Speaking the Truth

Gary is an author, trial lawyer, Mequon-area resident and town of Cedarburg supervisor. He is a columnist for the News Graphic and writes for several Wisconsin area magazines and is a national columnist with The American Thinker and PJ Media.  He lives with his wife, Lisa, and has three sons ages 18 to 28. Gary won Ozaukee County in his bid for the Wisconsin Assembly's 60th District in 2011, but came up just 58 votes short.

The Sub-Prime Mortgage Crisis and The Law of Unintended Consequences

We are currently knee-deep in a financial crisis that stems from the U.S. housing market, where fallout from the imploding subprime mortgage market has spilled over into the credit markets, as well as domestic and global stock markets. The stock markets will rebound. They always do. Instinctively, politicans call for more regulations to fix the problem. However, it was not a paucity of regulations which got us in this mess. It was government’s meddling in the free market system and liberal social engineering with government agencies and other people’s money.

 It makes for good campaign stump speeches to pound the podium and yell about greedy bankers and predatory lending practices. People cheer, hope for more bailouts, and even vote for the candidate who pounds and yells the loudest. These are the populist times we live in. But if we take both a deep breath and a step back, I think we’ll see that the problem was not the private sector, capitalism, a lack of regulations, or the free market system – the usual suspects. The culprit was government masquerading as private enterprise and engineering social utopia on the backs of taxpayers. The messes taxpayers are left to face are the unintended consequences of good intentions.

 Sub-prime mortgages are mortgages given at a higher interest rate to people who, according to traditional banking models, will not be able to repay the loans. They are known also as B-paper, near-prime, non-prime, or second chance mortgages. They are usually given away to poorer and minority borrowers with bad credit who would not otherwise qualify for such a mortgage. They are traditionally accompanied by higher interest rates, fees and costs. and frequently with adjustable rates which, unless the homeowner is able to continually refinance in an era of inflated housing prices, will eventually result in default of the loan. They involve giving loans to people usually cannot repay the loan. Over 14% of U.S. mortgages are sub-prime. Washington even found a way to award sub-prime mortgages with little or no down payment, little or no closing costs, and little risk to anybody except the taxpayer.

 Fannie Mae was created in 1938 as part of FDR’s New Deal. Fannie Mae (short for Federal National Mortgage Association) was established as a “government-sponsored enterprise” (GSE) in order to provide local banks with access to federal dollars in an attempt to provide “affordable housing” for those who couldn’t afford mortgages. How nice. This led to the secondary mortgage market, where Fannie Mae borrowed from other institutions and even foreign governments at low rates and used the money to buy these sub-prime mortgages from legitimate mortgage lenders, even reselling many of them to Wall Street investment firms. Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of government backing and exemption from taxation.

 Freddie Mac (short for Federal Home Loan Mortgage Corporation), a similar GSE created in 1970 to avoid monopolization of the market, and Fannie Mae controlled over 90% of the secondary mortgage market. Their assets are nearly 50% greater than the nation’s largest bank, which is why when they started to be used as a political tool, things went awry.

 Both Fannie and Freddie are overseen and regulated by another huge federal bureaucracy known as the Office of Federal Housing Enterprise Oversight (OFHEO). Despite plenty of government regulation, Fannie Mae, run primarily by Democrats with big hearts, gave away lots of taxpayer money to far-left pet projects and organizations, including the Congressional Black Caucus, Jesse Jackson’s Rainbow Coalition, ACORN (known for its voter fraud and Obama’s tenure there), the Congressional Hispanic Caucus, to name a few. The top five politicians receiving donations from Fannie Mae were Democrats, including the top two: Chris Dodd and Barack Obama. John McCain received a little and Sarah Palin took nothing.

 It was Jimmy Carter and the Democrat Congress who put in place the Housing and Community Development Act of 1974. This populist legislation pressured private financial institutions to make risky loans to people with a history of delinquencies, bankruptcies, job instability, and high debt-to-income ratios – all for the purpose of providing “affordable housing.” These loans would not have been made using traditional banking and mortgage guidelines and practices.

 Sub-prime lenders saw what Fannie and Freddie were doing and began to move away from using their own deposits to back their mortgages. They began borrowing money from Wall Street investment firms, who thus became intertwined in the practice. Wall Street bundled the mortgages and sold the cash flow from them as bonds – known as “mortgage-backed securities.” Wall Street’s ability to purchase and securitize these obligations caused local lenders to ignore risks they otherwise wouldn’t have. The entire practice of sub-prime lending, with Fannie and Freddie leading by example, was encouraged – and even compelled – by Washington.  

