Tuesday, October 07, 2008

UPDATE: How the Democrats screwed it up on Fannie Mae and Freddie Mac

From Todd Lowe:

Every time I turn on my TV, I hear Barney Frank, Nancy Pelosi or Harry Reed shrilly complain that this “mortgage mess” and the meltdown of Fannie Mae and Freddie Mac are the result of “failed Bush policies” and lack of regulation, when, in fact, it was the Democrats who resisted the additional controls and oversight Republicans wanted. By providing lucrative positions for Democrat officials and by funding supportive community organizations, Fannie and Freddie became the Democrat Party’s piggy bank.

In 1977 under the Carter administration, Congress approved the Community Reinvestment Act (CRA) to encourage banks to help meet the credit needs of the communities in which they are chartered. A bank’s performance was measured on its efforts to comply with the act. The Carter administration also contributed funding to “community organizations” such as ACORN (Association of Community Organizations for Reform Now) to help enforce the act. Under the act, these community organizations could file petitions to delay or stop a proposed merger, acquisition or new bank branch. One way these delays could be avoided was for the bank to donate to the community group or to give the community group the ability to originate mortgages and collect a fee. In 1999, Sen. Phil Gramm, R-Texas, included a provision in bank legislation to prevent such “CRA extortion” by requiring reporting of such payments.

In 1995, the Clinton administration expanded subprime authorizations to lenders under CRA. Loans substantially increased, and home prices accelerated. From 1990 to 1995, home prices tracked with inflation. However, from 1995 to 2007, home prices increased at almost twice the rate of inflation. Too much money was chasing too few homes, and price increases encouraged excessive borrowing. Buyers, anticipating that their homes that would rise in value, bought now rather than later, believing they could refinance later at rates they could afford.

1997 saw the first securitization of CRA loans when First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. had a $384.6 million offering of securities backed by the CRA. On Sept. 30, 1999, The New York Times reported that Fannie Mae, under pressure from the Clinton administration, was easing credit requirements to increase home ownership rates among minorities and low-

income consumers. This pressure became the snowball rolling down the hill that grew and grew. On Sept. 6, 2008, The Wall Street Journal stated “Freddie and Fannie own or guarantee more than $5 trillion of mortgages.” About $780 billion of these mortgages are subprime.

In September 2003, the New York Times reported a Bush administration proposal to create a new agency to oversee Fannie Mae and Freddie Mac. Congressional Democrats denounced the bill. According to The New York Times, “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Rep. Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “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 December 2004, Fannie Mae fired CFO J. Timothy Howard and CEO Franklin Raines. As CEO for five years, Raines received $91 million in bonuses. Fannie Mae’s profits had to be restated for the previous four years, and Fannie Mae recognized $9 billion of losses on interest-rate risk hedging derivatives.

Earlier in 2004, the House of Representatives held a hearing on a report from the Office of Federal Housing Enterprise Oversight suggesting regulation for Fannie and Freddie. Ed Royce of OFHEO suggested, “Congress must create a new regulator with powers at least equal to those of other financial regulators, such as the Office of the Controller of the Currency or Federal Reserve.” While the Republicans begged for more regulation, the Democrats condemned Royce and praised Fannie and Freddie. Barney Frank, D-Mass., currently chairman of the Financial Services Committee, said, “But I have seen nothing in here that suggests that the safety and soundness are at issue ... ”

In 2005, S.190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005 was introduced by Charles Hagel, R-Neb., and co-sponsored by John McCain, R-Ariz. During debate on the bill, John McCain stated, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” The bill was blocked by Democrats.

In 2007, the cracks in the foundation of the housing boom became visible. Prices started to decline. Mortgage defaults increased. Subprime lenders started going under. Values of securitized mortgage loans substantially decreased; balance sheets assets of banks and other financial institutions were reduced; credit was drying up.

Recently on “Good Morning America,” President Clinton said, “the responsibility the Democrats have may rests more in resisting any efforts by Republicans in Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”

But why would Democrats resist efforts to “tighten up a little on Fannie Mae and Freddie Mac”? Follow the money. Former Fannie CEO, Franklin Raines, Clinton Director OMB, got $91 million, while vice chairman, Jamie Gorelick, Clinton deputy attorney general, got $26 million, and the list goes on.

Community organizations such as ACORN can extort money from banks, receive grants from government, and it even received $800,000 this year from the Obama campaign. ACORN supports the Democratic Party through its PAC and targeted voter registration and get out the vote drives. Between 2004 and 2006, ACORN employees were accused of submitting fraudulent voter registration cards and forging signatures on ballot initiatives in 12 states. Yet, ACORN is one of the community organizations benefitting under CRA.

Fannie and Freddie have provided lucrative employment for high-ranking Democrats and an army of workers through the community organizations supported under CRA. Yet the Democrats cry that this is another example of failed Republican policies of deregulation. It was their regulation, CRA, that coerced banks to make questionable loans. It was their obstruction that prevented financial regulation of Fannie and Freddie. It was their friends who were minding the store.

The outcomes of these failed Democrat policies are to be expected, but I am astounded by the audacity of hype to blame the Republicans.

I agree with everything here.

And from Thomas Sowell:

Fact Number One: It was liberal Democrats, led by Senator Christopher Dodd and Congressman Barney Frank, who for years– including the present year– denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis.

It was Senator Dodd, Congressman Frank and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac.

It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today’s financial crisis.

Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush’s Secretary of the Treasury, five years ago. [Don't believe it? Read this.]

Yet, today, what are we hearing? That it was the Bush administration “right-wing ideology” of “de-regulation” that set the stage for the financial crisis.

