Is it my imagination, or is U.S. Rep. Darrel Issa about the only member of Congress who is doing his homework to keep the government honest?
The guy is willing to find facts and challenge fantasy. Let’s see a few Democrats start doing this.
Issa, the ranking Republican on the House Oversight and Reform Committee, just released a report on how 16 years of government interference with mortgage giants Fannie Mae and Freddie Mac was largely responsible for last year’s financial meltdown.
Exempt from SEC. Investors.com summarizes the findings (and I add some notes):
* With an implicit subsidy to American homeowners in the form of reduced mortgage rates, Fannie Mae and its sister government sponsored enterprise, Freddie Mac, squeezed out their competition and cornered the secondary mortgage market. They took advantage of a $2.25 billion line of credit from the U.S. Treasury.
* Congress, by statute, allowed them to operate with much lower capital requirements than private-sector competitors. They “used their congressionally-granted advantages to leverage themselves in excess of 70-to-1.” [That’s $70 in loans to each $1 in capital reserves. “During hearings on the collapse of Wall Street investment bank Lehman Brothers, members of the (Oversight) Committee were outraged to learn that Lehman Brothers was leveraged at a ratio in excess of 30-to-1.” Fannie and Freddie were more than twice as bad as Lehman.]
* The two GSEs [government sponsored enterprises, Fannie and Freddie] were the only publicly traded corporations exempt from SEC oversight. All their securities carried an implicit AAA rating regardless of the quality of the mortgages.
* The Department of Housing and Urban Development set quotas for GSE investment in affordable housing.
* Encouraged by an inaccurate 1992 Boston Federal Reserve Bank study charging racial discrimination in mortgage lending, the two GSEs [Fannie Mae and Freddie Mac] were strongly pressured to “lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers.”
* In 1992, Congress directed HUD to establish multiple quotas requiring mortgage quotes for low-income families.
* In 1995, the Clinton administration issued a National Homeownership Strategy, loosening Fannie and Freddie’s lending standards and insisting that lenders “work collaboratively to reduce homebuyer downpayment requirements.” [The Clinton administration in 1995 also amended the Community Reinvestment Act, the 1977 law aimed at ending mortgage discrimination against people who could afford loans but who were turned down simply because they lived in poor neighborhoods. “According to one academic study of CRA, this regulatory change (in 1995) marked ‘a shift in emphasis from procedural equity to equity in outcome” in numbers of loans to poor areas.]
* The [Clinton] administration complained that in 1989 only 7% of mortgages had less than a 10% downpayment. By 1994, it [had been] raised to 29%. [“It also created pressure for secondary market investors such as Fannie Mae and Freddie Mac to buy these loans. The correspondingly lower emphasis on how the loans were being made inevitably meant less attention would be paid to their quality and sustainability.”]
* Reduced underwriting standards spread into the entire U.S. mortgage market to those at all income levels. [The American Enterprise Institute noted, “Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.”]
* A complete decoupling of home prices from Americans’ income fed the growth of the housing bubble as borrowers made smaller down payments and took on higher debt.
* Wall Street firms specializing “in packaging and investing in the lowest-quality tranches of mortgage-backed securities, profited hugely from the increased volume that government affordable lending policies sparked.”
* Wall Street firms, homebuilders and the GSEs [Fannie Mae and Freddie Mac] used money, power and influence to block attempts at reform. Between 1998 and 2008, Fannie and Freddie spent over $176 million on lobbyists. [“They paid lobbyists to influence members of Congress to block legislative proposals that would have stripped them of their preferential advantages. The GSEs (Fannie and Freddie) even paid lobbyists just so they would not lobby against them.”]
* In 2006, Freddie paid the largest fine in Federal Election Commission history for improperly using corporate resources to hold 85 fundraisers for congressmen, raising a total of $1.7 million.
Anti-reform bias. Issa’s report says:
“The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans.
“This intervention began with two government backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses.
“Government intervention also created ‘affordable’ but dangerous lending policies which encouraged lower down payments, looser underwriting standards and higher leverage.
“Finally, government intervention created a nexus of vested interests – politicians, lenders and lobbyists – who profited from the ‘affordable’ housing market and acted to kill reforms.
“In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate. However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American taxpayer and economy.”
