The Bush administration is hopping mad at the New York Times for a story the Gray Lady published Sunday, “White House Philosophy Stoked Mortgage Bonfire.” The White House will have to defend itself on this one, but we are concerned that the Times, in its partisan desire to tarnish President Bush, provides far too narrow a focus on the government’s central role in creating the current crisis. By pretending troublesome government policies that contributed to the housing bubble began with Bush, the Times makes it easier for those inclined to make the same policy mistakes again.

Government-sponsored entities Fannie Mae and Freddie Mac are at the core of the current housing crisis. Fannie and Freddie make no actual loans; instead they buy loans from banks, and then bundle and repackage them as securities. For years Fannie and Freddie leveraged their government-sponsored advantages — including exemptions from state and federal taxes, lower capital requirements, and the ability to borrow at rates well below those paid by private companies — to create a co-monopoly in the housing finance sector.

Fannie and Freddie partnered with lenders to expand the subprime market. With Fannie and Freddie’s help, subprime giant Countrywide Financial grew from a tiny institution to the largest mortgage lender in the country. At the height of the boom, Fannie and Freddie bought 44% of the entire subprime market. Long before Bush took office, Heritage warned about the systemic risk Fannie and Freddie posed to the American taxpayer. In 1991, following the Savings and Loan disaster, Heritage pushed for the full privatization of Fannie and Freddie, predicting that “maintaining secondary mortgage firms in a twilight zone between the public and private sectors … may be a recipe for an eventual taxpayer bailout.” No one listened.

Even the New York Times noticed the risks posed by Fannie and Freddie in September 1999, a full 16 months before Bush took office. The Times reported:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. …

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. …

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

The debate over Fannie and Freddie is much more important than Bush’s legacy. Fannie and Freddie existed before Bush came to office, they were instrumental in worsening the housing bubble, and now some want to make sure they continue to exist long after Bush leaves. Who on earth would want Fannie and Freddie to continue to exist in their current form? Senate Banking Chairman Sen. Chris Dodd (D-CT) and Sen. Charles Schumer (D-NY)? That’s who.

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