Say Anything Blog

A reader sends along this New York Times article written by Stephen Labaton and published on September 11th, 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.

Guess who opposed this new regulation?  Homebuilders, who didn’t want it to get more difficult to get a home loan, and Democrats who didn’t want to go back on their demands that everyone (including people who couldn’t afford it) should own a home.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

’‘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, 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.

Would more government bureaucracy and regulation have fixed Freddie Mac/Fannie Mae?  Who knows.  But what this shows is that the trouble Fannie Mae/Freddie Mac were in has been known to the powers-that-be in Washington for years, and that for whatever reason no fix was ever put in place.

The truth is that this collapse (which, by the way, is worse than Enron ever was except that this time the taxpayers are on the hook) was forseeable from the very day Fannie Mae/Freddie Mac were founded.  I mean, government-backed loans?  Why in the world did anyone ever think that these two companies would engage in good faith business practices when they’ve known from the get-go that if things ever went south the politicians would be there to bail them out with other people’s money?