Congressman Barney Frank told PBS Frontline that, in 2004, he tried to stop Fannie Mae and Freddie Mac from backing and buying high-risk home loans.
But where’s the proof he tried to prevent any of that reckless lending? Hadn’t he promoted the financial disaster for 15 years?
On the “Inside the Meltdown” series last month, Frank said:
“I would say in 2004-2005 you began to see a pattern of subprime mortgage failures. I don’t remember it exactly. I do know that in 2004, when the Bush administration ordered Fannie Mae [Federal National Mortgage Association] and Freddie Mac [Federal Home Mortgage Corp.] to increase the number of mortgages they bought from people below the median income, I complained and said, ‘Look, you are going to jeopardize them, and you are going to push people into mortgages [they] can’t afford.’
“I do remember very clearly, by 2005, several members of the Committee on Financial Services -- again, the Republicans were in the majority during this point -- two from North Carolina, where there has been real leadership on this, [Democratic Reps.] Mel Watt and Brad Miller, and myself, working with the Republican Spencer Baucus [R-Ala.], started to see if we could draft the legislation to restrict bad subprime mortgages. A couple of others were trying to do this, too, [Reps.] Paul Kanjorski [D-Pa.] and Ed Royce [R-Calif.].
“So by 2005 there was a recognition that too many bad mortgages were being issued, and we were trying to work something out. And then [Texas Rep.] Tom DeLay, as the Republican leader, sent word to [Rep.] Mike Oxley [R-Ohio], the chairman of the committee: ‘Stop it. You are not going to get any bill up.’ ... First we tried to push Greenspan to use the authority, and he wouldn’t do it. And secondly, we then tried to draft a bill, and Tom DeLay said no. ... If we had been able to stop it in 2005, we would have diminished this crisis.”
Risking default. But where was Barney Frank in 1991? Encouraging Fannie Mae and Freddie Mac to back high-risk mortgages.
The Boston Globe reported Frank was encouraging loans that Fannie Mae specifically objected to as too likely to be defaulted on. The Globe, Nov. 22. 1991:
Fannie Mae national spokesman David Jeffers said yesterday that the mortgage company restricted purchases of mortgages on multi-family homes after it saw many such mortgages go into default during the real estate slowdown.
He said the default rate on mortgages on two-family homes is twice that of single-family homes, and the rate for three-deckers is five times the rate for single-family dwellings.
But Jeffers said that after discussions with area homeowners, housing advocates, Kennedy and Rep. Barney Frank (D-Mass.), Fannie Mae officials agreed to purchase the mortgages made under the state’s “soft second” program, the primary source of mortgages for first-time homebuyers of low and moderate means.
‘Roll the dice.’ Where was Barney Frank in 2003? Encouraging Fannie Mae and Freddie Mac to back high-risk mortgages.
Barney Frank, Sept. 25, 2003:
“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....”
Where was Barney Frank in 2004? Letting Fannie Mae and Freddie Mac back high-risk mortgages.
Called for halt? On Frontline, he says the Bush administration in 2004 ordered Fannie Mae and Freddie Mac to increase the number of mortgages they bought from people below median income. Frank says he said then:
“Look, you are going to jeopardize them, and you are going to push people into mortgages [they] can’t afford.”
But did Barney Frank say anything like that in 2004? Where is the record of it? In fact, it was Frank who said in 2004 that the Bush administration wanted to regulate Fannie Mae and Freddie Mac more than he did.
Mobile home divide. At an Oct. 6, 2004, subcommittee hearing, Frank said he basically agreed with the Bush administration on restoring the “safety and soundness” of Fannie Mae and Freddie Mac, but he opposed Bush’s demand for tougher regulations on loans for “new products” like mobile homes (“manufactured housing”):
“What derailed the legislation was an insistence by the Bush administration on going beyond safety and soundness and giving the regulators, for example, particular power to say, ‘Well, they’re going beyond their charter in housing; they should not do these new products.’ There were specific issues here that transcended safety and soundness or went under it, but the administration was seeking powers that were not related to safety and soundness. …
“As to safety and soundness, manufactured housing is an example. I do not expect Fannie Mae and Freddie Mac to make as much money as possible on every single entity. The attitude of OFHEO [Office of Federal Housing Enterprise Oversight] towards manufactured housing is an example of why I’m concerned about making sure the regulator has safety and soundness powers, but not general powers. In manufactured housing, it was those of us on this committee, Democratic and Republican who care about housing who pushed Fannie Mae to stay in it.”
