[Congressional Record (Bound Edition), Volume 154 (2008), Part 16]
[Extensions of Remarks]
[Page 22968]
[From the U.S. Government Publishing Office, www.gpo.gov]




           BLAME FANNIE MAE AND CONGRESS FOR THE CREDIT MESS

                                 ______
                                 

                           HON. VIRGINIA FOXX

                           of north carolina

                    in the house of representatives

                       Sunday, September 28, 2008

  Ms. FOXX. Madam Speaker, I submit the following article for the 
Record.

             [From the Wall Street Journal, 23 Sept. 2008]

           Blame Fannie Mae and Congress for the Credit Mess

            (By Charles W. Calomiris and Peter J. Wallison)

       Many monumental errors and misjudgments contributed to the 
     acute financial turmoil in which we now find ourselves. 
     Nevertheless, the vast accumulation of toxic mortgage debt 
     that poisoned the global financial system was driven by the 
     aggressive buying of subprime and Alt-A mortgages, and 
     mortgage-backed securities, by Fannie Mae and Freddie Mac. 
     The poor choices of these two government-sponsored 
     enterprises (GSEs)--and their sponsors in Washington--are 
     largely to blame for our current mess.
       How did we get here? let's review: in order to curry 
     congressional support after their accounting scandals in 2003 
     and 2004, Fannie Mae and Freddie Mac committed to increased 
     financing of ``affordable housing.'' They became the largest 
     buyers of subprime and Alt-A mortgages between 2004 and 2007, 
     with total GSE exposure eventually exceeding $1 trillion. In 
     doing so, they stimulated the growth of the subpar mortgage 
     market and substantially magnified the costs of its collapse.
       It is important to understand that, as GSEs, Fannie and 
     Freddie were viewed in the capital markets as government-
     backed buyers (a belief that has now been reduced to fact). 
     Thus they were able to borrow as much as they wanted for the 
     purpose of buying mortgages and mortgage-backed securities. 
     Their buying patterns and interests were followed closely in 
     the markets. If Fannie and Freddie wanted subprime or Alt-A 
     loans, the mortgage markets would produce them. By late 2004, 
     Fannie and Freddie very much wanted subprime and Alt-A loans. 
     Their accounting had just been revealed as fraudulent, and 
     they were under pressure from Congress to demonstrate that 
     they deserved their considerable privileges. Among other 
     problems, economists at the Federal Reserve and Congressional 
     Budget Office had begun to study them in detail, and found 
     that--despite their subsidized borrowing rates--they did not 
     significantly reduce mortgage interest rates. In the wake of 
     Freddie's 2003 accounting scandal, Fed Chairman Alan 
     Greenspan became a powerful opponent, and began to call for 
     stricter regulation of the GSEs and limitations on the growth 
     of their highly profitable, but risky, retained portfolios.
       If they were not making mortgages cheaper and were creating 
     risks for the taxpayers and the economy, what value were they 
     providing? The answer was their affordable-housing mission. 
     So it was that, beginning in 2004, their portfolios of 
     subprime and Alt-A loans and securities began to grow. 
     Subprime and Alt-A originations in the U.S. rose from less 
     than 8% of all mortgages in 2003 to over 20% in 2006. During 
     this period the quality of subprime loans also declined, 
     going from fixed rate, long-term amortizing loans to loans 
     with low down payments and low (but adjustable) initial 
     rates, indicating that originators were scraping the bottom 
     of the barrel to find product for buyers like the GSEs.
       The strategy of presenting themselves to Congress as the 
     champions of affordable housing appears to have worked. 
     Fannie and Freddie retained the support of many in Congress, 
     particularly Democrats, and they were allowed to continue 
     unrestrained. Rep. Barney Frank (D., Mass), for example, now 
     the chair of the House Financial Services Committee, openly 
     described the ``arrangement'' with the GSEs at a committee 
     hearing on GSE reform in 2003: ``Fannie Mae and Freddie Mac 
     have played a very useful role in helping to make housing 
     more affordable . . . a mission that this Congress has given 
     them in return for some of the arrangements which are of some 
     benefit to them to focus on affordable housing.'' The hint to 
     Fannie and Freddie was obvious: Concentrate on affordable 
     housing and, despite your problems, your congressional 
     support is secure.
       In light of the collapse of Fannie and Freddie, both John 
     McCain and Barack Obama now criticize the risk-tolerant 
     regulatory regime that produced the current crisis. But Sen. 
     McCain's criticisms are at least credible, since he has been 
     pointing to systemic risks in the mortgage market and trying 
     to do something about them for years. In contrast, Sen. 
     Obama's conversion as a financial reformer marks a reversal 
     from his actions in previous years, when he did nothing to 
     disturb the status quo. The first head of Mr. Obama's vice-
     presidential search committee, Jim Johnson, a former chairman 
     of Fannie Mae, was the one who announced Fannie's original 
     affordable-housing program in 1991--just as Congress was 
     taking up the first GSE regulatory legislation.
       In 2005, the Senate Banking Committee, then under 
     Republican control, adopted a strong reform bill, introduced 
     by Republican Sens. Elizabeth Dole, John Sununu and Chuck 
     Hagel, and supported by then chairman Richard Shelby. The 
     bill prohibited the GSEs from holding portfolios, and gave 
     their regulator prudential authority (such as setting capital 
     requirements) roughly equivalent to a bank regulator. In 
     light of the current financial crisis, this bill was probably 
     the most important piece of financial regulation before 
     Congress in 2005 and 2006. All the Republicans on the 
     Committee supported the bill, and all the Democrats voted 
     against it. Mr. McCain endorsed the legislation in a speech 
     on the Senate floor. Mr. Obama, like all other Democrats, 
     remained silent.
       Now the Democrats are blaming the financial crisis on 
     ``deregulation.'' This is a canard. There has indeed been 
     deregulation in our economy--in long-distance telephone 
     rates, airline fares, securities brokerage and trucking, to 
     name just a few--and this has produced much innovation and 
     lower consumer prices. But the primary ``deregulation'' in 
     the financial world in the last 30 years permitted banks to 
     diversify their risks geographically and across different 
     products, which is one of the things that has kept banks 
     relatively stable in this storm.
       As a result, U.S. commercial banks have been able to 
     attract more than $100 billion of new capital in the past 
     year to replace most or their subprime-related write-downs. 
     Deregulation of branching restrictions and limitations on 
     bank product offerings also made possible bank acquisition of 
     Bear Stearns and Merrill Lynch, saving billions in likely 
     resolution costs for taxpayers.
       If the Democrats had let the 2005 legislation come to a 
     vote, the huge growth in the subprime and Alt-A loan 
     portfolios or Fannie and Freddie could not have occurred, and 
     the scale of the financial meltdown would have been 
     substantially less. The same politicians who today decry the 
     lack of intervention to stop excess risk taking in 2005-2006 
     were the ones who blocked the only legislative effort that 
     could have stopped it.

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