The Mortgage Meltdown – Why is McCain Afraid to Pin the Blame Where It Belongs?

For John McCain and the Republicans, there’s nowhere to go but up. Cut through all of the self-congratulatory talk about how foresighted and responsible they were in voting for the $700 billion mortgage bailout and the truth is that the GOP today is staring into a political abyss. The stock market has fallen, and the remarkable political bounce that Republicans had gained with Sarah Palin’s vice-presidential nomination is gone.

Obama has surged into the lead in the polls by depicting McCain as out of touch, aided by the Arizona senator’s erratic, muddled performance on the bailout. First, he temporarily suspended his campaign, and then reversed himself the following day. McCain joined Obama in voting for the bailout bill last Wednesday, then went on national television the following day to denounce the very legislation he had just voted for as “insanity” and an “obscenity, because it’s a waste of taxpayer dollars.” In the same interview, McCain added that Americans need a president who would veto pork-laden bills like the one he just voted for. After flailing about incoherently like this, McCain needs to understand that a substantial part of the Republican “base” (whose votes he desperately needs if he is to have any chance of defeating Obama) feels betrayed by his performance on the bailout issue. McCain appeared so cowed by Treasury Secretary Henry Paulson’s warnings of economic collapse that he embraced the very kind of pork-barrel legislation he had denounced hundreds of times on the campaign trail.

What’s frustrating about the timidity of McCain and the congressional Republican leadership is that they have moral high ground on this mortgage-bailout issue, and Obama and the Democrats have huge political liabilities if Republicans have the good sense to exploit them. McCain may be starting to understand this; on Monday, he blasted Obama and the Democrats for killing his legislative efforts to reform Fannie Mae and Freddie Mac (the federal government-sponsored housing agencies whose collapse helped trigger the current financial crisis) several years ago. These efforts were blocked in 2005 and 2006 up because of opposition from congressional Democrats, among them Sens. Chris Dodd and Barack Obama, who received hundreds of thousands of dollars between them in campaign contributions from supporters of Fannie and Freddie .But that is just the tip of the political iceberg when it comes to the Democrats’ responsibility for the collapse of these two companies, which cost taxpayer s close to $200 billion and helped trigger the larger meltdowns in mortgage and credit markets.

The fact is that Washington politicians, the overwhelming majority of them Democrats, had a very large role in creating the mortgage mess in the first place. For more than 30 years, the federal government has pursued policies (often in tandem with Left-wing community activist groups like Obama’s ACORN) in which credit requirements were systematically eroded in order to make loans to people with poor credit histories who were very unlikely to pay them back.

Responding to complaints that banks were refusing to make loans to persons, mostly racial minorities who lived in poor inner-city areas, Congress passed and President Carter signed into law in 1977 the Community Reinvestment Act (CRA), which decreed that these financial institutions have “an affirmative obligation” to meet the credit needs of the communities in which they operate, and that federal regulators need to take this into account when considering requests to merge or open branches. Yet enforcement of the law was sporadic until the early 1990s, when the Federal Reserve Bank of Boston laid the groundwork for the Clinton Administration’s efforts to breathe new life into the CRA. The study, released to great fanfare by the Boston Fed, supposedly proved that racial bias in mortgage lending (as opposed to creditworthiness) was to blame for nonwhites’ inability to get housing loans. That conclusion “comports with common sense, no more studies needed,” Boston Fed President Richard Syron declared.

But the study soon fell apart under close scrutiny. Alicia Munnell, the Boston Fed‘s vice president for research, admitted in an interview that appeared in the January 4, 1993, issue of Forbes, that the study mishandled statistics on minority default rates. When the errors were accounted for, the same study showed no evidence that minority applicants were being discriminated against. Months after the interview appeared, Munnell joined the Clinton Administration as assistant secretary of the treasury for economic policy. In 1995, Treasury announced a new series of regulations that would make it much more difficult for banks to get a satisfactory CRA rating which could be critical to their survival.

No longer would businesses be able to get by with good ratings based on effort. Instead they would have to meet specific performance goals, broken down by neighborhood, income group and race, Howard Husock wrote in the Winter 2000 issue of City Journal. The CRA regulations enabled Left-wing “community organizations” like ACORN and the Boston-based Neighborhood Assistance Corporation of America (NACA) to put pressure on banks to lower credit standards. The CRA also became an effective political club to force banks to subsidize groups like ACORN and NACA, who also conducted voter-registration and lobbying campaigns.

