Countrywide's VIP loans

Here is a recent article discussing how Countrywide used special loan packages for VIPS (government officials and many working for Fannie Mae) to gain preferential treatment for their subprime loans:

"Other than Countrywide, no other entity's employees received more VIP loans than Fannie Mae," Issa said in a release. "These relationships helped Mozilo increase his own company's profits while dumping the risk of bad loans on taxpayers."

 There are two main issues that need to be discussed. First, there is needs to be separation between financial firms and government officials. How can we expect elected officials to pass important regulations when they receive generous benefits from the institutions they are trying to regulate (read Paulson's secret Russian meeting).

The second issue is the role of Fannie Mae and Freddie Mac. Here are two private companies that operated as a government sponsored enterprise.  They were free to take on excess risk, knowing they had the full backing the US government should they fail. They were free to go after excessive profits (through buying Countrywide's subprime loans) without facing the risks. Fannie and Freddie play an important role in the financial system. Banks issue 30-year mortgages and then sell them to Fannie/Freddie. The mortgages then get bundled and sold to investors all over the world. Fannie and Freddie then use this income to purchase more home loans. This process allows banks to issue more home loans. The problem now becomes risk. Banks no long care about repayment since they are selling the loans to Fannie and Freddie. This provides the perfect environment for creating more subprime mortgages.