Can You Afford Not to Hold Them Accountable?

Nov

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Part Two: Setting the Record Straight

In Part One of this series, we looked at causes of the mortgage meltdown in terms of Wall Street. They aren't the only one's with dirty hands, our corrupt Congress is to blame too. While Obama, Pelosi, and Barney Frank blame "Bush and the Republicans" with the Elite Media parroting along, the REAL story is quite different.

Fannie Mae was created as part of FDR's New Deal. It was created to buy and secure mortgage debt, so the banks could clear their books and write more loans. In 1968, Congress took Fannie Mae's debt off its books by privatizing the company (but still let them keep their government charter). Then in 1970, Congress created Freddie Mac, thinking that way, Fannie Mae couldn't monopolize the secondary mortgage market. These two companies are known as government-sponsored enterprises (GSE). A GSE is a publicly-traded, private corporation created by Congress, and backed with an implicit government guarantee.

As you read the rest of the story, keep the following words by Barack Obama on September 15, 2008 in mind.

"[The Republican] philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people ... Confident of their clout in Washington, they made hundreds of billions in bad loans, knowing that if they lost money, the government would bail them out ... And they were right. The gambles did not pay off, our economy went into recession, and the taxpayers ended up footing the bill. Does that sound familiar?"

If Barack Obama was speaking the truth, he'd call for Congressional hearings and a criminal investigation on Fannie Mae and Freddie Mac, after all, he's quick to use the Department of Justice to silence his critics, so you'd think he'd want to root them Republicans out!

But he doesn't call for any such investigation ... because it would destroy his political machine and aspirations to rule the world.

Here's what REALLY happened ...

The Community Reinvestment Act that was signed into law in 1977 by President Carter, was designed to increase bank loans to minorities, but the Democrats didn't think that was good enough.So in 1994, President Clinton determined banks needed to be even more aggressive in writing minority loans. Unveiling his National Homeownership Strategy, he rewrote the rules for both Fannie Mae and Freddie Mac.

Banks now had to follow strict numerical quotas and other measures pertaining to the level of "diversity" in their mortgage portfolios. The bank regulators used federal data, broke it down by neighborhood, income group and race, then rated banks on quota performance. Forced to comply, banks started writing loans based on race instead of the financial ability of the consumer to repay the loan.

In 1992 (major economic events don't happen overnight), a Federal Reserve Bank of Boston "study" claimed there was evidence of discrimination in mortgage lending. Using this one report, the Fed created a manual titled "Closing the Gap, A Guide to Equal Opportunity Lending." By downloading the manual, you can read for yourself how they wanted to loosen mortgage underwriting standards, but here's a quick list in case you don't have the time.

Property (the asset that backs the loan) standards should be checked for arbitrary rules as to the age, location, condition, or size of the property, because they can negatively affect the applicant.
Special consideration given to applicants with relatively high obligation ratios.
Policies regarding applicants with no credit history or problem credit history should be reviewed.
Lack of credit history shouldn't be seen as a negative factor. In reviewing past credit problems, lenders should consider extenuating circumstances.

Enough about the Fed for now, I just wanted to provide enough background information for a good understanding of the legislation that was soon to follow. We'll look into the Federal Reserve in Part Five.

In October of the same year, a debate took place on the floor of the House of Representatives, lead by Iowa Republican Jim Leach, to create a new regulator for Fannie Mae and Freddie Mac. Leach warned that the two companies had changed "from being agencies of the public at large to money machines for the stockholding few." Massachusetts Democrat Barney Frank stood in strong opposition to him, claiming that regulation simply wasn't needed, because the GSEs served a public service.

Congress did end up establishing the Office of Federal Housing Enterprise Oversight (OFHEO) as an arm of the Department of Housing and Urban Development (HUD), but as a regulator, the OFHEO was incredibly weak. The regulatory agencies that regulate banks set their own budget, but the OFHEO was required to seek congressional approval, thus setting up a system where members of Congress could exert pressure and push the pet projects of their biggest donors.

The OFHEO was under pressure right from the start. The Democratic-controlled Congress led by Barney Frank, pushed to have the GSEs capital-requirements reduced to only 2.5%, and got their wish. Capital-requirements are the amount of assets they must hold to back the loans. To put it in simple terms, the GSEs would only be required to hold $2.50 in assets for every $100 they had in outstanding loans.

President Clinton also appointed Andrew Cuomo, a young guy with no banking or real estate experience, to run HUD. Both Clinton and Bush were motivated to create a legacy of increased homeownership, so HUD set high housing goals, that under the 1992 law had to be met. In 1995, Henry Cisneros (Cuomo's predecessor) dictated that the GSEs required percentage of low to moderate income loans in their portfolio, was to be 42%. Andrew Cuomo then increased the number to 50%!