One activist with close ties to Obama was Madeline Talbott, longtime director of Chicago ACORN. Writing in the September 29th New York Post, Stanley Kurtz described at length how Talbott began a pressure campaign to drag banks in the area “kicking and screaming” into high-risk loans to people with troubled credit histories. Soon, thanks to the Clinton Administration, Fannie Mae and Freddie Mac took the plunge. In June 1995, President Clinton, Vice President Gore and HUD Secretary Henry Cisneros announced the administration’s strategy for increasing homeownership to an all-time high. ACORN activists were honored guests at the ceremony, where Clinton declared that the strategy could be implemented administratively and “will not cost the taxpayers one extra cent.”

Influential members of the mainstream media bought this line. Ronald Brownstein of the Los Angeles Times began a May 31, 1999, analysis piece this way: “It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded.” Brownstein expressed hope that (since-disgraced) Fannie Mae boss Franklin Raines and HUD Secretary Andrew Cuomo would reach an agreement “that provides more fuel for the extraordinary boom transforming millions of minority families from renters into owners.” In fact, we now know that the “boom” was in reality a con job – a cruel hoax created by political hustlers and that the “fuel” consisted of irresponsible loans that will cost taxpayers hundreds of billions of dollars at a minimum to clean up.

In September 1993, the Chicago Sun-Times reported on how Talbott led an initiative in which five Chicago-area institutions participated in a $55 million program with ACORN to provide mortgages to low- and moderate-income people with “troubled credit histories,” and Talbott persuaded Fannie and Freddie to buy up the loans. The pilot program “worked” (at so far as funneling money to the poor from the banks was concerned). That purported success also helped set the stage for today’s financial implosion by encouraging Fannie and Freddie to expand their efforts to make more loans to such people.

Obama returned to Chicago in the early 1990s, and Talbott got him to train her personal staff, and he also trained the ACORN organizers leading Talbott‘s assaults against Chicago banks. Soon, Obama was involved in subsidizing ACORN through the Woods Fund, where he substantially expanded support for such groups. Kurtz (who has probably spent more time investigating Obama’s “community organizing” background than any other journalist) makes clear that the future U.S. senator was not just involved in funding ACORN, but also helped conceal its radical nature from the American public.

A report issued by the Obama-supervised Woods Fund in the mid-1990s acknowledges the difficulty of getting foundations and donors to contribute to confrontational leftist groups like ACORN. The Woods Fund’s claim to be “non- ideological,” it said, has “enabled the Trustees to make grants to organizations that use confrontational tactics against the business and government ‘establishments’ without undue risk of being criticized for partisanship.” In addition, as the leader of another charity, the Chicago Annenberg Challenge, Obama provided support to ACORN, ostensibly for “education” projects,“ Kurtz adds. For her part, Talbott supported Obama‘s successful run for the Illinois Senate in 1996.

But the Democrats’ complicity in creating the mess goes well beyond this. After accounting scandals shook Fannie Mae in 2003-2004, agency chief Raines (President Clinton’s former OMB director) resigned. During his five years at the helm of Fannie, Raines made $90 million (he later was forced to return $24 million). He subsequently advised Obama’s presidential campaign on housing policy. In 2005 and 2006, McCain was one of a handful of lawmakers who introduced legislation to reform Fannie and Freddie. That legislation was blocked by Senate Democrats including Obama and Banking Committee Chairman Chris Dodd. Thanks to their efforts, GOP attempts to reform Fannie and Freddie’s financial practices were sabotaged until July 2008, when Republicans successfully demanded them as the price for passage of a housing bill. But by then, it was too late to stop the impending collapse.

While both firms were adding massive losses onto their investment portfolios between 2005 and 2007, House Democrats joined their Senate colleagues in blocking every effort by Republicans to pass reforms. Obama’s lower-key efforts complemented those of House liberals like Reps. Barney Frank, Maxine Waters and Gregory Meeks, who can be seen on YouTube praising Raines and haranguing federal regulator Armando Falcon for issuing a report that questioned the agency‘s financial practices. (Perhaps someone could send the McCain campaign the YouTube video of the 2004 House Financial Services Committee hearing at which this took place.)

McCain could also go back to 2004 and read the written testimony of Roger Barnes, a Fannie Mae accountant who questioned the bookkeeping practices occurring under Raines and Fannie Mae chief financial officer Timothy Howard in 2002. Barnes said his warnings were ignored because of a culture of “intimidation” in which employees were encouraged to give Raines and Howard information that would please the markets, rather telling the truth about Fannie’s worsening financial condition. McCain should also focus on Frank, who scurrilously suggests that Republican criticism of the CRA is motivated by racial prejudice. Fox News reported last week that during the early 1990s, when Frank pushed Fannie and the Clinton Administration to loosen regulations on mortgages, the congressman‘s live-in boyfriend, Herb Moses, was an executive working to develop Fannie‘s “affordable housing” programs. (The couple broke up in 1998, a few months after Moses left the company).

