On the second anniversary of the bailouts of Fannie Mae and Freddie Mac, it’s now obvious that weak lending standards, serving the political interest of affordable housing for all, were the main reason for the nation’s mortgage meltdown.

But the government just can’t permit lending to anyone and everyone; it must insist on prudent judgment about who will repay and who will default. Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble — surprise! — but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.

The same mistake occurred in 1929, when any investor could buy stocks on margin with as little as 10 percent down. Small wonder that after the crash the U.S. government instituted a margin requirement of 50 percent down.

Congress should apply the same principle to housing purchases, increasing the amount a buyer must put down and other safeguards to assure prudent lending. Congress refuses to do this. Why? Giving citizens cheap, easy housing is a great way to win votes, no matter what horrific repercussions ensue.

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‘There were people in this society who for economic and, frankly, social reasons can’t and shouldn’t be homeowners,” Frank said in an interview with the Fox Business Network and sounding a lot more like an elephant than a donkey. “I think we should, particularly, stop this assumption that you put everybody into homeownership.”

After years of blaming heartless Republicans and Wall Street for the crisis caused by Fannie Mae and Freddie Mac — and their predominantly Democratic supporters in Congress — it’s refreshing to hear a member of the Democratic Party admit his mistakes.

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Today the Obama administration will begin a discussion on how to overhaul our nationalized housing finance system. Moderated by Treasury Secretary Timothy Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development (HUD), the “Conference on the Future of Housing Finance” seeks answers to what went wrong in the U.S. housing market. This promises to be the next big domestic policy debate—one that could mold housing finance for a generation or more. But the early signs of where policy makers might be headed are not promising.

A consensus is building around a three-part grand bargain:

• An explicit federal guarantee of a large portion of the mortgage-backed securities created to finance American’s home mortgages;

• A tax on these securities to fund low-income housing initiatives; and

• A requirement that issuers of securities meet affordable housing mandates.

This is a dead end for two reasons. First, while supporters of an explicit federal guarantee tell us it will never be called upon, Americans have read this book before and know how it ends.

The second is much less well known but equally deadly: the central role in the recent real estate collapse that was played by the federal affordable housing policy created by Congress and implemented since the 1990s by HUD and banking regulators.

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The administration has vowed to produce a plan by January to change the role the two government-controlled firms play in supporting the housing market. The conference on Tuesday is aimed at soliciting views from top industry officials on how to the companies should be restructured.

The Bush administration seized Fannie Mae and Freddie Mac in September 2008 as the financial crisis was reaching fever pitch. The two companies were heavily saddled with mortgage losses after the implosion of the U.S. housing market.

A consensus has since emerged that their former status as shareholder-owned but congressionally chartered entities, which fostered a belief in financial markets that the government would not let them fail, should not be resurrected.

Still, the debate over how much support the government should provide to foster homeownership is likely to prove messy given the diversity of views along the political spectrum. Any decision on what to do could take years to resolve.

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THE Federal National Mortgage Association — known as Fannie Mae — and the Federal Home Loan Mortgage Corporation — Freddie Mac — were poorly structured from the time, 40 years ago, when they were set up as so-called government-sponsored enterprises. Both of these technically private companies, designed to foster the issuance of home mortgages, enjoyed implicit federal backing in the event they got into financial trouble but only weak regulation to prevent such trouble. Essentially, the federal government insured the companies’ liabilities but never charged a premium.

Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies’ executives.

Fannie and Freddie’s risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.

On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form.

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But when it comes to the mortgage market, the innovation piece looks to be off the agenda. Instead, as Mr. Geithner made clear in response to a question after his speech at New York University, the Administration seems more intent on rehabbing the two biggest obstacles to innovation in home-finance—government-owned Fannie Mae and Freddie Mac. No talk here of trying something new.

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Mr. Raines writes that “the facts about the financial collapse of Fannie and Freddie are pretty clear.” So let’s review those facts. In Mr. Raines’s telling, Fannie Mae was undone by a decision—made after he left in 2004—to purchase loans “with lower credit standards” just before the bust. But even this managerial decision wasn’t entirely the companies’ fault. Rather, according to the man who presided over one of the largest accounting scandals in history while at the helm of Fannie Mae in 2003, Fan and Fred’s big mistake was chasing Wall Street’s credit standards downward at the end of the boom.

What he doesn’t say is that Fan and Fred had a political and legal mandate to support low-income housing. At the end of 2004, the U.S. Department of Housing and Urban Development released its “housing goals” for Fannie Mae and Freddie Mac for 2005-2008.

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To watch President Obama sign the financial reform bill last week was to be reminded of the greatest financial scandal that never was: the collapse of Fannie Mae and Freddie Mac in September 2008, and their subsequent continued existence as money-losing zombie financial companies in the bosom of the federal government.

Fannie and Freddie have liabilities in excess of $5 trillion. They have already directly cost taxpayers nearly $150 billion, with no end in sight. Most of the banks bailed out in the fall of 2008 have gotten back on their feet and many have paid back, or started to pay back, the money provided to recapitalize them at the height of the panic. Not so Fan and Fred. They continue to bleed money, and each quarter brings new losses and new demands on their unlimited line of credit with the federal government, which is to say the American taxpayer. And yet these facts are ignored—not just by Congress or the administration, but by the press and much of the public.

Meanwhile, Fannie and Freddie, failures that they are, have become more central than ever to America’s mortgage industry. They underwrite the vast majority of all new home loans, and they own or guarantee about half of all the mortgages outstanding.

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Already their $160 billion government rescue has surpassed the amount spent on AIG, Citigroup and other poster boys of the financial crisis, making their liability “the mother of all bailouts,” as one analyst put it.

The failed Washington-based mortgage giants were more exposed to subprime and other junk home loans than any of Washington’s favorite Wall Street whipping boys. And they commanded a much larger share of the mortgage market. Together they owned or guaranteed more than half the mortgages and mortgage-backed securities when they collapsed in 2008.

Thanks to their politically mandated lending goals, congressionally chartered Fannie and Freddie were at the heart of the subprime scandal. We can’t think of two companies more deserving of overhaul.

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