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The American Enterprise Institute offered a plan today to eliminate the “bubble-inducing distortion” it blames for the recent financial crisis – mortgage underwriters Fannie Mae and Freddie Mac. The assessment stands at odds with the Center’s recent FactWatch which reviewed government data and concluded that while Fannie and Freddie contributed to the mortgage meltdown, Wall Street led the way.

The heart of the conservative think tank’s proposal for a government-free mortgage-finance system is two-fold: phase out Fannie and Freddie, and allow only the most credit-worthy, or “prime mortgages,” to be securitized.

Prime mortgages are generally those granted to borrowers with FICO scores – a credit ranking lenders use to assess the safety of loans – of 660 or above. Subprime mortgages are usually made to those with scores under 620.

According to a September 2010 report from the Federal Housing Finance Agency, Fannie and Freddie’s regulators, the government sponsored enterprises hewed much closer to AEI’s proposed securitization standard. Between 2001 and 2008, an average 84 percent of mortgages those agencies acquired were extended to prime borrowers. Only 5 percent of the loans they acquired were “subprime.”

Mortgages that were bought up by the private market were less likely to qualify for prime designation. During the same eight-year period, only 47 percent were prime, compared with 32 percent subprime. Overall, Wall Street-backed mortgages were 4.5 times more likely to become seriously delinquent.

House Republicans have criticized the $150 billion in taxpayer funds injected into Fannie and Freddie since they were placed in government conservatorship in late 2008 and are expected to soon offer legislation that would wind down the mortgage giants. At the end of the month, Treasury Secretary Timothy Geithner is due to release his recommendations about Fannie and Freddie, as required by the Dodd-Frank financial reform bill.

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