I fully understand that talking about these sorts of things is very uncomfortable for John McCain, who would rather be talking about “bipartisanship,” and how he collaborates with liberal Democrats on the mortgage bailout, campaign-finance “reform,” climate change, and amnesty for illegal aliens. The problem is that if McCain follows his natural instincts, the election is over and Barack Obama will take the oath as president on Jan. 20, 2009. But if McCain were to take the gloves off and force Obama to choose between defending the likes of Madeline Talbott, ACORN and Barney Frank, or throwing them under the proverbial bus, the old war hero may still have a fighting chance.

Here’s why I wouldn’t blame Bush...

http://www.whitehouse.gov/news/releases/2008/10/20081009-10.html

Today, the Washington Times incorrectly accused the White House of ignoring warnings of trouble ahead for government-sponsored enterprises (GSEs) and neglecting to “adopt any reform until this summer,” when it was too late. “Neither the White House nor Congress heeded the warnings, Fannie and Freddie retained strong bipartisan support during the 1990s and early part of this decade.” (Editorial, “Hear, See And Speak No Evil About Fannie And Freddie,” The Washington Times, 10/9/08)

Over the past six years, the President and his Administration have not only warned of the systemic consequences of failure to reform GSEs but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. In fact, it was Congress that flatly rejected President Bush’s call more than five years ago to reform the GSEs. Over the years, the President’s repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems with the GSEs.

2001

* April: The Administration’s FY02 budget declares that the size of Fannie Mae and Freddie Mac is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.” (2002 Budget Analytic Perspectives, pg. 142)

2002

* May: The Office of Management and Budget (OMB) calls for the disclosure and corporate governance principles contained in the President’s 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)

2003

* February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.

* September: Then-Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.

* September: Then-House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration’s assessment, saying “these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” (Stephen Labaton, “New Agency Proposed To Oversee Freddie Mac And Fannie Mae,” The New York Times, 9/11/03)

* October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying “if it ain’t broke, don’t fix it.” (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)

* November: Then-Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.” To reduce the potential for systemic instability, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE.” (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)

2004

* February: The President’s FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital and calls for creation of a new, world-class regulator: “The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore … should be replaced with a new strengthened regulator.” (2005 Budget Analytic Perspectives, pg. 83)

* February: Then-CEA Chairman Mankiw cautions Congress to “not take [the financial market’s] strength for granted.” Again, the call from the Administration was to reduce this risk by “ensuring that the housing GSEs are overseen by an effective regulator.” (N. Gregory Mankiw, Op-Ed, “Keeping Fannie And Freddie’s House In Order,” Financial Times, 2/24/04)

* April: Rep. Frank ignores the warnings, accusing the Administration of creating an “artificial issue.” At a speech to the Mortgage Bankers Association conference, Rep. Frank said “people tend to pay their mortgages. I don’t think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren’t there.” (”Frank: GSE Failure A Phony Issue,” American Banker, 4/21/04)

* June: Then-Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and calls for reform, saying “We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System.” (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)

2005

* April: Then-Secretary Snow repeats his call for GSE reform, saying “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system.” (Secretary John W. Snow, “Testimony Before The U.S. House Financial Services Committee,” 4/13/05)

* July: Then-Minority Leader Harry Reid rejects legislation reforming GSEs, “while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process.” (”Dems Rip New Fannie Mae Regulatory Measure,” United Press International, 7/28/05)

2007

* August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying “first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.” (President George W. Bush, Press Conference, the White House, 8/9/07)

* August: Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd ignores the President’s warnings and calls on him to “immediately reconsider his ill-advised” position. (Eric Dash, “Fannie Mae’s Offer To Help Ease Credit Squeeze Is Rejected, As Critics Complain Of Opportunism,” The New York Times, 8/11/07)

* December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying “These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I’ve called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon.” (President George W. Bush, Discusses Housing, the White House, 12/6/07)

2008

* February: Assistant Treasury Secretary David Nason reiterates the urgency of reforms, saying “A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully.” (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)

* March: President Bush calls on Congress to take action and “move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages.” (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)

* April: President Bush urges Congress to pass the much needed legislation and “modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes.” (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)

* May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.

o “Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow state housing agencies to issue tax-free bonds to refinance sub-prime loans.” (President George W. Bush, Radio Address, 5/3/08)

o “[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator.” (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)

o “Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans.” (President George W. Bush, Radio Address, 5/31/08)

* June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying “we need to pass legislation to reform Fannie Mae and Freddie Mac.” (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)

* July: Congress heeds the President’s call for action and passes reform legislation for Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.

* September: Democrats in Congress forget their previous objections to GSE reforms, as Senator Dodd questions “why weren’t we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? … I have a lot of questions about where was the administration over the last eight years.” (Dawn Kopecki, “Fannie Mae, Freddie ‘House Of Cards’ Prompts Takeover,” Bloomberg, 9/9/08)

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