So it was Bush the regulator, Frank the gambler.
DeLay tactics. I’d like someone to explain why, according to Frank, Congressman Tom DeLay killed action on Fannie Mae-Freddie Mac reforms in 2005. By then, reforms probably were too late anyway, but how does DeLay explain his role? Democrats did most of the cheerleading for the risky loans, but Fannie Mae and Freddie Mac were buying off both Democrats and Republicans to avoid prudent regulations.
Where is the record, as Frank describes it, of the Bush administration, acting on its own, ordering more risky loans by Fannie Mae and Freddie Mac? Oh, it’s possible, but it’s more probable the Bush administration pursued that policy only because Frank and his corrupt friends in Congress insisted on it.
It was the Bush administration that called on Congress in 2003 to do something to rein in Fannie Mae and Freddie Mac and compel those financial institutions to end their loose lending. What was Frank’s first response to that Bush proposal?
‘Not facing crisis.’ As The New York Times reported Sept. 11, 2003:
“These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,” said Representative 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.”
How PBS lets Barney Frank get away with his revision of history is beyond me. Frank pushed Fannie Mae and Freddie Mac into backing $1 trillion in bad home loans. Now we’re all paying for his abuse of these institutions, and PBS helps cover up the crime.
Frank Warner
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Here is Barney Frank’s opening statement at a Sept. 25, 2003, hearing of the Committee on Financial Services, considering the Bush administration’s proposal to place Fannie Mae and Freddie Mac under more intense oversight and regulation:
I joined this committee in 1981 because I am interested in housing. And I guess I wouldn't want to boast about my accomplishments, because the situation regarding housing, particularly people who are of moderate and low income, has gotten worse during my tenure. I won't accept the blame, but I clearly haven't done a great deal of good.
And it makes it all the more important that we use every tool that we do have to try improve the housing stock. And Fannie Mae and Freddie Mac are two of the very important tools that we have.
And there are people I know who are critical of the arrangements that we have. I, frankly, welcome the fact that we have in Fannie Mae and Freddie Mac a means of bringing down housing costs that doesn't put a hit on the federal budget.
Essentially, there are people in the country who are prepared to lend money to Fannie Mae and Freddie Mac at less interest rates than they might get elsewhere. I thank those people for doing that. I must tell them that I hope they are not doing that on the assumption that if things go bad, I or my colleagues will bail them out. We will not.
On the other hand, I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger. And I was glad to have Secretary Snow say when he testified that this is not something we are doing in response to a crisis. For once, Congress is getting out ahead of a problem. This is not the situation where, like the editorial writers, we come down from the hills after the battle is over and shoot the wounded. In this case, we are taking some anticipatory steps.
I don't think we face a crisis; I don't think that we have an impending disaster. We have a chance to improve regulation of two entities that I think are on the whole working well.
I have a particular concern. I know the ranking member of the Capital Markets Subcommittee has another concern about the independence and how well it will be able to function, and I share his views and will be working with him on that.
My primary interest -- and I know I share this with others on this committee who care a lot about housing -- is to make sure that nothing is done in this reorganization that weakens the ability, indeed the obligation of Fannie Mae and Freddie Mac to help us with our housing problem.
Now, housing is an interesting part of our economy. The argument that prosperity in general deals favorably with a lot of social problems has a lot of truth to it. By the end of the 1990s, the wages of low-income people had gone up. A number of things that we want to see happen happened from prosperity in general, but not in housing.
Paradoxically, because of the nature of the supply-demand relationship with housing, because of the kinks in the pipeline that negatively affect the supply of housing, the very prosperity of the 1990s that was so welcome for most of us exacerbated the housing problem for many people, in particular geographic areas and for people in particular economic situations.
So it is all the more important that we muster the maximum resources to protect those people and to maximize the leverage.
So when you move the regulation to Treasury, if that is done, and you leave housing with HUD, I am skeptical that, absent anything else, that is going to sufficiently protect housing.
Now, of course there are differences, I would agree. In the current administration it might make much difference whether it is in HUD or Treasury or if it were at the Nuclear Regulatory Commission, for all the attention we have gotten to housing from HUD. But we are not legislating only for the next year and a half, we are legislating for the future.
So I intend to be pressing to make sure that if a transfer goes through -- and there are other questions to be addressed, and the ranking member on Capital Markets will be addressing some of them -- that the housing function is not only protected, but strengthened. I want to increase the leverage we have.
Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.
A warning here? Barney Frank now claims that, in 2004, he was warning against pushing Fannie Mae and Freddie Mac to make risky mortgage loans. Those warnings are, so far, impossible to find.
At least in 2003, it sure looks as if he was saying, there’s nothing wrong with Fannie Mae and Freddie Mac; let them back even more reckless loans.
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At a May 20, 2004, hearing of the House Financial Services Committee, HUD Secretary Alphonso Jackson told Congressman Frank:
“I am here to make sure that the GSEs [Fannie Mae and Freddie Mac] effectuate the affordable housing goals and that is what I am here to speak about.”
And Frank responded:
“Let me say, Mr. Secretary, I am glad about that. In fact, I was very critical. HUD delayed a year in promulgating new goals. HUD had the right to promulgate new goals that could have taken effect this year, and delayed. So I am glad they are doing it. We are pushing for even more.”
Frank was pushing for even more. Some warning ... not.
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Later in that May 20, 2004, hearing, Frank returned to this subject, demanding that Secretary Jackson explain why the Bush administration had not increased the lending goals of Fannie Mae and Freddie Mac earlier.
Frank: I must have to respond for 30 seconds on this administration's concern about the affordable housing goals. The fact is that you had the legal authority to promulgate increased goals last year that would now be in effect. Your administration failed to do that. Indeed, when we called attention to that failure, the original response from the department was, oh well, we are planning to do it. Only afterwards did they realize that the time has passed in which you could have done it for this year.
So the fact is that there was no, a whole presidential term will have gone by in which the goals were left untouched, although you had the authority last year to increase them, and you deliberately did not exercise that authority and you promulgated them this year, but you had the legal authority to do it last year, let it go by. In fact, when we noted that, someone said, well, we are going to it, but it was too late for you to do it last year.
So it is pretty clear to me that historically your interest in increasing the goals came after your desire to make other changes in the GSEs. Otherwise, I do not know why you would not have done it before. Let me ask you then, why did HUD not last year use its authority to promulgate those higher goals so they would already be in effect?
Jackson: Congressman, I think that is absolutely a fair question. I will simply answer this way. It was an oversight on our part. I believe that the rules should be promulgated.
Frank: It was an oversight. You forgot to raise the goals for the GSEs.
Jackson: It was an oversight. I think your analysis is correct. It was brought to the attention, and immediately when it was brought to our attention...
Frank: We brought it to your attention.
Jackson: I agree with you. You brought it to our attention. But it was not that we had not been working on it.
Frank: It is hard for me to believe, Mr. Secretary, that if this was really an important thing to you, that something that basic you would have just lost it.
Jackson: It is very important to me. That is why we are working on it. I am the secretary and that is why we are working on it.
Frank: But you overlooked it last year.
Does that sound like Barney Frank was telling the Bush administration to stop raising the Fannie and Freddie lending goals? Or does it sound like Frank was doing just the opposite?
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At the Oct. 6, 2004, hearing, Barney Frank raked financial oversight director Armando Falcon Jr. over the coals for daring to tell a Financial Services Committee subcommittee that Fannie Mae and Freddie Mac were flirting with disaster.
Check out this part of the hearing. Does this sound like Barney Frank wanted to hear about the risks that Fannie Mae and Freddie Mac faced? How could he adjust policy to the facts when he didn't want to hear the facts?
Frank: I appreciate the answers, Mr. Falcon, you gave to Mr. [Congressman Joseph] Crowley. But it makes me even more disturbed that you, both in your written statement and again, sort of threw "safety and soundness" around almost like kind of boilerplate.
I think you just accurately answered the questions that, no, if everything works out as we expect it to, there are no threats, et cetera, this -- you seem to be saying, "Well, these are in areas which could raise safety and soundness problems." I don't see anything in your report that raises safety and soundness problems. Your answers to Mr. Crowley certainly didn't indicate that there were.
How does this raise safety and soundness problems, other than the kind of, frankly, almost ritualistic saying, "Well, these are areas where safety and soundness could be implicated presumably if it went far enough"?
But I think it is irresponsible -- let me be very clear -- on the basis of this report and what you have concluded so far -- I mean, we have earnings smoothed out. With regard to derivatives, you have told you me you cannot even say at this point whether they have under- reported or over-reported earnings.
