Horrible news for the Dems: Fanniegate is turning uglier still.
Along with its evil twin Freddie Mac, Fannie Mae is one of the key institutions of the blue social model that provide government subsidies to the middle class. Already implicated in the housing bubble and the proliferation of liar loans and bogus mortgage backed securities, Fannie and Freddie may also have been up to their government-subsidized eyeballs in foreclosure abuse. Gretchen Morgenson—whose work Via Meadia has blogged on before—has a new piece in the NYT suggesting that the management knew years in advance that Fannie and Freddie’s foreclosure practices — contracted out to law firms — were seriously flawed but they did very little to correct them:
Fannie Mae, the mortgage finance giant, learned as early as 2003 of extensive foreclosure abuses among the law firms it had hired to remove troubled borrowers from their homes. But the company did little to correct the firms’ practices, according to a report issued Tuesday.
Only after news reports in mid-2010 began to describe the dubious practices, like the routine filing of false pleadings in bankruptcy courts, did Fannie Mae’s overseer start to scrutinize the conduct. The report was critical of that overseer, the Federal Housing Finance Agency, and was prepared by the agency’s inspector general.
Disturbingly, Fannie and Freddie gave their law firms an economic incentive to file false foreclosure documents:
The law firms in the network agreed to a flat-rate fee structure and pricing model based on the volume of foreclosures they completed.
The entire story is worth reading. Not only did Fannie hire for its legal work law firms which forged bankruptcy documents, but it also gave them more power over its foreclosure operations after it was taken over by the government. In one case, a contracted law firm for Fannie and Freddie “was handling more than 75,000 foreclosure actions a year before Fannie Mae terminated it because of vast problems with its legal work.”
A scandal like this is likely to do much more damage to Fannie and Freddie’s public image than their seriously flawed lending practices. Corrupt lending agencies forging documents which cause homeowners to lose their homes is the kind of scandal which the public can understand.
The story is toxic to Dems for several reasons. First, while the Bush administration did its share of Fannie-enabling, many of the key players are prominent Democratic activists and donors. The Clinton administration stuffed the upper reaches of the federal agencies with good friends and many of the names and faces involved will look good in GOP attack ads come 2012.
Second, the Fannie/Freddie mess and the Dems’ involvement in it, makes it much harder for the Democrats to run as a credible anti-Wall Street, economically populist party. Eager Democratic populists like James Carville think or at least say that running to the left can help Democrats win in 2012; the Fanniegate story is a way the GOP can undercut that Democratic narrative.
Third and perhaps most damaging, the Fanniegate mess illustrates the potential for even the best government programs with the best of intentions to backfire expensively and disastrously. Lobbying by advocacy groups like ACORN allied to banking interests helped warp Fannie Mae’s programs from sound housing finance for the middle class into a toxic disaster that helped bring about the Great Recession. This is the Tea Party case for small, limited government wrapped up into a comprehensible package and blames Democratic special interests for much of the country’s economic woes.
Anything that makes Fanniegate look uglier puts weapons into GOP hands for 2012; in many cases, the impact could be even more significant in close congressional and senate races where incumbents have voting records that leave them vulnerable. Strategists for both parties should take note.