 In 1995, Bill Clinton renewed efforts to force private mortgage companies and lenders to create "affordable housing" for people who wouldn't qualify for traditional mortgages. Attorney General Janet Reno and Assistant Secretary for Fair Housing and Equal Opportunity Roberta Achtenberg implemented even more regulations focused on putting pressure on legitimate mortgage institutions to give more and more risky loans, and accused those who didn't of "redlining" – accusing those who employed sound lending principles of being racist.

 Reno and Achtenberg threatened these institutions with government sanctions if the private companies didn't make these politically correct loans. “There will be investigations if you do not follow these regulations, if you don’t make loans to these people,” Reno is quoted as saying. Thus the sub-prime market was forced onto private companies, as legitimate Wall Street mortgage lenders and brokers were compelled to buy more of the risky paper from Fannie, Freddie, and even traditional mortgage lenders.

 Some Republicans were not fooled by the good intentions. In 1997, Republican Congressman Jim Leach called for an investigation into the investment practices of Freddie Mac. The Democrat Congress did not listen and the investigation went nowhere.

 Fannie Mae CEO Daniel Mudd gave a tear-jerker speech to Congress, telling them that he was “tearing down the barriers to delivering on the American Dream.” How nice. Little did we know he was tearing down our economy in the process. But one person did know.

 President George Bush was not fooled. In 2003 Bush proposed the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis, including a new agency to oversee Fannie and Freddie. The Democrats cried foul, and Barney Frank said Melvin Watt accused Bush of wanting this oversight committee so he could weaken the bargaining power of poorer families. Bush’s proposed regulations could not even get a vote in the Senate.

 Countrywide Financial Corp., the nation’s largest mortgage lender and home loan servicer, tried to emulate the success of Fannie Mae. It’s CEO, Angelo Mozilo, gave speeches on mortgage social engineering and his dream of everybody owning a home. How nice. Countrywide gave cut-rate mortgages to congressmen, journalists and other V.I.P.'s in an effort to curry favor. The Countrywide Six – all Democrats – also received benefits and favorable loans from Countrywide in exchange for support in Congress.

 A 2003 investigation by the Justice Department and the SEC into the accounting practices at Freddie Mac revealed fraudulent accounting practices to the tune of nearly $5 billion dollars and resulted in the termination of three of the company's top executives. This included Fannie Mae chairman and CEO Franklin Raines, who had benefitted to the tune of more than $90 million from 1998 to 2003. Raines, who is black, is now an economic advisor to Barack Obama, according to the Washington Post. Former board member Jim Johnson, who is white, had to resign recently from Obama’s campaign because it was revealed he got sweetheart deals from Countrywide Financial Mortgage Company.

 From 2001 to 2005, American homeowners took a ride on the world housing bubble. Home prices climbed and climbed, peaking in 2005. This rise in home prices masked the bad loans made by Fannie Mae, Freddie Mac, and other sub-primers, because even a foreclosure would leave the lender with property worth more than the loan balance. Then the housing bubble burst. Values of residential property plummeted, interest rates rose, and more than 1.5 million people lost their homes. There are more than 8,000 new foreclosure filings every day. Wall Street investers started withdrawing money and mortgage insurers like Milwaukee’s MGIC were the first responders called on to clean up the mess. Lenders, with less cash, offered fewer loans and fewer opportunities to refinance high interest loans and ARM’s. Suddenly, Wall Street was at risk and the unintended consequences of those pushing the risky loans were laid bare.

 All roads in this crisis lead to Fannie and Freddie. The U.S. Treasury and Federal Reserve are looking at the prospect of a $1 trillion bailout of this New Deal experiment, in order to prevent the subprime crisis from crashing the world economy. The Bear Stearns bailout, the Lehman Brothers bankruptcy, the sale of Merrill Lynch & Company, and now a drop of more than 62% in AIG's share price, all flowed from Fannie and Freddie and Washington’s good intentions. Those good intentions now expose taxpayers to more than $1 trillion in liabilities.

 Once again, we see the law of unintended consequences on display. Like the Social Security and Medicare debacle which nobody in Washington has the stones to tackle, this financial holocaust is courtesy of liberal idealism and socialist policies forced on private institutions and implemented in large scale on the backs and wallets of others. While there were plenty of private companies eager to jump on the greed train when things were going well, this catastrophe is typical of what happens when government gets its hands on any part of our economy.

 Just imagine what the results will look like if Barack Obama is elected and we turn our health care industry – one-third of our nation’s economy - over to these same well-intentioned government bureaucrats. We’ll be looking into the teeth of the unintended consequences of more good intentions for the next century – if we last that long.     

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