Fannie Mae and Freddie Mac together hold or own up to FIVE TRILLION DOLLARS in mortgage debt. That's more than half the total of the current U.S. national debt.
If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
-- John McCain, May 25, 2006
Their failure is what has sparked the world financial crisis and the blame lies solely with the Democrats in Congress who shielded them from reform for years while Democrat party hacks running the companies enriched themselves. (it's a Democrat scandal as I described here).
Looking back to the root of the problem Wayne Barret describes how the snowball started:
Republican Reforms Blocked by Democrats
Andrew Cuomo and Fannie and Freddie
How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis
By Wayne Barrett
The Village Voice
Tuesday, August 5th
...Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
In the year 2000 Congressman Richard Baker (R-La.) then the chairman of the House subcommittee that had jurisdiction over Fannie and Freddie introduced legislation to more tightly regulate the mortgage giants. The bill never saw the light of day. Congresspersons from both parties receive contributions from Fan & Fred (the list) and collectively they spent $174 million lobbying Congress the last ten years.
The result of Rep. Baker's legislation would not have been a surprise to Rep. Paul Ryan (R-WI) who had proposed tighter regulation in the 1990's only to find a highly paid Fannie Mae lobbyist stalking him at events in his district and who played hardball by directing calls to every mortgage holder in the Congressman's district falsely implying that Ryan meant to raise their rates.
Republicans Try Again
In 2004 another attempt was launched. The Senate took up a measure put forwarded by Senate Banking Committee Chairman Richard Shelby (R-AL) only to have it blocked again by Fan & Fred using Democrats as a partisan attack machine:
Fannie and Freddie chose to fight legislation in the Senate Banking Committee that embodied the administration's minimum requirements, particularly the receivership provision, in the late spring of 2004. The companies called in their chits and managed to obtain solid Democratic opposition to the bill crafted by the committee's chairman, Richard Shelby (R-Ala.). The committee also watered down the receivership provision. The partisan nature of the vote to send the bill to the floor virtually assured that it would not be taken up in the Senate unless Fannie and Freddie relented in their opposition ... but Fannie and Freddie would not budge. It may be that the [Fan&Fred] were banking on the defeat of President George W. Bush and on the assumption that a Democratic president would abandon the effort to pass tougher regulation. If that was their thinking, it was an exceedingly costly error.In the last year of the Republican Congress House GOP leaders were determined to try again. They put forward H.R. 1461 [109th]: Federal Housing Finance Reform Act of 2005. The bill would have stripped control of Fan & Fred from the Housing and Urban Development Department where Cuomo had turned it into a regulatory farce.
The bill would also introduce "anti advocacy provisions" barring money from Fan & Fred being used as a slush fund for liberal lobbying organizations.
Despite Democrat opposition to that measure the bill passed the House, but could not get a vote in the Senate even after the anti-lobbying provision was removed.
John McCain was one of three Republicans in the U.S. Senate to sponsor the bill. Rising to propose the legislation Senator McCain's words now sound prophetic:
Senator McCain Speaks in Support ofMcCain took action in 2005 that might have helped us avoid the severity of this current financial crisis. Democrats also took action in 2005 and stopped McCain's reforms.
The FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ACT OF 2005
The United States Senate
May 25, 2006
Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.