Here's how it all works: Fannie Mae and Freddie Mac don't actually write mortgages, they BUY mortgages from banks. You know how you often get stuck having to change who you make your mortgage payments too? Well, this is in large part why. Banks no longer need to hold the debt they sell. They can simply sell it to someone else, in this case, the government. So the mandate to increase low to moderate income loans artificially created a significantly large buyer, the GSEs. Banks and mortgage companies therefore started writing more low to moderate income loans, because thier risk was greatly reduced - Fannie Mae and Freddie Mac would simply buy them.

Andrew Cuomo was also in charge of writing the rules that govern the GSEs. Demanding that they buy more risky loans, he was steadfast against imposing any new reporting rules. He didn't want the government to know how risky these loan portfolios were. He also allowed Fannie and Freddie to get credit towards their mandates using "predatory practices" like steep loan fees and heavy pre-payment penalties.

While Cuomo directly loosened the reins and increased their quotas, by-passing the then Republican-controlled Congress, Clinton had his Secretary of Treasury Robert Rubin, hike the penalties on banks that didn't meet their racial quota on distressed, low to moderate income loans.

Let's add it all up ... Increased mandates + fewer reporting rules + government support of "predatory" practices + penalties against banks who DON'T write risky loans + reduced capital-requirements = DISASTER!

You don't have to be a banking whiz to understand that this is poisonous recipe.

According to Wayne Barrett of the Village Voice (emphasis added), "Fannie had gone from $1.2 billion in subprime-mortgage and securities purchases in 2000 to $9.2 billion in 2001 and $15 billion in 2002. Freddie's numbers were murkier, but clearly also on the rise. In 2003 alone, the two bought $81 billion in subprime securities-which also count against the goals." You can read his superb article detailing Andrew Cuomo and the mortgage crisis here.

Time to Regulate:

In March of 2000, Clinton's final year of office, Undersecretary of the Treasury Gary Gensler spoke in front of Congress proposing legislation that would eliminate the GSEs ability to borrow from the Treasury. In other words, eliminating the government's "implicit" guarantee.

Three months later, John L. Smith of the Competitive Enterprise Institute, testified before Congress warning that Fannie Mae and Freddie Mac's "implicit" guarantee "create[s] a serious hazard to the market, to taxpayers [and] to the economy." As he noted about these creatures ... "strange organizations, neither private- sector fish nor political-sector fowl ... as a result, no one is quite sure how these entities should be evaluated or held accountable."

Representative Paul Kanjorski (D) ridiculed the warning, stating "that is almost a fallacious argument." Kanjorski insisted the increasing amount of debt at the GSEs was nothing more than a mirage, created by "inflation and the growth of population ... Everything, proportionately, is that much larger."

In 2001, former Federal Reserve Chairman Paul Volcker said that Fannie and Freddie's mandate wasn't to monopolize the mortgage market, but " ... solely to develop a secondary market, and they've gone way beyond that."

The Bush administration declared in its Fiscal Year 2002 Budget that the size of Fannie Mae and Freddie Mac may be "a potential problem," and financial troubles at the GSEs "could cause strong repercussions in [the] financial markets." Then in May, later the same year, the Office of Management and Budget (OMB) sought to have the disclosure and corporate governance principles of Bush's 10-point plan for corporate responsibility to be applied to the GSEs But they were only met with hostility.

In September 2003, responding to a warning the OFHEO issued in February, President Bush pushed to create a new regulatory agency within the Treasury Department to supervise the GSEs. The agency would set one of the two capital-requirements for the companies, an authority that currently resides in Congress. Also, the new agency would exercise authority over any new lines of business and regulate the GSEs risk portfolios.

Bush's Treasury Secretary John Snow told the House Financial Services Committee that, "There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises." Snow also argued that Congress should eliminate the power of the president to appoint directors to Fannie Mae and Freddie Mac.

In his now infamous retort, then-Ranking Member of the House Financial Services Committee, Democrat Barney Frank (D) said (emphasis added):

"I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios ... these two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis ... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing," in contention of the Bush administrations ideas for increased regulation.

Frank's colleague Representative Melvin Watt (D) agreed, saying of the proposed regulation:

"I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

Representative Maxine Waters (D), speaking to Housing and Urban Development Secretary Mel Martinez added:

"Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs ever missed their housing goals?"

And then the Democrats kept piling on ... at the House Financial Services Committee hearing on September 25, 2003, Barney Frank argued AGAINST the need for "safety and soundness" at Fannie and Freddie proclaiming (emphasis added):

"I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing ... "

Representative Gregory Meeks (D) got angry with the OFHEO for doing their job of trying to regulate the GSEs (emphasis added):

"I am just pissed off at OFHEO because if it wasn't for you I don't think that we would be here in the first place.

