Tuesday, September 16, 2008

McCain, The Fannie & Freddie Crisis, & Obamafuscation

Obama needs a Sister Souljah moment to distinguish himself to independent and weak Republican voters who are agreeing with GOP claims that Obama is a classic liberal . . . Obama has a golden opportunity with the U.S. financial system falling apart at the seams.

Congressional Democrats were and remain the leading defenders of Fannie Mae and Freddie Mac, promising to resist efforts to shrink the companies, now under government control, and sell off their assets. Democrats had plenty of help from Republicans, to be sure, but it was mainly conservatives who have been warning for more than a decade that their public risk/private profit model was a disaster waiting to happen. . . .

Caroline Lochhead, S.F. Chronicle, 15 Sep. 2008

We are in a fiscal crisis today largely because of the sub-prime lending crisis. At the intersection of the crisis is Fannie Mae, Freddie Mac, and Democratic politics. It was Bill Clinton who set this time bomb in motion by forcing lenders into the sub-prime market. It was Clinton who used Fannie Mae and Freddie Mac as the center pieces of his strategy to extend home loans to marginal borrowers. And it has been largely Democratic lawmakers who have protected the scheme over Republican and Bush administration efforts to reign it in over the past eight years.

Thus the advice liberal commentator Ms. Lochhead offers Obama is sage indeed, but there is little chance of Obama taking it. There are certain lines Obama does not cross, and one of those is taking on his party. He and the entire Democratic party are attempting to disingenuously toss off the current fiscal crisis on the Republicans and George Bush. I don't think that they can accomplish that, even with the MSM fully on their side, unless John McCain continues to fumble about. John McCain, unlike Obama was calling for an overhaul of Fannie Mae and Freddie Mac years ago. He desperately needs to find his bearings on this one and go on the attack. He needs to be placing the blame for this mess where it belongs.

This current financial crisis is a creation of govenment policy. More particularly, it is, at its point of inception, a creation of Democrat identity politics, pure and simple. John Lott gives us some background on how Clinton era regulations to force the lowering of lending standards, ostensibly to benefit minorities, came about:

Some of the very people who are now advocating new regulations were the same ones that forced through the regulations over a decade ago that caused the problems that we are facing today.

This all started back in 1992, when a Boston Federal Reserve study claimed to find evidence of racial discrimination. The Fed later used the study to produce a manual for mortgage lenders that: "discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants."

So what is on the list of Fed’s "outdated criteria"? Such "discriminatory" factors as the borrower’s credit history, income verification, and the size of the mortgage payment relative to income.

But it turns out that the original study was mistaken.

Economists discovered that there were errors in the data the study used. Some minorities were listed as having wealth up to hundreds of times greater than they actually had, making it look like wealthy minorities were being turned down for loans. When the data errors were corrected minorities with the same financial background as whites had been at no disadvantage in getting mortgages.

Investors Business Daily has more on the origins of the current fiscal crisis rumbing through our markets today:

Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the "trickle-down" economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.

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.

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

At the same time, the Clinton administration was pushing Fannie and her brother Freddie Mac to buy more mortgages from low-income households.

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today's nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

What the IBD does not tell us is the efforts made mostly by Republicans and conservatives to reign in this travesty over the past decade, all of which have been successfully fought off by the left. The fact that Fannie and Freddie were time bombs waiting to explode was written on the walls well over a decade ago, and if there was any question, it should have been clear to all when it came to public attention that Fannie and Freddie were invovled in ENRON style accounting practices. The Bush administration took a hard line - Congressional Democrats did not - and it was they who won the day. This from the Washington Post:

In June 2003, Freddie Mac dropped a bombshell: It had understated its profits over the previous three years by as much as $6.9 billion in an effort to smooth out earnings.

OFHEO seemed blind. Months earlier, the regulator had pronounced Freddie's accounting controls "accurate and reliable."

Humiliated by the scandal, then-OFHEO director Armando Falcon Jr. persuaded the White House to pay for an outside accountant to review the books of Fannie Mae. The agency reported in September 2004 that Fannie Mae also had manipulated its accounting, in this case to inflate its profits.

The companies were humbled. The flaws of their business practices were laid bare.

The companies soon faced new bills in both the House and the Senate seeking increased regulation. The Bush administration took the hardest line, insisting on a strong new regulator and seeking the power to put the companies into receivership if they foundered. That suggested the government might not stand behind the companies' debt.

Fannie Mae and Freddie Mac succeeded in escaping once more, by pounding every available button.

The companies orchestrated a letter-writing campaign by traditional allies including real estate agents, home builders and mortgage lenders. Fannie Mae ran radio and television ads ahead of a key Senate committee meeting, depicting a Latino couple who fretted that if the bill passed, mortgage rates would go up.

The wife lamented: "But that could mean we won't be able to afford the new house."
Most of all, the company leaned on its Congressional supporters.

This from Hot Air, discussing what happened next:

The New York Times reported this five years ago:

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.

