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09-26-2008, 05:02 PM
Congress Pushed Fannie, Freddie In Wrong Direction During 1990s
BY TERRY JONES
INVESTOR'S BUSINESS DAILY
Posted 9/25/2008
It was October 1992, nearly 15 years before the housing meltdown and subprime crisis.
Republican Rep. Jim Leach of Iowa was on the floor of the House, talking about something that no one at the time seemed to care about: the potential danger that Fannie Mae (FNM (http://javascript<b></b>:jsfOpenPowerTool('H3Q4Q5',1,0))) and Freddie Mac (FRE (http://javascript<b></b>:jsfOpenPowerTool('H3U4I5',1,0))) posed to the economy.
In remarks later reported by the Washington Post, Leach warned that Fannie and Freddie were changing "from being agencies of the public at large to money machines for the stockholding few."
Leach's prescient comments went unheeded — indeed, Congress spent the next decade and a half avoiding the alarms going off around Fannie and Freddie. Until, that is, it was too late.
Led by top Democrats, including Rep. Barney Frank in the House and Sen. Chris Dodd in the Senate, Congress not only did nothing about the growing risks at Fannie and Freddie, it in essence doubled down on their risks.
The Democrat-led Congress of the early 1990s eased capital limits on the two mortgage lending giants, letting them use enormous leverage — 2.5% of assets at Fannie and Freddie, vs. 10% for banks — to expand lending to low-income, minority communities.
Regulator Reined In
Congress, with the passage of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, also created a regulator for Fannie and Freddie — but made sure that, from the very beginning, it would essentially be neutered.
That regulator, the Office of Federal Housing Enterprise Oversight, an arm of the Department of Housing and Urban Development, was unique among financial regulators in that it had to go back each year to Congress for its budget.
This assured its total dependence on Congress — a less-than-ideal situation for a regulator.
Over the next decade or so, Fannie and Freddie made sure that OFHEO stayed off their backs, funneling $200 million to various political causes and community activists while donating to 354 political candidates of both parties.
Congress Eases Lending Rules
In 1994, the Democratic Congress again moved, passing the Community Reinvestment Act — an update of the original 1977 law.
For the first time, homeowners that previously didn't qualify — either because they couldn't put any money down or had bad credit — were made eligible for government-backed loans.
The housing boom was on.
During the 1990s, according to one Fed study, Fannie and Freddie enjoyed a subsidy of as much as $182 billion, with most of that going to shareholders — not to poor borrowers, as supporters of the government-sponsored enterprises have often claimed.
Still, even after the GOP won control of Congress in 1995, Democrats in both houses worked with President Clinton as Fannie and Freddie's enablers.
Clinton, bypassing Republicans in Congress, had HUD rewrite the rules for Fannie and Freddie to let them get involved in the subprime market for the first time.
Robert Rubin's Treasury got involved too, reworking its own rules to crack down on banks that didn't make enough loans to distressed, minority neighborhoods.
That year, Fannie Mae bought an estimated $18.6 billion in subprime loans from banks. By 2004, that amount had exploded to $175 billion, or 44% of the total.
Republicans controlled Congress from 1995 through 2006. But under Clinton their hold was precarious, and with the Internet boom on and several foreign financial crises to deal with, Fannie and Freddie got lost in the shuffle.
Too Little, Too Late
At the tail end of Clinton's administration, Treasury officials under the new secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses.
Undersecretary Gary Gensler went to Congress in 2000 seeking an end to the companies' special status — especially the "implicit" federal guarantee of their now-$5.4 trillion loan portfolio — and more power for regulators to boost the companies' capital requirements.
Democrats raised a ruckus. So did Fannie and Freddie, which were both headed by politically well-connected CEOs who knew how to strategically reward — and punish — those who crossed them.
"We think that the statements evidence a contempt for the nation's housing and mortgage markets," Freddie Mac spokeswoman Sharon McHale said at the time, summing up the sentiment in Congress.
