Shootout at the Mortgage Lender Corral

A duel has broken out between Conservative Newspaper editorial boards and bloggers against the Congressional Democrats over the mortgage lenders Freddy Mac and Fannie May. The opening shot was fired by the Wall Street Journal last week at Barney Franks, the Massachusetts Democrat, in an editorial entitled Fannie May’s Patron Saint;

Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank. Asked about Treasury’s modest bailout condition that the companies reduce the size of their high-risk mortgage-backed securities (MBS) portfolios starting in 2010, Mr. Frank was quoted on Monday as saying, “Good luck on that,” and that it would never happen.
[Barney Frank]

There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.

Franks fired back yesterday in “I’ve Long Been a Champion of Fannie/Freddie Reform”;

At the bottom of the first column of the editorial, the Journal begins by saying that “By early 2007, Mr. Frank was in charge of the House Financial Services Committee, arguing that he had long favored some kind of reform.” A reader unfamiliar with the facts would have no idea that I did not simply argue in favor of reform, but presided over passage of a very tough reform bill.

Taking less time for their return volley, the WSJ Editorial Board answered today in Barney’s Rubble;

Mr. Frank contends that he favored “very strong reform” of Fannie Mae and Freddie Mac, even before Democrats took over Congress after the 2006 elections. To adapt a famous phrase, this depends on what the meaning of “reform” is. Mr. Frank did support a bill that he and others on Capitol Hill described as reform. But on the threshold reform issue — limiting the size of the portfolios of mortgage-backed securities (MBS) that the two companies could hold — Mr. Frank was a stalwart opponent.

In fact, Mr. Frank was publicly arguing for an increase in the size of their combined $1.4 trillion portfolios right up to the day they were bailed out. Even now, after he’s been proven wrong about a taxpayer guarantee, he opposes Treasury’s planned reduction in the size of the portfolios starting in 2010, according to a quote attributed to him in this newspaper last week. “Good luck on that,” he reportedly said. Mr. Frank’s spokeswoman hung up the phone when we sought confirmation Tuesday.

In the meantime, Curt at Flopping Aces dug up an Investor’s Business Daily Op-Ed that lays the blame for the current mortgage difficulties squarely at the feet of multiculturalist Democrats who were too busy trying to “level the playing field”, as they say, than paying attention to the outcome of their dirty dealings;

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

Curt (with a link to the NY Times story) also reminds us that it was the Bush Administration, five years ago who introduced legislation to limit the two mortgage giants;

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Also writing at Flopping Aces, Mike’s America reminds us that John McCain tried to avoid the current crisis in mortgage lending back in 2005 when he proposed legislation to that effect;

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. 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.

As Mike’s America writes, today the words of John McCain sound prophetic. But in the rush to save their own asses, the Democrats can’t hear the freight train coming up behind them.

Category: Politics