How does this threaten the safety and soundness, what you have uncovered, of Fannie Mae?
Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight: Just the very fact that we have serious doubts about the accuracy of the financial statements and their books and records, the very fact that we have identified very serious internal controls...
Frank: Well, let me ask a question. Does any accuracy threaten the safety and soundness? That is what bothers me. There is a quality and a quantity issue here.
There are inaccuracies that can be disturbing, and if they led to inappropriate compensation, I would be very unhappy. But the notion that any inaccuracy implicates safety and soundness, I think, based on what you have said here, where you cannot even conclude -- you have said you cannot even quantify any potential amount of loss. To throw "safety and soundness" around in that thing I think really is, for a regulator, irresponsible.
Falcon: Well, I think internal controls are a very serious safety and soundness concern. A breakdown or a lack of internal controls...
Frank: Do you think the safety and soundness is at risk right now?
Baker: Mr. Crowley, that will have to be your last question. If you can wrap up.
Frank: He accepts that.
Crowley: That was my first question, as a matter of fact.
Frank: Yes, I mean, you have just told Mr. Crowley it didn’t implicate safety and soundness. Does it, your report, what you have reported?
Falcon: No, I think our report absolutely does implicate safety and soundness.
Frank: Is the safety and soundness at risk now?
Falcon: Are they at risk of becoming insolvent right now? No. We have an agreement with the board in place that will address these problems, provide an adequate capital cushion. We think we...
Frank: That is the answer. The rest is just rhetoric.
Congressman Richard Baker: The gentleman's time is expired once over. Mr. Ose?
Congressman Doug Ose: Thank you, Mr. Chairman. I yield 15 seconds to Mr. Shays. And I'm counting.
Congressman Christopher Shays: Thank you.
I would just like to say to you, Mr. Falcon, what you have done is you have exposed illegal activity on the part of Fannie Mae, and you are being criticized for exposing it. If they have a safety and soundness problem, or if the markets are impacted, it will only be impacted based on what Fannie Mae did.
And I just want to congratulate you. You have more courage that I realized you have, because the messenger is being shot and not the person who did the wrongdoing. I've seen it here in this committee, and I'm pretty outraged by what I'm seeing.
Congratulations for what you have done.
Let’s thank Congressman Shays for noticing had badly Falcon was abused, and how Falcon was trying to alert the Congress to how poorly Fannie Mae and Freddie Mac were operated. Let’s also remember that Shays is gone. On Election Day 2008, Frank won, Shays lost.
* * *
Later in the Oct. 6, 2004, hearing, Barney Frank made it clear he was upset that Fannie Mae and Freddie Mac would have to raise their capital cushion by 30 percent to protect themselves from default. Clearly intending to push more risky loans, Frank even calls the 30 percent ruling “arbitrary,” when Falcon had just told him it was a necessary safeguard.
Consider this discussion between Frank and Fannie Mae Chairman Franklin Raines:
Barney Frank: We had HUD last year not exercise its right to increase your goals. As you know, HUD had the right, a year before, to -- last year they could have promulgated an increase in your affordable housing goals that would have taken effect this year. They didn't do it. It was an oversight, according to the secretary; they forgot to do it.
Now they're talking about increasing. And I certainly want to see an increase in the amount of affordable housing. But obviously if your overall activity shrinks, we are in trouble because, if I'm correct, your affordable housing goals are not absolute but they're percentages of your overall activity.
So the question is, what will the effect of the 30 percent additional capital be on your reaching an absolute amount, in terms of affordable housing?
Franklin Raines of Fannie Mae: The answer is, we don't know yet. We have a 45-day period to come up with a capital plan, under the agreement, which we will do.
We don't have a lot of choices. As you know very well, you either can reduce the size of your activities or you can increase the amount of capital that you have. If we have to reduce the size of our activities, then the percentage made up of the affordable housing goals will go down because we will be doing less business.
Frank: So that arbitrary 30 percent might result in a diminution in your affordable housing activity?
Raines: Well, if the capital plan requires us to reduce our activities, yes, it would reduce the impact of the goals as a result of our having made those choices.
Frank: Thank you, Mr. Chairman.
Barney Frank’s claimed 2004 warning remains undocumented.
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See also: Newt Gingrich, why is GOP nearly silent about Barney Frank’s destroying Fannie Mae and Freddie Mac?
See also: Darrel Issa reports how political abuse of Fannie Mae and Freddie Mac caused financial meltdown.
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