This should have been a no-brainer, right? With hindsight, we can see that the Bush administration had accurately diagnosed the problem in the lending market and had a plan to address it. Fannie Mae and Freddie Mac reluctantly supported the plan. However, Democrats objected:

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

"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."

Representative Melvin L. Watt, Democrat of North Carolina, agreed.
"I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing," Mr. Watt said.

Every single Democrat today is trying to toss this debacle at the feet of George Bush and the Republicans. You can read McCain's speech on this matter here. He blames Wall St. and greed, giving Democrats and Obama a pass. It is incredibly weak and unfocused. It does not refute the charges being laid against against he, Bush and the Republican Party. This is an immense strategic error. McCain needs to have a simple message. This is a Demorcrat debacle at inception. McCain, not Obama, was the only one who has previously called for reform of Fannie and Freddie. And now Obama, rather than admit the problems, is trying to hide the causes, protect the Democratic Party, and his own failure to foresee these problems. He is lying to America. You will only get straight talk from one side of the ticket. That is the simple message McCain needs to be conveying. And while he is doing it, he can note that the two greatest recipients of campaign contributions from Fannie and Freddie are Chris Dodd and Barack Obama.

Update: Pelosi, for her part, is trying to disclaim any Congressional responsibility for this mess, pointing instead to McBush. See links at Memorandum.

Update II: Hot Air has a complimentary post on this that memorializes McCain's speech on Fannin and Freddie in 2005, when he forecast the crisis that has now occurred. The legislation that McCain proposed was killed in committee by the greatest beneficiary of Fannie and Freddie largesse, Chris Dodd. The legislation that McCain proposes was notable for its lack of support from the second greatest recipient of Fannie and Freddie largesse, the junior Senator from Illinois.


Freedom Fighter said...

Hi GW,
Great post, but I have one caveat_ whatever his other sins, Clinton did not `force lenders into the subprime market.' In fact it existed long before him.

What in fact happened is that the bond boys on Wall Street wanted a piece of the 3 trilion dollar home mortgage market, particularly after seeing how much money could be made by pushing through the paper during the refi boom.

What they essentially did was to set themselves up as 'investors' who created what the biz calls a secondary market, buying up loans written with much more lax criteria than Fannie and Freddie
(their problems stem from poor management and the decline in equity in places like California rather than non-performing loans per se). The rate of return was high, the commish was good and everybody was happy.

It wasn't the idea of lending to people with lower credit scores that did things in as much as speculation both in that secondary market and by homeowners who bought with little or no down, figuring that another sucker would come along and pay even more for the property or that they could refinance themselves out of a poor loan in a year or so when the property appreciated.

Another cause of the lack of equity that no one wants to mention in this political season is the fact that many homeowners simply looked at th eappreciuation and spent it, using their homes like ATMs with easy lines of credit..and that,of course is something all the lenders facilitated with ezy lines o' credit...AKA second mortgages. When values went down, no more equity and people simply walked.

That's what ended the party..that, and the fact that most potentiasl homeowners in large metro areas like Los Angeles, New York and San Francisco were simply priced out of the market due to high prices and high property taxes based on the inflated values.It was simply far cheaper for most people to rent than buy.

Until prices come back down to affordable levels and inventory goes down, the housing market will remain in the doldrums.Unfortunately,the Federal goverment's actions to try and stem the rate of foreclosures and to transfer subprime loans made to people with lousy credit and no equity onto the FHA's ( AKA the US taxpayers) shoulders is simply going to make the problem worse.

Sorry to be so damn long winded...

All Best,

Unknown said...

Obama was on the legal team back in the mid-90s that sued Citibank over lending to the minorites he was "social organizing." I don't think he wants to comment on sub-prime loans.

GW said...

FF - thanks much for the clarification. My recollection of the Clinton regulations is that they actually established a penalty for turning down the sub-prime market. I do not disagree that the chance for cash draws speculators like flys, but I do not believe this could have happened without that. With that caveat, I agree with all of your points.

Judith - a superb point. Thanks for that. If you have more info or any links on that, I'd love to see them. I will also follow up on this.

Anonymous said...

A good summary of how this came about due to the desire to make home ownership more available to minorities. A laudable goal, but pushed too far and too fast when money became so easy.

A whole lot of the easy money came from the Yen carry trade. Borrow money in Japan at 1% then lend it here in the USA for 4-6%. Sell the loans to Fannie/Freddy or other loan consolidators, pay off the loan in Japan and repeat.It fueled a lot of speculation in real estate in Florida, Arizona, Las Vegas, and California.

In Florida people were putting deposits on houses in developments before the foundations were laid. They could then sell the completed homes at a profit and never even move in. Easy money, while it lasted. However, when demand dropped off (as mortgage rates went above 6%) many of these people got caught out with a house and mortgage they did not want or could not afford. Thus the high foreclosure rates in those four areas.

Sillie Lizzie said...

Anen to Jimmy J. I have a personal story to tell from my experience with that, on both sides of the aisle. If you care to hear it, click here:
Roots of Fannie,Freddie: GREED of Mr. & Mrs. America

Unknown said...