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Why The Mortgage Crisis Happened
...In subcommittee testimony, Democrats vehemently reject regulation of Fannie Mae in the face of dire warning of a Fannie Mae oversight report.

A few of them — Black Caucus members in particular — are angry at the OFHEO director as they attempt to defend Fannie Mae and CRA.

Committee Chairman Baker called the report "very troubling" and "of extraordinary importance not only to those who wish to own a home, but as to the taxpayers of this country who would pay the cost of the cleanup of an enterprise failure. . . . The analysis makes clear that more resources must be brought to bear to ensure the highest standards of conduct are not only required, but more importantly, they are actually met."

In reply, Rep. Waters said: "Through nearly a dozen hearings . . . we were trying to fix something that wasn't broke. . . . We do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines."

Added Rep. Gregory Meeks, D-N.Y.: "I'm just pissed off at OFHEO. Because if it wasn't for you, I don't think that we'd be here in the first place. And now the problem . . . we're faced with is maybe some individuals who wanted to do away with GSEs in the first place, you've given them an excuse to try to have this forum so that we can talk about it and maybe change the the direction and the mission of what the GSEs had, which they've done a tremendous job.

"There's been nothing that was indicated that's wrong with Fannie Mae. Freddie Mac has come up on its own. And the question that then presents is the competence that your agency has with reference to deciding and regulating these GSEs . . . I am very upset, because you . . . may be giving any reason to give someone heart surgery when they really don't need it."

But Rep. Ed Royce, R-Calif., said he hoped the committee would "move swiftly to create a new regulatory structure for Fannie Mae, for Freddie Mac, and the Federal Home Loan Banks."

Replied Rep. Lacy Clay, D-Mo.: "This hearing is about the political lynching of Franklin Raines."

Royce: "There is a very simple solution. Congress must create a new regulator with powers at least equal to those of other financial regulators, such as the OCC or Federal Reserve."

Rep. Gregory Meeks, D-N.Y.: "Why should I have confidence, why should anyone have confidence, in you as a regulator at this point?"

Armando Falcon, OFHEO director: "Sir, OFHEO did not improperly apply accounting rules; Freddie Mac did. OFHEO did not fail to manage earnings properly; Freddie Mac did. So this isn't about the agency engaging in improper conduct. It's about Freddie Mac."

Rep. Christopher Shays, R-Conn., noted: "We passed Sarbanes-Oxley, which was a very tough response to that, and then I realized that Fannie Mae and Freddie Mac wouldn't even come under it. They weren't under the '34 act, they weren't under the '33 act, they play by their own rules, and I'm tempted to ask how many people in this room are on the payroll of Fannie Mae, because what they do is basically hire every lobbyist they can possibly hire. They hire some people to lobby, and they hire some people not to lobby so that the opposition can't hire them."

Rep. Arthur Davis, D-Ala.: "You're making very broad and categorical judgments about the management of this institution, about the willfulness of practices that may or may not be in controversy. You've imputed various motives to the people running the organization. You went to the board and put a 48-hour ultimatum on them without having any specific regulatory authority to put that kind of ultimatum on them. That sounds like some kind of an invisible line has been crossed."

Rep. Shays: "Fannie Mae has manipulated OFHEO for years. And for OFHEO to finally come out with a report as strong as it is, tells me that's got to be the minimum not the maximum."

Rep. Frank: "You seem to me 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."

Rep. Waters: "Under the outstanding leadership of Mr. Frank Raines, everything in the 1992 Act has worked just fine. In fact, the GSEs have exceeded their housing goals. What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100% loans."

Rep. Lacy Clay, D-Mo.: "I find this to be inconsistent and and a rush to judgment. I get the feeling that the markets are not worried about the safety and soundness of Fannie Mae as OFHEO says that it is, but of course the markets are not political."

Rep. Frank: "But I have seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as kind of a general shibboleth when it does not seem to me to be an issue."

Rep. Don Manzullo, R-Ill.: "Mr. Raines' $1.1 million bonus and a $526,000 salary. Jamie Gorelick, $779,000 bonus on a salary of $567,000. This is . . . nothing less than staggering....

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Barney Frank's Bankrupt Ideas
...In 1995, as Howard Husock pointed out eight years ago in City Journal, "the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance."

Creditworthiness and due diligence no longer mattered. As a 1999 New York Times editorial observed: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Bill Clinton administration to expand mortgage loans among low- and moderate-income people and felt pressure to maintain its phenomenal growth in profits."

On Frank's and Clinton's watch, the Community Reinvestment Act was changed to force the issuance of bad loans. Banks would be rated on the number of loans, not on their soundness. Fannie Mae and Freddie Mac were then encouraged to buy them up. It was all about affordable housing, even if the housing was unaffordable.

"From the perspective of many people, including me, this is another thrift industry growing up around us," Peter Wallison, a resident fellow at the American Enterprise Institute, said back in 1999. "If they fail, the government will have to step in and bail them out the way it stepped up and bailed out the thrift industry." ...

...Democrats believe in affordable housing even if it's at the expense of the vast majority who watch their credit, work hard and pay their mortgages on time. But for the deadbeats, particularly Democratic constituencies, they have ways to make affordable the housing you couldn't afford. So first, they forced them into housing they couldn't afford, and now they give them a financial mulligan....

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How Mortgage Crisis Happened: Good Intentions Paved Dire Path
...The New York Times wrote that the "democratization of credit" is "turning the American dream of homeownership into a nightmare for many borrowers." The "newfangled mortgage loans" — called affordability loans — "represent 60% of foreclosures."...

...Rep. Arthur Davis, D-Ala., now admits Democrats were in error: "Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie: We were wrong."...