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By - April 23, 2010

“Banking Reform” Ignores Fannie and Freddie

Yesterday, Harry Reid moved the 1,400 page financial regulation bill forward by setting the cloture vote for Monday afternoon. You would think that a bill of this size would certainly address the central problems that led to the mortgage meltdown that got us all into this mess.

You would be wrong.

According to Connie Hair of HumanEvents.com, this bill would do nothing to reform Fannie Mae or Freddie Mac. According to Hair, “Fannie Mae and Freddie Mac were at the very heart of the financial meltdown in 2008 and they continue to bleed billions of taxpayer dollars. But the whole issue of financial reform of the housing industry is noticeably absent from the Democrats’ bill.”

Rep. Scott Garrett (R-N.J.), top Republican on the Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises for the House Financial Services Committee sent a memo yesterday to Valerie Jarrett, Senior Advisor and Assistant to the President for Intergovernmental Affairs and Public Engagement, asking her why the president’s reforms don’t include “the two biggest risk takers in our economy — Fannie Mae and Freddie Mac.”

Garrett went on to say,

The government needs to look no further than itself to find the root cause of the financial crisis. In attempts to meet a dual public and private mission, Fannie and Freddie endorsed lower and lower underwriting standards which allowed significantly less credit-worthy borrowers to purchase homes. These new standards then paved the way for financial institutions to begin seeking new ways to underwrite and approve loans, degrading the overall creditworthiness of securitized products.

Garret is exactly right to say that the government is the “root cause of the financial crisis”. Although, to be specific, he should have added that it’s the Democrats in the government that are to blame. Let’s have a little history lesson, shall we?

In 2003, President Bush proposed a “significant regulatory overhaul” of Fannie Mae and Freddie Mac, in order to “determine whether the two are adequately managing the risks of their ballooning portfolios.” It didn’t go anywhere. Why?

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.”

The Democrats’ priority on maintaining “affordable housing” has always been suspect. “Affordable housing” means low property values, which equates to smaller mortgages and, thereby, smaller mortgage payments. Under the banner of anti-discrimination and “war on poverty” policies, Democrats in the Nineties encouraged lenders (in the form of government backing) to loan money to people who were highly unlikely to pay it back. From Investor’s Business Daily Editorials:

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.

Adding more home buyers into the market, thanks to artificially lax lending guidelines, drove up home prices. In order to keep housing “affordable”, interest rates were suppressed (underpricing the risk associated with them), which drove more home owners into the market, which increased prices. This is how a bubble is created. Bush wisely saw that this cycle would eventually lead to major financial problems (like the ones we’re still dealing with today), but the Dems didn’t want to put any “pressure” on Fannie or Freddie.

Jump forward a couple of years to when John McCain co-sponsored the Federal Housing Enterprise Regulatory Reform Act of 2005. McCain warned us that “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.” It appears that his prediction was accurate, as the tab for the banking bailouts came out to more than $1,000 for every man woman and child in the country.

McCain’s bill died in committee, under the leadership of Sen. Chris Dodd, a Democrat from Connecticut and chairman of the Banking Committee. Oddly enough, a scandal came to light in 2008 involving Dodd receiving discounts and preferential treatment through Countrywide’s V.I.P. program during 2003 and 2004. According to wikipedia, “in 2006 Countrywide financed 20% of all mortgages in the United States, at a value of about 3.5% of United States GDP, a proportion greater than any other single mortgage lender.” Countrywide would have been directly affected by increased regulations, but, lucky for them, they had a friend in high places looking out for them.

Speaking of Countrywide, during the primaries in 2008 Obama accused Countrywide of “infecting the economy” and helping to create the home foreclosure crisis. However, when it came time to look for a running mate, Obama turned to James Johnson to help with the search. According to the New York Sun, Johnson received more than $7 million from the same Countrywide sweetheart program as Dodd.

You can tell a lot about a man by the friends he keeps, but if Obama’s link to Johnson and Johnson’s link to Countrywide isn’t enough for you, consider this from John Gibson of Fox News from September, 2008:

Lehman Brothers’ collapse is traced back to Fannie Mae and Freddie Mac, the two big mortgage banks that got a federal bailout a few weeks ago. Freddie and Fannie used huge lobbying budgets and political contributions to keep regulators off their backs. A group called the Center for Responsive Politics keeps track of which politicians get Fannie and Freddie political contributions. The top three U.S. Senators getting big Fannie and Freddie political bucks were democrats and number two is Senator Barack Obama.

Now, remember that Obama had only been in the Senate for four years but still managed to grab the number two spot ahead of John Kerry, who had decades in the senate and Chris Dodd, the chairman of the senate banking committee.

In Barack Obama we have a politician with less than half a decade of leadership experience, whose party directly contributed to this problem while his historical revisionism has led him to blame everyone but those who are truly responsible for the crisis at hand. Asking Democrats to reform financial regulations is like calling up the arsonist to see if he can help you put out the fire he started in your basement. Just like health care “reform”, all these new regulations will do is give more power to the government while wasting more of your money.

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