And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have ... is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had ... "

Maxine Waters continued her contempt of additional regulations on Fannie and Freddie, stating (emphasis added):

"I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke ... Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals ... "

Waters was either in denial, or just didn't have the mental capacity to understand what was going on. Note that twice now, instead of addressing the financial "safety and soundness" of the GSEs, she focused merely on their "goals." Maybe she thought a magic money fairy (the Fed) would simply make the much needed assets appear?

Barney Frank, determined to halt any form of additional regulation, turned to the GSEs themselves. This most bizarre of "investigations" in the entire crisis (so far), went as follows (emphasis added):

Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?

Mr. Raines?

Mr. Raines: No, sir.

Mr. Frank: Mr. Gould?

Mr. Gould: No, sir ...

Mr. Frank: OK. Then I am not entirely sure why we are here ... I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.

He might as well have asked the cat, with fins still sticking out of its mouth, "Did you eat the goldfish?"

At the Senate Banking Committee hearings on February 24-25, 2004, Senator Thomas Carper (D) posed the question:

"What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?"

Federal Reserve Chairman Alan Greenspan responded:

"What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability ... is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets ... "

Senator Christopher Dodd (D) snapped back (emphasis added):

"I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion ... "

Council of the Economic Advisers Chairman Greg Mankiw wrote an editorial in the Financial Times, stating (emphasis added):

The issue of GSE reform goes well beyond the role of housing in the economy. It has far-reaching implications for the entire US financial system ...

Fannie and Freddie are owned by their private shareholders and the Federal Home Loan Banks are owned by their members [and] ... enjoy privileges including exemption from state and local income taxes and from Securities and Exchange Commission registration and disclosure requirements.

... the larger issue is that the subsidy creates a source of systemic risk for the US financial system ... Even a small mistake in GSE risk management ... could have ripple effects throughout the economy.

But the Democrat shenanigans continued ... Senate Banking Committee, April 6, 2005, Senator Chuck Schumer (D) told Fed Chairman Greenspan (emphasis added):

"Mr. Chairman. As you know, I have utmost respect for you and think you've done an excellent job as Fed chairman, but on this issue we don't see eye to eye. And in fact I'd say some of the things you're saying -- you're a lot smarter on these issues than we are, but they almost defy common sense."

Senator Jack Reed (D), during a Subcommittee on Banking hearing on July 28, 2005 said of Greenspan's warning (emphasis added):

"[Chairman Greenspan] does argue that GSEs present greater systemic risk because their assets are concentrated on mortgage related assets while banks are more diversified. However, I think this misses the point."

Actually Jack, it's YOU who missed the point! Treasury Secretary John Snow repeated his call for GSE reform again, saying:

"Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong ... "

Later that year, the Democrats won back the House, and took over control in January, 2006. Under the leadership of Pelosi, they continued their defiance of regulating Fannie Mae and Freddie Mac. In December of the same year, Barney Frank, Chairman of the House Financial Services Committee, continued his fight against regulating the GSEs at the Office of Thrift Supervision Housing Forum. Here's what he had to say (emphasis added):

"Now let me turn to housing - we have more to do yet in the deregulation. I'm just saying that one of the things that we did was to try and reduce the reporting requirement from the banks to the financial detectives. And far too much has to be reported now, in my judgment ... And we ought to thin that down so they can do a better job."

In July 2007, two Bear Stearns hedge funds invested in mortgage securities collapsed. Bush again, called on Congress to increase regulation. In the following month, foreclosure filings were up 243,000 - 115% higher than the year before. In September, single-family home sales declined by 7.5% from August, to the lowest level in nine years. And the median sale price of homes fell by 6% from the year before.

In January 2008, Bank of America announced the purchase of Countrywide, and Citigroup announced that their mortgage portfolio lost $18.1 billion.

None of this deterred Senator Dodd, "who along with Democratic Sens. John Kerry, Barack Obama and Hillary Clinton were the top four recipients of Fannie and Freddie campaign contributions from 1988 to 2008 -- actively opposed such measures and further weakened existing regulation." In fact, Dodd went on CNN's Late Edition (July 13, 2008) and huffed (emphasis added):

"To suggest somehow that [Fannie Mae and Freddie Mac] are in trouble is simply not accurate. The facts are that Fannie and Freddie are in sound situations. They have more that adequate capital, in fact more than the law requires."

And the rest, as they say ... is history.

Conclusion:

This was not Bush and the Republicans fault, nor did have anything to do with the free market. This disaster was created by politicians, mostly Democrats, and two government-sponsored enterprises. And there's nothing free market about that!

We can only come to two possible conclusions:

They were all stupid and naive and didn't know better.
They're all crooked.

Either way, not one of these people deserves to be a member of our government, but I'm betting on #2!

There should be serious, public, intrusive, all-out FBI investigations into each of these politicians, who for years protected the shenanigans at Fannie and Freddie.

But I'm not going to hold my breath ...