Threats to Congress. Issa has specifics on how Fannie Mae and Freddie Mac pushed their weight around, even in Congress:
“When Congressman Jim Leach (R-IA) proposed assessing a fee on the GSEs [Fannie Mae and Freddie Mac] to offset the federal subsidy they receive on their cost of borrowing, ‘it took just twelve hours for Fannie to blow the idea out of the water.’ Fannie Mae also forced then-Treasury Secretary Larry Summers to ‘tone down’ a report that was originally going to criticize the cozy relationship between the federal government and the GSEs.
“When Congressman Paul Ryan (R-WI) sought to increase regulation of the GSEs, Fannie Mae sent lobbyists to harass him in his Wisconsin congressional district, going so far as to call his constituents and accuse him of seeking to increase mortgage rates, generating 6,000 angry responses to his office. When Ryan transferred to a committee without direct oversight of the GSEs, Fannie CEO Raines sent him a ‘congratulatory’ note. ‘He meant good riddance,’ said Ryan.
“When Congressman Christopher Shays (R-CT) introduced legislation to end the GSEs’ unique exemption from SEC registration, he ‘had lobbyists literally barging into my room,’ while Fannie CEO Raines reportedly called the lawmaker to ask, ‘What the hell have [you] done?’ The GSEs retaliated by ending the home-buying forums in Shays’ district in an attempt to hurt him politically. [Shays lost his re-election bid in 2008.]
“Congressman Cliff Stearns (R-FL), who scheduled hearings on Freddie Mac’s use of improper accounting procedures in 2004, had his jurisdiction over the GSEs stripped by House Speaker Dennis Hastert (R-IL), who assigned the task to Michael Oxley (R-OH), who was the most frequent featured guest at 19 of the fund-raisers Freddie Mac held for members of his committee.”
Haven for hacks. Issa’s report reveals how political hacks got high-paying jobs in Fannie Mae and Freddie Mac, rendering impossible the effective and objective oversight these mortgage lenders needed.
“Fannie and Freddie also served as a revolving door for powerful former politicians, their aides and even their family members. [Former Fannie Mae CEO] Jim Johnson managed Walter Mondale’s 1984 presidential campaign, chaired the vice presidential selection committee for presidential candidate John Kerry, and was involved in President Barack Obama’s vice presidential selection process. [Former Fannie Mae CEO] Franklin Raines had been President Clinton’s Director of the Office of Management and Budget. Former Clinton Deputy Attorney General Jamie Gorelick served as Vice-Chairman of Fannie Mae and earned [was paid] over $26 million in compensation. Former Fannie Senior Vice President John Buckley had served as a Republican Congressional staffer and senior advisor to Republican House Speaker Newt Gingrich. The son of Republican Senator Bob Bennett worked for Fannie Mae’s Utah regional office, while Democratic Representative Barney Frank’s partner, Herb Moses, worked at Fannie Mae from 1991 to 1998 as Assistant Director for Product Initiatives while Frank sat on the House Banking Committee with responsibility for oversight of the GSEs.
“Until President George W. Bush ended the practice, the President of the United States appointed five members to the GSEs’ boards. This was a unique arrangement among publicly-traded companies and solely a function of their hybrid public-private nature.”
Abuse of power. Congressman Issa has pulled together the history and the facts on how politicians turned Fannie Mae and Freddie Mac’s lending procedures into a wholly preventable disaster. Read the whole report.
Frank Warner
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Footnote: Fannie Mae paid for dubious 2002 study.
Issa's report also faults a Fannie Mae-commissioned 2002 study by economist Joseph Stiglitz, OMB Director Peter Orszag and Orszag's brother, Jonathan Orszag. The study concluded that “risk to the government from a potential default on GSE [Fannie and Freddie] debt is effectively zero.” The study also found that “the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.”
I hadn't heard of the 2002 study until now. It's called "Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard." It sure lowers my opinion of Stiglitz as a serious economist.
Of course, friends of Stiglitz and the Orszag brothers are defending the study by claiming it estimated the risk was zero barring a severe housing downtown or economic depression. But the defenders overlook the most obvious mistake of Stiglitz, Orszag and Orszag: Their failure to see that, as soon as we reached the negative curve of the economic cycle (with rising gasoline prices or any other phenomenon that large) the high-risk loans encouraged by Fannie Mae and Freddie Mac would help cause a severe housing downtown and depression.
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