Obama's housing crisis problem

Wall Street Journal Editorial:

Barack Obama may have come up with a creative way to solve the housing recession: Let everyone buy property at a discount the way he did from Tony Rezko, and give everyone in America a discount mortgage the way Angelo Mozilo of Countrywide did for Fannie Mae's Jim Johnson. Team Obama's real estate and mortgage transactions are certainly a change from business as usual. They suggest old-fashioned back-scratching below even current Beltway standards.

A former CEO of mortgage financing giant Fannie Mae, Mr. Johnson is now vetting Vice Presidential candidates for Mr. Obama. But he is also a textbook case for poor disclosure as regulators sifted through the wreckage of Fannie's $10 billion accounting scandal. Despite an exhaustive federal inquiry, Mr. Johnson managed to avoid disclosing one very special perk: below-market interest-rate mortgages from Countrywide Financial, arranged by Countrywide CEO Angelo Mozilo. Journal reporters Glenn Simpson and James Hagerty broke the story this weekend.

Fannie Mae tells us that Mr. Johnson did not inform the company's board of these sweetheart mortgage deals, nor did his CEO successor Franklin Raines, who also received such loans. We can understand why. Fannie bought mortgages from loan originator Countrywide, and then packaged them into securities for sale or kept the loans and profited from the interest. Mr. Mozilo told Dow Jones in 1995 that he was "working very closely . . . with Jim Johnson of Fannie Mae to come up with a rational method of making the process more efficient by the use of credit scoring."

Since Fannie was buying Countrywide's loans, under terms set by Mr. Johnson and later Mr. Raines – or by people in their employ – the fact that Fannie's CEO had a separate personal financial relationship with Countrywide was an obvious conflict of interest. The company's code of conduct required prior approval of such arrangements. Neither Mr. Johnson nor Mr. Raines sought such approval, according to Fannie.

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One question is whether Messrs. Johnson and Raines were using their position to pad their own incomes that were already fabulous thanks to an implicit taxpayer subsidy. (See the table nearby.) But the bigger issue is whether they steered Fannie policy into giving Mr. Mozilo and Countrywide favorable pricing, which means they helped to facilitate the mortgage boom and bust that Countrywide did so much to promote. A further federal probe would seem to be warranted, and we assume Barney Frank and his fellow mortgage moralists will want to dig into this palm-greasing from Capitol Hill.

The irony here is that Mr. Obama has denounced Mr. Mozilo as part of his populist case against corporate excess, calling Mr. Mozilo and a colleague in March "the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis." Obama campaign manager David Plouffe also said in March that "If we're really going to crack down on the practices that caused the credit and housing crises, we're going to need a leader who doesn't owe these industries any favors." But now this protector of the working class has entrusted his first big task as Presidential nominee to the very man who received "favors" in return for enriching Mr. Mozilo.

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This is really a reflection of the arrogance and hypocrisy of Democrats including Obama. they think their stuff does not stink. Johnson performed similar vetting for Mondale and Kerry, and I bet Kerry recommended him to Obama for this year's vetting. Neither of them or Johnson considered that anyone would question the choice, because the Obama attacks on countrywide were just political rhetoric. Democrats demonize big companies as part of their shtick. They just assume all these guys are Republicans. That is a bad assumption.