This is the letter Obama has been beating Republicans over the head with saying he warned about the financial crisis. Even the headline on Obama's site doesn't say that. When you read the letter you realize it is anything but a warning about a financial meltdown (it is also interesting that it seems impossible to find via a search engine, does google not index Obama's site?) Anyway, here is my breakdown of the letter
Dear Chairman Bernanke and Secretary Paulson,
There is grave concern in low-income communities about a potential coming wave of foreclosures. Because regulators are partly responsible for creating the environment that is leading to rising rates of home foreclosure in the subprime mortgage market, I urge you immediately to convene a homeownership preservation summit with leading mortgage lenders, investors, loan servicing organizations, consumer advocates, federal regulators and housing-related agencies to assess options for private sector responses to the challenge.
Obama recognizes it is a regulation problem, but what are the problem regulations that are causing the foreclosures? Obama never does answer that question.
We cannot sit on the sidelines while increasing numbers of American families face the risk of losing their homes. And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.
This is where Obama states the problem. Is the problem that the market might meltdown? No. The problem Obama is concerned about is people losing their homes.
Working together, the relevant private sector entities and regulators may be best positioned for quick and targeted responses to mitigate the danger. Rampant foreclosures are in nobody’s interest, and I believe this is a case where all responsible industry players can share the objective of eliminating deceptive or abusive practices, preserving homeownership, and stabilizing housing markets.
Obama warns us about a danger that must be mitigated. Is the danger a market meltdown? No. The danger is the rising number of forclosures.
The summit should consider best practice loan marketing, underwriting, and origination practices consistent with the recent (and overdue) regulators’ Proposed Statement on Subprime Mortgage Lending. The summit participants should also evaluate options for independent loan counseling, voluntary loan restructuring, limited forbearance, and other possible workout strategies. I would also urge you to facilitate a serious conversation about the following:
Obama proposes a summit to discuss loan practices. Then he talks specifics.
What standards investors should require of lenders, particularly with regard to verification of income and assets and the underwriting of borrowers based on fully indexed and fully amortized rates.
This sounds good, but what does he mean by this. Does he mean they should be tightened or loosened (to encourage more lending)?
How to facilitate and encourage appropriate intervention by loan servicing companies at the earliest signs of borrower difficulty.
Again it sounds good, but what does he mean by intervention. According to Biden during the VP debate it means adjusting the interest rate and the principal DOWN.
How to support independent community-based-organizations to provide counseling and work-out services to prevent foreclosure and preserve homeownership where practical.
In other words, he wants to funnel more money to ACORN. One of the organizations that cause the financial mess in the first place.
How to provide more effective information disclosure and financial education to ensure that borrowers are treated fairly and that deception is never a source of competitive advantage.
Everybody can support that, but what does he mean? Telling people they can afford a home loan they have no chance of playing back would seem to be deceptive. Is that what Obama means?
How to adopt principles of fair competition that promote affordability, transparency, non-discrimination, genuine consumer value, and competitive returns.
Another statement that everyone would agree with, but about as specific as saying you favor pie (is that apple, peach, cherry, cow pie you favor?)
How to ensure adequate liquidity across all mortgage markets without exacerbating consumer and housing market vulnerability.
There it is: liquidity. Obama can offically say he warned of a liquidity crisis. But the liquidity crisis he is worried about doesn't seem to be the one we are dealing with today. He seems worried that there won't be enough money to continue to make sub-prime loans. No mention anywhere that a liquity crisis could lead to a stock market meltdown (in fact, no mention of the stock market in the entire letter.)
Of course, the adoption of voluntary industry reforms will not preempt government action to crack down on predatory lending practices, or to style new restrictions on subprime lending or short-term post-purchase interventions in certain cases. My colleagues on the Senate Committee on Banking, Housing and Urban Affairs have held important hearings on mortgage market turmoil and I expect the Committee will develop legislation.
It is buried in a compound sentence, but Obama makes it perfectly clear. Nothing should be done to restrict sub-prim loans.
the adoption of voluntary industry reforms will not...style new restrictions on subprime lending
Obama's famed "warning letter" is actually warns that NOTHING should be done to eliminate the root cause of the financial crisis: sub-prime lending.
Nevertheless, a consortium of industry-related service providers and public interest advocates may be able to bring quick and efficient relief to millions of at-risk homeowners and neighborhoods, even before Congress has had an opportunity to act. There is an opportunity here to bring different interests together in the best interests of American homeowners and the American economy. Please don’t let this opportunity pass us by.
Obama calls for groups like ACORN to get involved in solving the crisis. He then states the purpose of this letter: bring relief to homeowners. To get the government involved in helping people who can't pay their mortgages.
Sincerely,
U.S. Senator Barack Obama
The bottom line is that even the most casual reading of this letter would make people understand that Obama DID NOT warn of the meltdown of Fannie and Freddie or of the current financial crisis.
Obama, in fact, seems concerned that the rising number of people defaulting on sub-prime loans is causing lenders to be more reluctant to issue MORE sub-prime loans. Far from a warning that would have fixed the current problem. Had Obama's advice been followed, the current crisis probably would have been WORSE.
