. In 1995 Fannie and Freddie convinced the Department of Housing and Urban Development (HUD) to let them get affordable-housing credit for buying subprime securities that included risky loans to low-income borrowers. In 2003 Fannie and Freddie bought $81 billion in subprime securities. In 2004 they bought $175 billion — 44% of the subprime market. Now Fannie and Freddie are in the same financial hole as Countrywide. They suffered $9 billion in mortgage-related losses last year and are sitting on another $19 billion in additional losses they have not yet fully acknowledged.

Conservatives have been pushing for fundamental reform of Freddie and Fannie for years. Long before the subprime crisis became apparent, conservatives warned that “their commanding presence exposes U.S. financial markets to excessive risk and instability.” Now Congress is actually considering some common-sense reform, but the good measures are being held hostage as part of a larger housing package that includes a permanent slush fund for corrupt partisan groups like ACORN and a massive bailout of irresponsible lenders like Countrywide. Congress should focus on what is important and necessary: reforming Freddie and Fannie to ensure that future housing problems do not develop into crises that could threaten the stability of the overall financial system or require massive taxpayer-funded bailouts.

Quick Hits:

• The Wall Street Journal examines “How Prime Minister Maliki Pacified Iraq.”
• Nobody loves liberal demagoguing on gas prices as much as lobbyists do.
• Two newly elected Democrats from conservative districts called the Democratic budget a tax increase on the middle class.
• Conservatives in the House and Senate are revolting against Republican party leadership.
• Failed presidential candidate and UFO believer Rep. Dennis Kucinich (D-Ohio) introduced 35 articles of impeachment against President Bush last night.