It was the last chance during the Clinton era for anything like real reform.
BY TERRY JONES
INVESTOR'S BUSINESS DAILY
Posted 9/25/2008
It was October 1992, nearly 15 years before the housing meltdown and subprime crisis.
Republican Rep. Jim Leach of Iowa was on the floor of the House, talking about something that no one at the time seemed to care about: the potential danger that Fannie Mae (FNM (http://javascript<b></b>:jsfOpenPowerTool('H3Q4Q5',1,0))) and Freddie Mac (FRE (http://javascript<b></b>:jsfOpenPowerTool('H3U4I5',1,0))) posed to the economy.
In remarks later reported by the Washington Post, Leach warned that Fannie and Freddie were changing "from being agencies of the public at large to money machines for the stockholding few."
Leach's prescient comments went unheeded — indeed, Congress spent the next decade and a half avoiding the alarms going off around Fannie and Freddie. Until, that is, it was too late.
Led by top Democrats, including Rep. Barney Frank in the House and Sen. Chris Dodd in the Senate, Congress not only did nothing about the growing risks at Fannie and Freddie, it in essence doubled down on their risks.
The Democrat-led Congress of the early 1990s eased capital limits on the two mortgage lending giants, letting them use enormous leverage — 2.5% of assets at Fannie and Freddie, vs. 10% for banks — to expand lending to low-income, minority communities.
Regulator Reined In
Congress, with the passage of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, also created a regulator for Fannie and Freddie — but made sure that, from the very beginning, it would essentially be neutered.
That regulator, the Office of Federal Housing Enterprise Oversight, an arm of the Department of Housing and Urban Development, was unique among financial regulators in that it had to go back each year to Congress for its budget.
This assured its total dependence on Congress — a less-than-ideal situation for a regulator.
Over the next decade or so, Fannie and Freddie made sure that OFHEO stayed off their backs, funneling $200 million to various political causes and community activists while donating to 354 political candidates of both parties.
Congress Eases Lending Rules
In 1994, the Democratic Congress again moved, passing the Community Reinvestment Act — an update of the original 1977 law.
For the first time, homeowners that previously didn't qualify — either because they couldn't put any money down or had bad credit — were made eligible for government-backed loans.
The housing boom was on.
During the 1990s, according to one Fed study, Fannie and Freddie enjoyed a subsidy of as much as $182 billion, with most of that going to shareholders — not to poor borrowers, as supporters of the government-sponsored enterprises have often claimed.
Still, even after the GOP won control of Congress in 1995, Democrats in both houses worked with President Clinton as Fannie and Freddie's enablers.
Clinton, bypassing Republicans in Congress, had HUD rewrite the rules for Fannie and Freddie to let them get involved in the subprime market for the first time.
Robert Rubin's Treasury got involved too, reworking its own rules to crack down on banks that didn't make enough loans to distressed, minority neighborhoods.
That year, Fannie Mae bought an estimated $18.6 billion in subprime loans from banks. By 2004, that amount had exploded to $175 billion, or 44% of the total.
Republicans controlled Congress from 1995 through 2006. But under Clinton their hold was precarious, and with the Internet boom on and several foreign financial crises to deal with, Fannie and Freddie got lost in the shuffle.
Too Little, Too Late
At the tail end of Clinton's administration, Treasury officials under the new secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses.
Undersecretary Gary Gensler went to Congress in 2000 seeking an end to the companies' special status — especially the "implicit" federal guarantee of their now-$5.4 trillion loan portfolio — and more power for regulators to boost the companies' capital requirements.
Democrats raised a ruckus. So did Fannie and Freddie, which were both headed by politically well-connected CEOs who knew how to strategically reward — and punish — those who crossed them.
"We think that the statements evidence a contempt for the nation's housing and mortgage markets," Freddie Mac spokeswoman Sharon McHale said at the time, summing up the sentiment in Congress.
It was the last chance during the Clinton era for anything like real reform.