I hope you will take time to read this thought-provoking article by someone in our ranks who knows about these things first hand. Don’t let anyone fool you that the GOP is responsible for this economic mess! Thanks, Jack, for putting this into an easy-to-understand article.

 

Dianne B. Edmondson

Denton County GOP Chair

The Economic Crisis:  We Were Warned!

by Jack Anderson, GOP Precinct 131 Chair, Frisco Area Victory Chair

and a former investment banker who is now a small business owner.

REPUBLICANS ISSUED WARNING YEARS AGO

We were warned.  Several times, in fact.  The Bush Administration gave us the first warning 6 years ago after only being in office for two months.  The President’s 2002 budget request declared that, “Fannie Mae and Freddie Mac are a potential problem because of the size of either one of them and that if either failed it could cause strong repercussions in financial markets.”

HOW DID WE GET INTO THIS SITUATION?

So how did buying a house create the financial quagmire from Main St. to Wall St. to the U.S. Government and back to Main St. in the form of a bailout?  Answer: Government intervention in the free market process.   

When people purchase homes through loans, the mortgage typically does not stay with the lending institution.  It is then sold “upstream” to an investment bank who securitizes the mortgage and bundles it with hundreds of other mortgages to be re-sold in the secondary markets to investment banks and countless financial entities that purchase these Mortgage Backed Securities as investments in their portfolios.  Because all of these securities were backed by the “full faith and credit” of the U.S Government, buyers never seriously considered the credit and collateral of the underlying mortgages.

Wall Street, in their innovative ways, also continued to create new, and many times, riskier investments from these securities.  But one thing never changes: Every time a home owner defaults on paying his loan, it undermines the quality of the security that was purchased.

WHAT PART DO FANNIE MAE AND FREDDIE MAC PLAY IN THE CRISIS?

Freddie and Fannie were a problem as early as 2002 because the Clinton Administration and the Democrats in Congress wanted everyone in America to have a home regardless of income and credit.  Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) are Government Sponsored Enterprises (GSE’s).  They are backed by the federal government to buy mortgage loans from the lenders, so lenders can in turn go create more loans.

In a September 30, 1999 New York Times article written by Steven Holmes, it was reported that, “In a move that could help increase home owner ship rates, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lender. … Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.” The article continued, “Fannie Mae was encouraged to help lending institutions make more loans to so-called sub prime borrowers…… In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk..”

This new program was intentionally geared toward people whose incomes and credit ratings were not sufficient to qualify for conventional loans.  Many of these mortgages had what was called a “teaser rate” which initiated as a very low rate, later increased to a higher rate.  People who could not qualify for  conventional loans in the first place suddenly were saddled with even higher payments.  Why did everyone think this would work?  The housing market bubble.  But, everything in life goes in cycles, especially real estate.  So home values in various housing markets around the country started declining and people couldn’t pay their mortgages, making the underlying mortgages in those securities, which Wall Street. and the investment community buys, worth less every day.  But, this new lending criteria continued.

ANOTHER REPUBLICAN WARNING IS IGNORED!

In addition to the warning in April 2002, the White House upgraded its warning in 2003 to “a systemic risk that could spread beyond just the housing sector.” In the Fall of 2003, the White House was pushing Congress hard for a new regulatory agency to oversee both Freddie and Fannie when, during the House Financial Services Committee of September 10, 2003, then Treasury Secretary John Snow said that “…we need to create a strong world class regulatory agency to oversee the safety and soundness …” of Fannie and Freddie.

In that same hearing, Secretary Snow received tremendous pushback from then ranking House Financial Services Committee member and now Chairman Rep. Barney Frank (D-Mass.) who said, “Freddie & Fannie are not in a crisis”.  Instead, Frank said the Federal Government should do more to encourage Freddie and Fannie to increase efforts to get low income families into homes.  “The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure the possibility of serious financial losses, which I do not see, ”  Frank said. The legislation to create a regulatory body was blocked on a party line vote with all Democrats voting against it. 

REPUBLICAN PROPOSE STRONGER REGULATIONS; DEMOCRATS KILL THE PROPOSAL

The Republicans again tried to be pro-active in this area in 2005, when the Senate Banking Committee Chaired by Richard Shelby (R-AL) tried to pass new strong regulations which would have prevented Freddie and Fannie from buying the bad loans.  It would have created a new regulator for Freddie and Fannie with the power that a bank regulator has which safeguards everything a bank had in it loan portfolio.  All of the Republicans voted for it all and all of the Democrats voted against , including the now-Chairman of the Committee, Chris Dodd (D-CN). Democrats voted against stronger regulations even after Federal Reserve Board Chairman Alan Greenspan warned Senators that Freddie and Fannie “…are playing with fire.” On  April 6, 2005 at  the Committee hearing, Greenspan cautioned, “We increase the possibility of insolvency and crisis……Without restrictions on the size of (Freddie and Fannie), we put at risk our ability to preserve safe and sound financial markets in the U.S. ”.  This prediction unfortunately is being shown to be correct.  But because the Democrats voted to block, those new regulations never got to be considered by the full Senate and died.

Trying once again trying to avert a possible crisis and co-sponsoring legislation pushing for regulation, reform minded Senator John McCain (R-AZ), said in a speech on the Senate floor on May 25, 2006, ” For years I have been concerned about the regulatory structure that governs Freddie and Fannie …… and the sheer magnitude of these companies ...the GSE’s need to be reformed without delay.”  The bill made it out of the Senate Banking Committee with a party line vote, all the Democrats voting against it, but knowing they would not have enough votes for passage, Senate Republicans could not bring it up on the Senate floor.

WHY HAVEN’T WE HEARD THE TRUTH ABOUT THIS?

Because, according to Brent Bozell of Media Research Center , the mainstream news media liked the concept of government-sponsored entities and bureaucracy. “It is a Holy Grail issue with liberals and media because they wanted people who couldn’t afford homes to have one. So the media looked the other way as the house of cards collapsed.  Barney Frank prevented the solution from happening for years.” 

The solution is being worked currently by the very people who caused it and they are suggesting a taxpayer bailout trying to cover their own mistakes and trying to make everyone think they have it handled.  Sen. Harry Reid (D-NV) said last week, “We don’t know what to do.”  So the only solution they have is to, once again, make the taxpayers pay for it. 

We should be talking about a workout not a bailout.  There are several people with good ideas, but they are not chairing these committees that are meeting. And to blame this on the Republicans, as many partisans are attempting to do, is both incorrect and hypocritical. Sen. Chris Dodd (D-CN) said just today (September 25, 2008) that this crisis was avoidable. And he’s absolutely right. Problem is, Sen. Dodd was one of those who chose NOT to avoid it.