NCPA - National Center for Policy Analysis


October 23, 2007

So determined are Rep. Barney Frank (D-Mass.) and Sen. Chuck Schumer (D-N.Y.) to "do something" about subprime mortgages that they have come up with a proposal that is unnecessary, will do little to help distressed borrowers, and would increase the risk to taxpayers from Fannie Mae and Freddie Mac, says the Wall Street Journal.

According to their proposal:

  • They would temporarily lift the caps currently in place on the companies' portfolios of mortgage-backed securities by 10 percent, or about $140 billion.
  • Fannie and Freddie are then supposed to use that head room to underwrite mortgage refinancings to help distressed borrowers, with 85 percent of the cash, or some $125 billion, going into subprime loans.

Of course, Fan and Fred don't make loans. They are forbidden from doing so. If the companies wanted to underwrite risky subprime loans, they could do it today by adjusting their underwriting standards in consultation with their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).  But there are reasons not to, says the Journal:

  • First and foremost, those loans are risky; moreover, they are barred by their charters from underwriting any loan with more than an 80 percent loan-to-value ratio, a fact that the Frank-Schumer bill wouldn't change.
  • This alone would prevent them from riding to the rescue of the borrowers most at risk of foreclosure.
  • Finally, ordering OFHEO to lift caps imposed in response to multibillion-dollar accounting frauds at both firms doesn't exactly send a strong message about the need for the duo to clean up their acts.

At a time when Rep. Frank claims to want to strengthen the regulator's powers, this bill would have the opposite effect by showing that OFHEO can and will be pushed around by Congress for purposes of political atmospherics.

Source: Editorial, "Fannie More," Wall Street Journal, October 23, 2007.

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