[Extensions of Remarks]
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From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

BLAME FANNIE MAE AND CONGRESS FOR THE CREDIT MESS

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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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