The Root Of The Problem....

From the LA Times in May 1999....

In 1992, [a majority Democratic] Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets.

Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers.

When resources are allocated to sectors of an economy that would not have received attention except for government meddling, those resources are diverted from other sectors that may have more deserving and overall more productive for an economy as whole. So as we go through the bailout process, keep in mind that maybe it wasn't just the greed of Wall Street (which is natural and desirable for an economy) but also the culpability of a social policy out of Washington that mandated upon these organizations.