The testimony provided several keywords that highlight the reckless conduct of the above financial leaders.  Their justification for decisions which led to the downfall of these quasi-government operations are quite clearly revealed.  Together they provide a microscope ideally suited to understand the gross dysfunction that continues in Washington today.  Franklin Raines, listed above with Fannie Mae, served through the latter years of the Clinton Administration, and early years of the Bush administration.  He was one of Obama's financial consultants during the election campaign. 

Subprime Lending in Billions:  2000 to 2005

        The above chart shows the subprime lending market roughly during Franklin Raines tenure as CEO at Fannie Mae.  This growth was predominantly within the private mortgage market, and was being underwritten through non-government sources.  While Raines collected about 90 million dollars of compensation (wages and bonuses) during that time, Fannie Mae was not a major player in this subprime growth.  In addition to looting the company for private profit, he also reduced Fannie Mae's reserve from 10 to 2.5%.  This reserve reduction allowed Fannie Mae to grow more quickly, and hold fewer assets as protection against a market correction. 

          David Mudd became Raines successor at Fannie Mae in 2005.  He testified that a serious debate within the organization at the time was whether to (1) stay the course and remain a niche player within the mortgage market, or (2)  enter the subprime market as a major player.  His choice was to become a major player in spite of the fact that his company was authorized by the tax payers through congress to provide higher risk mortgages for citizens with minority, marginal financial, and underserved status.  With this decision, he committed to "restore the company's position in the mortgage market", a fatal decision for the American taxpayer.  From 2005 to 2008 Fannie and Freddie essentially took over the sub-prime and Alternate A markets from the private sector, and the growth line from the above chart was quickly converted from private to public debt. 

          Richard Syron testified that early in his tenure (2003 - 2008) Freddie Mac was experiencing a declining share of the market.  As private sector funding was underwriting most of the high-risk loans, Freddie Mac was losing out on this "unique market growth opportunity".  His decision, like Mudds, was to place the government squarely in competition for market share with private capitol. 

          Mudd and Syron collaborated to take over the subprime and alternate-A mortgage market from the private sector, underwriting as much as 95% of the high-risk mortgage market during the period that followed 2005.  The rest is history. 

          With a significant correction in the real estate market and four-dollar gasoline during the second half of 2008, some 70% of Americans became home owners.  Many had little, if anything invested in their homes.  Many had 2% teaser loans with an adjustment to substantial rates after they had lived in the homes for a period of time.  A few made no down payment, had reported income which was not verified, and were purchasing homes that far exceeded the home value which they could afford.  Outright fraud was a central issue in many of the home purchases. 

          The folks on Main Street were not alone in this fraudulent behavior.  Honest realtors and mortgage brokers were co-conspirators, and simply looked the other way, as they knew they would be collecting their fees on the front end of each transaction.  Bankers believed that their investment was protected through securitization of the risky mortgages, since they were packaged within a cluster of other, higher rated mortgages. 

          There are numerous principles which warrant adjustments to avoid future melt-downs from real estate financing.

Political Principles: 

          Affordability is a great catch-all concept, but becomes particularly suspect when attached to home mortgages.  Public housing has never been inexpensive, but the idea that the American dream can be sold on the cheap to all persons who can sign their names is not affordable. 

          When any government operation is concerned with market share, it is time to look for a fox in the henhouse.  The governments in most states are precluded from competing with private markets by state law, as they should be.  By contrast, the federal government appears to believe that there should be no distinction between private money and tax revenue.  Beginning around 2005, the quasi-government operations decided to become competitors of the private sector, and essentially took over the subprime mortgage market. 

          Many in Washington continue to believe that individual homeowners in default on their loans should be able to renegotiate their loans, presumable because they were mislead in the quest for affordable housing.  The fallacy of this strategy has already been calculated for such loans.  Recent evidence shows that up to 50% of the mortgages renegotiated are in default again within six months.  The do-gooders in Washington, primarily Democrats, appear incapable of learning even from recent history, and clearly would continue down the path of affordable housing over and over, with the default rate seemingly irrelevant to them.  The taxpayers, unlike their elected politicians, have a vastly different opinion about repeating failing policies over and over until they come out right.  Hello!!

          It has been alleged that unless government pays wages and bonuses like that of private industry, the government will not be able to attract or retain quality managers.  The alternative appears to be more nearly the case:  When quasi-government operations include payment of both salaries and bonuses to their executives, the monies paid encourage both graft and corruption, much as they do in private businesses.  When the fox is in the henhouse, it doesn't matter whether the henhouse is private or public.  A fox is still a fox. 

Wall Street Connection: 

            Any process where high risk and prime contracts are included in the same securities package should be illegal.  Those who would package good food with garbage should be criminalized.  Anybody within a financial or quasi-financial institution who would buy such a package should be selling hamburgers in a fast food restaurant, after a period of dish washing. 

          When long-term underwriting decisions are made by folks who receive their compensation on the front of a transaction, they are not compelled to focus on the quality of their decisions.   The up-front compensation of realtors  (and mortgage brokers) should be tied directly to the long term continuation and soundness of their decisions.  A smaller initial commission and annual renewal fees, like that paid to insurance agents, would have prevented the current meltdown.  Realtors should receive no more than three (3%) percent commission on sales contracts, with an additional renewal commission of 1/2% per year for a maximum of four years. 

Media Complicity:

          On many occasions the media reported that many mortgages were greater than the home values they represented.  This has relevance only for the holder of the paper in the event of default.  For the home owner it is simply another excuse to avoid payments or to live free until the movers arrive.  In the automobile industry, new cars are worth many thousand dollars less than the mortgage as soon as they are driven off the lot.  Folks don't abandon new cars because of mortgage value disparity.  They need transportation.  The same folks also need a place to live, and unless the mortgage payment is stretching the family budget beyond their means they will default only following unusual circumstances. 

Moral Bankruptcy:       

          While the federal regulators are accused of failure to regulate, they sued Franklin Raines for  illegally collecting bonus money, with assistance from legal consultant at Fannie Mae, Jamie Gorelick.  Following their findings, the regulators "clawed back" about a third of his illegally declared bonus money. 

          While Fannie and Freddie avoided high risk loans for years, it seems clear that greed and the capacity to profit personally lead these executives to make the disastrous decisions that produced a world-wide meltdown in the financial markets.  While they are clearly guilty of neglect of their fiduciary responsibilities, the moral outrage is more clearly evident when Fannie and Freddie are allowed to hire lobbyists to brow-beat their authorizing politicians, and further make political contributions to those politicians who are likely to support the gross neglect of the public trust.  In the hearings, it was reported that as much as 179 million dollars was spent by Fannie and Freddie on lobbying expenses.

          And Wall Street is accused of greed!  Those who are free of guilt should cast the first stones.