---

How Congress Ignored Warnings And Stiff-Armed Reform Of GSEs
...Rep. Barney Frank, in response to warnings about growing riskiness in housing markets, said in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable." Critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see."

As for government pressures on Fannie and Freddie to loosen their mortgage lending standards, Frank said: "I believe that we, as the federal government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals."

He said, "I would like to get Fannie and Freddie more deeply into helping low-income housing and possibly moving into something that is more explicitly a subsidy." He added: "I want to roll the dice a little bit more in this situation towards subsidized housing."

Congressman Frank expressed a fear that criticisms of lower lending standards could create pressures to tighten those standards, because "the more pressure there is there, then the less I think we see in terms of affordable housing."

Congressman Frank dismissed fears expressed by those who saw an implicit commitment by the federal government to bail out Fannie Mae and Freddie Mac that could lead these giants to engage in more risky financial operations, because they felt they were backed up by the government, and this could lead investors to go along with accepting their risky securities, based on the same implicit reliance on the federal treasury.

"But there is no guarantee," Congressman Frank asserted, "there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee."

Such statements were not just some popping off by an isolated politician. Barney Frank was in 2003 the ranking member of the House Committee on Financial Services and would later become chairman of that powerful committee in 2006. He was a very influential force in the housing market.

Later events, however, were not kind to Congressman Frank's assertions. Those investors who had relied on taxpayer bailouts of Fannie Mae and Freddie Mac turned out to be right and Barney Frank wrong. As of January 2009, Fannie Mae and Freddie Mac were in line to receive $238 billion in federal bailout money and were asking for $70 billion more....

...Back in 2004, when Fannie Mae and Freddie Mac were under criticism, Sen. Dodd called them "one of the great success stories of all time" and urged "caution" in restricting their activities, out of fear of "doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years."

After accounting errors totaling $11 billion were discovered in the books of Fannie Mae and Freddie Mac, President Bush in 2007 said that these government-sponsored enterprises should complete "a robust reform package" before being allowed to expand their mortgage portfolios. Sen. Dodd said that President Bush should "immediately reconsider his ill-advised" position.

As late as July 2008, after the housing market had collapsed, Sen. Dodd continued to defend Fannie Mae and Freddie Mac as being "on a sound footing."

Later events did not deal kindly with this assertion either, as both these hybrid enterprises were bailed out to prevent their collapse and were taken over by the federal government....

...In June 2004, in response to President Bush's expressed concerns about the riskiness of Fannie Mae and Freddie Mac, 76 Democrats in the House of Representatives sent him a letter defending these government-sponsored enterprises, and again making the case that "an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing."

These 76 House members included such prominent individuals as Frank, Waters, Nancy Pelosi and Charles Rangel....