Would you personally give a loan of $300,000 to someone with a 450
FICO score to 80% at a 6% interest rate, even if they show by
documenting income that they can repay the loan? If so you can take
control of about 6% of the entire mortgage market. The credit score
shows their history of repaying debt. It is not the most accurate
system BUT someone with a low score you can be assured that they have
missed payments, Why should they be rewarded with the same rate as
other people who pay their bills on time? I agree with your statement
that they should be able to repay the loan, but thats about it. The
higher the risk, the higher the return. And as we can see the lenders
took on to much risk, even for their 10% paper returns.

People who took out more than they could afford in hopes that real
estate would always increase are now paying for their actions and so
are the banks/shareholders that loaned those people the money.

However, there is one area where I believe Fannie and Freddie have
been involuntarily forced to provide funding for mortgages with a high
probability of forclosure.  Both GSEs have to fulfill their HUD goals,
including goals regarding affordable housing.  Each year Fannie and
Freddie are forced to purchase a higher percentage of "affordable"
mortgages.  These "affordable" mortgages are frequently mortgages sold
to subprime borrowers with interest rates that are obviously higher
than those charged to prime borrowers.

Fannie and Freddie don't have an option to disregard their HUD goals.
Their regulator, OFHEO, ensures they meet all of their HUD
requirements.  In times of market turmoil, such as today, Fannie and
Freddie must step up and provide funding to make mortgage funding more
available and affordable, especially to minority and disadvantaged
borrowers.  However, stringent HUD goals are causing Fannie and
Freddie to fund an excess amount of mortgages for home buyers that are
unlikely to be able to make their mortgage payments.