“The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.” So reports the New York Times.
We earlier discussed how Fannie Mae, the bigger of the two government-backed mortgage giants being bailed out, helped spawned the mortgage crisis, and how its managers, like Franklin D. Raines, used Enron-style accounting fraud to inflate their multimillion dollar bonuses. Ideological fads promoted by Fannie Mae, like “affordable housing” and “diversity,” were behind the the proliferation of high-risk, subprime loans, now defaulting at a rate of hundreds of thousands. Lawmakers and regulators encouraged foolish bank managers to follow those fads and give loans to borrowers with poor credit ratings and little savings, rather than following traditional lending criteria, such as requiring applicants to show a good credit rating and make a substantial downpayment. Economically-destructive banking regulations such as the Community Reinvestment Act also played an important role in promoting risky loans.