UPDATE: From Peggy Noonan:

As to what they will do about the crisis, Mr. Obama will raise taxes on the rich and help us weatherize our homes, while Mr. McCain favors "energy independence" and buying up mortgages. On the causes of the crisis they spoke of insufficient regulation, or high spending.

But these were not the great causes. Neither party has clean hands. Or rather, both parties have dirty hands. Here is the truth, spoken by the increasingly impressive Sen. Tom Coburn: "The root of the problem is political greed in Congress. Members . . . from both parties wanted short-term political credit for promoting homeownership even though they were putting our entire economy at risk by encouraging people to buy homes they couldn't afford. Then, instead of conducting thorough oversight and correcting obvious problems with unstable entities like Fannie Mae and Freddie Mac, members of Congress chose to . . . distract themselves with unprecedented amounts of pork-barrel spending." That is the truth.

UPDATE: Debunking Paul Krugman and the Center for American Progress.


smrstrauss said...

How absurd.

Banks around the world are going belly up. We are hearing about trillions of dollars of investments in suspect “credit default swaps,” high leverage by banks making leveraged buyout loans, assets held “off balance sheet” so investors would not hear about them, mortgage-backed paper rated at AAA when it should have been DDD, and according to this blog, it is all caused by loans made to poor people. A fact you do not mention is that Greenspan fought against regulation of COMMERCIAL mortgage lenders, where by far most of the bad Sub-prime loans originated.

To be sure, some mortgage loans made to poor are now in default, but can you show with statistics that the rate of default of the poor is higher than the middle class? Or the rich? (see below.)

And yes, in 2004, four years ago, the Democrats did not see that there was a problem. Do you suppose that if a Democrat had got up in 2004 and said that “credit default swaps should be regulated” or that AIG was risky, any Republican would have listened to him? And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have blocked legislation. How did the minority party block legislation without the support of members of the majority party?

The following two articles destroy the MYTH that Fannie and Freddie were the main cause of the crisis:


From the Wall Street Journal

OCTOBER 1, 2008

The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.

Two weeks ago, I wrote that the breakdown of the nation's financial industry was undeniably a self-induced injury; that it would finally force conservatives to own up to the wrongheadedness of their deregulatory project; that they couldn't possibly blame the disaster on any of their traditional bogeymen…..

There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.

I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.

Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."

Ah, but truth is no ally to a conservative with his back to the wall. So much more helpful are the trusty narratives on which the movement was built. So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime people who are to blame; that by taking out loans they couldn't possibly pay off, these undesirable borrowers have ruined us all.

There is no way to measure the number of people who took out mortgages they knew they couldn't afford, of course, but for what it's worth, a 2007 report by the Mortgage Bankers Association reports that the FBI estimates "80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders." That means the lenders, not the borrowers.

Just imagine the flights of fancy that the theory of borrower malevolence and Wall Street victimization requires conservatives to take: All these no-account folks, you see, got together and forced investment banks to engineer subprime mortgages into highly leveraged securities. Then they tricked all manner of hedge funds and pension funds and financial institutions into buying these lousy products. Just for good measure, these struggling homeowners then persuaded bond-rating agencies to misrepresent the risk associated with these securities.

Now imagine what such a fantastic scheme, if true, would mean for capitalism itself. This economic system, glorified by all, dominates the globe today, bidding prices up and down, forcing entire nations to change their ways to better suit its needs, and yet it is so fragile that, when challenged by the weakest members of society and a handful of community organizers, it simply crumbles. Thank goodness the Soviets never figured this out.

End Quote

Second article, from Slate

Subprime Suspects
The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.
Slate Magazine
Daniel Gross

Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET

We've now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday's congressional roasting of Lehman Bros. CEO Richard Fuld and continued on Tuesday with Capitol Hill solons delving into the failure of AIG.

On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there's a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks—which had a long, distinguished history of not making loans to minorities—to make more efforts to do so.

The thesis is laid out almost daily on the Wall Street Journal editorial page, in the National Review, and on the campaign trail. John McCain said yesterday, "Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread." Washington Post columnist Charles Krauthammer provides an excellent example, writing that "much of this crisis was brought upon us by the good intentions of good people."

He continues: "For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity." The subtext: If only Congress didn't force banks to lend money to poor minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel's Neil Cavuto put it, "I don't remember a clarion call that said: Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster."

Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem.

But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

Here's why.

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.

Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system.

I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, and that required its septuagenarian CEO to play bridge while his company ran into trouble.

Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton's fault?

Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.

At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: "De minimis."

Lending money to poor people doesn't make you poor. Lending money poorly to rich people does.

End quote

john marzan said...

smrstrauss: "And the Republicans were in charge of Congress during the time when the Democrats were said in this article to have blocked legislation. How did the minority party block legislation without the support of members of the majority party?"

Easy. By peeling away enough Republicans like Sen. Bennett (with the help of Fannie money) to switch to their side and form a majority coalition to block reforms for Fannie and Freddie.

Daniel Gross: "The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong."

The Republican aren't blaming blacks and poor people. They're blaming the people who ran fannie mae to the ground (the ground zero for this financial crisis) and it's Democrat enablers. I myself think the idea of expanding home-ownership to poor black communities is a wonderful idea, BUT only if it's done right (without corruption) and without recklessly overdoing it for profit. Everything should be done in moderation.

See, the problem with democrats is that we can't have an honest discussion of how we got into this mess without somebody playing the race card.

THAT'S the problem.

john marzan said...

in a 2004 House hearing, one democrat blamed the gov't regulator for "lynching" Franklin Raines.

WTF was that?