Democrats blocked Bush’s Fannie Mae and Freddie Mac Reforms

After the bailout of Fannie Mae and Freddie Mac, and now AIG, everyone is wondering whose next and what really caused this mess. A look back in history provides some answers as to how we got here and what do we do now. The government leaned hard on banks back in the 70's thru the 90's to help those deemed less fortunate attain the American dream of homeownership. Problem is the folks who were being left out also tended to have bad credit histories. Under the banner of fairness, the banks capitulated and created what has become today's sub prime loan market. The rate of homeownership did in fact increase significantly in the last 10-15 years with much of that increase coming in disadvantaged groups.

When Bush took office he attempted to reform Fannie Mae and Freddie Mac to raise credit and down payment requirements because of the huge and growing risks the government would face in an economic downturn.

From the NEW YORK TIMES September 11, 2003:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Democrats such as Representative Barney Frank of Massachusetts and Representative Melvin L. Watt, Democrat of North Carolina blocked reform.

From the NEW YORK TIMES September 11, 2003:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, and the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of
North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

What actually caused the bank failures is the simple fact that home values are falling not rising. In a normal market where values are rising, banks don’t lose money on a failed loan because they get the house, which, with a rising value, is worth more than the loan.

The same thing happened in 1973, when energy costs doubled from the Arab oil embargo, banks failed, stocks fell, jobs where lost, home values fell.

Also see:
Democrats created Fannie Mae and Freddie Mac mess then stopped reforms.
Obama vs McCain, who is really more of the same?
Economic and Energy crisis, the real 3 a.m. call for Obama and McCain.