Failure at Freddie and Fannie

Wow:

At Freddie, risk officer Andrukonis expressed concern about a new mortgage product called stated-income, stated-asset that the company was considering buying. The loans required borrowers to state their incomes and assets, but not prove them.

In a memo to Syron and others, [Freddie risk officer] Andrukonis warned that in 1990 Freddie called this product "dangerous" and stopped offering it. "I'm not convinced we aren't leading the market into this product," Andrukonis wrote.

Freddie offered to buy the stated-income, stated-asset loans anyway.

Andrukonis and others expressed concern about another type of mortgage Freddie was buying, where neither income nor assets were stated on the loan application. Andrukonis said these were popular with Hispanic borrowers, but the delinquency rates of 8 to 13 percent were much higher than on conventional loans. People familiar with the matter said Freddie was being pushed by advocacy groups to come up with new loan products to offer to low-income and minority borrowers.

Let's review: Freddie and Fannie are government-sponsored enterprises that were chartered by the government and were perhaps implicitly backed by Congress if they ran into financial trouble. Indeed, the two were placed into government conservatorship this year as the mortgage crisis took hold. No bit players, the two organizations "owned or guaranteed about half of the U.S.'s $12 trillion mortgage market" according to wikipedia and were adopters of the stated income aka "liar loans" that went unverified.

Meanwhile, keep in mind that the low interest rates that prompted so many people to jump into the housing market were a product of government policy and it becomes increasingly difficult to characterize the current mess as the free market run amok.

That is not to say that the marketplace isn't entirely culpable here or never makes mistakes, but looking to the government as the antidote strikes me as incredibly misplaced.

To twist a quote from Winston Churchill, the free market is the worst form of economic policy except for all those other forms that have been tried from time to time.