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.