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It’s not the Treasury or a bunch of policy eggheads that should decide Fannie Mae and Freddie Mac’s fate. Considering the fraud they perpetrated on taxpayers, and the continuing bill they have left, it’s the Justice Department that should be making room in the cell next to Bernie’s for the GSE hucksters.

In January of this year we drew our readers’ attention to a whistleblower report in the Wall Street Journal detailing Fannie’s and Freddie’s subprime lending practices since 1993. Apparently, the GSE’s withheld important information from the market and ratings agencies by “misreporting” subprime loans on their books, according Edward Pinto, Fannie’s former chief credit officer.

…from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A….Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other agencies, and 1.4 million were on the books of the four largest U.S. banks…

In fact, while their political patrons have succeeded in selling the lie that it was “Wall Street” bankers who brought down the housing market, it turns out that Fannie and Freddie held nearly ten times as many subprime loans than the four largest U.S. banks, who have all paid back their bailout funds with interest (while Fannie and Freddie ask for more). So it’s quite possible that fraud at the government entities set the stage for and later burst the housing bubble. Yet the Justice Department discontinued its investigation into Fannie Mae’s accounting practices in 2006 without filing any charges. Bernie Madoff got 150 years in prison for defrauding clients of $65 million.

Fannie Mae has blown nearly $150 billion, with not even an apology to its clients, the taxpayers.

At the Treasury meeting this week, the public heard much about the continued need for government to promote “affordable housing” and “access to credit” but little of the staggering ponzi scheme that such public policy virtually mandated the last time around. After all, it was HUD, the regulator of Fannie and Freddie, who ordered affordable lending quotas that could only be satisfied by lowering the standards of lending or misreporting the quality of loans on the books.

This week, Pinto writes again in the Journal, calling for an end to affordable housing mandates. What he really should be calling for is an end to the Department of Housing and Urban Development (HUD) altogether. If some cannot afford a home today – at the lowest borrowing and home prices in nearly a century – perhaps they should just get used to renting. Anything else that might once again distort markets or permit questionable lending practices for political reasons has a name:

It’s called fraud.

Things might have gone differently at the Treasury meeting this week had the Justice Department been a speaker on the program. How much clearer the plan for the GSE’s future might be if we had an Attorney General who announced an investigation into whether two quasi-government departments, with near-unlimited use of taxpayer dollars, and their appointed regulator at HUD, had committed one of the greatest taxpayer frauds in American history.

Certainly, the public might be clearer about whether Wall Street or Capitol Street was more responsible for the current recession.
These are the risks of a mixed economy, where markets are manipulated by the politics of pull. Responsible homeowners are suffering losses of equity and market value, and will ultimately pay higher taxes, with nobody at Justice holding the fraudsters accountable. Misguided policies of housing affordablility has cost millions of home-renters (they were never really owners) their credit scores and their dignity. It has set back the cause of home ownership decades. And it has plunged the country into a recession that has cost millions of jobs and destroyed untold trillions in savings and retirement assets.

Ironically, there has always been plenty of affordable housing in America. Most of us will go to bed tonight in a housing unit we can afford by paying our rent in full or putting 20% down on an income-verified loan. We don’t need the unintended consequences of political interference that ultimately has made things less affordable – costing us equity, savings, and even our jobs. It’s time to end the fraud by putting Fannie and Freddie away for good, and taking out the head of their crime syndicate, HUD.

Otherwise, by the same standard, the Justice Department should pardon Bernie.