Christopher Dodd

The mortgage crisis was caused largely by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

(Fannie Mae engaged in massive fraud and political bullying to thwart reform. It and Freddie Mac lost so much money gambling on the housing market that they were taken over by the Federal Housing Finance Agency, which took them over in the name of ending their risky practices, but instead actually increased their purchases of risky mortgage loans in an effort to artificially prop up the housing market. Obama made Freddie Mac lose $30 billion more after the takeover in order to write off mortgage loans to delinquent mortgage borrowers.)

Worse, Obama’s proposed regulatory blueprint actually increases the pressure on banks to make risky mortgage loans to low-income borrowers, by ratcheting up enforcement of regulations mandating such lending under the Community Reinvestment Act, which was a key contributor to the financial crisis. His financial regulation overhaul would create a new bureaucratic agency, the Consumer Financial Protection Agency, to enforce the Act without regard for banks’ financial safety and soundness.

Obama’s proposed financial rules also let the government take over financial institutions even if they are not broke. That gives the government the ability to seize institutions in ways that favor special interest groups, either by bailing them out at taxpayer expense, or effectively giving their valuable assets away to politically-connected buyers. The administration’s white paper advocates a “regime” that would allow takeovers not only of banks, but also of “nonbank financial firms.” Under it, the government would receive “broad powers to take action with respect to the financial firm,” including “the authority to take control of the operations of the firm or to sell or transfer all or any part of the assets of the firm.”

That could really harm taxpayers. Take a look at what happened at AIG, which was bailed out at a cost of $170 billion. Billions of tax dollars were spent on payments to AIG customers like Goldman Sachs, the wealthy investment bank, which received more money than it ever expected to receive or had any right to receive from AIG. Goldman Sachs is now reporting record profits. Goldman Sachs is one of the biggest donors to the Democratic Party and liberal politicians.

Chrysler is another example of a wasteful federal takeover: after effectively taking over the company and giving it billions of taxpayer dollars that will likely never be repaid, the federal government gave most of the company to the United Auto Workers Union. Meanwhile, it ripped off the pension funds that were legally entitled to be paid back before the UAW received any money.

The government can take even a poorly-run institution and make it run worse. The government took over IndyMac bank, and then used its control to give mortgage bailouts at taxpayer expense. “FDIC Chairwoman Sheila Bair, whom Obama held over because of the liberal policies she pursued in the latter half of the Bush administration (such as strong backing of the Community Reinvestment Act), . . . disregarded taxpayer interests upon seizing the large thrift Indymac and other banks and created a ‘model’ mortgage modification program for thousands of borrowers that wrote off principal on the loans and reduced interest payments to well below market rates. Initial results show a redefault rate in programs like these of more than 50 percent, but Bair and Obama show no signs of stopping this flawed experiment with taxpayer dollars.”

Obama’s proposals would force banks to make even MORE risky loans to low-income people. Even liberal newspapers like the Village Voice have admitted that “affordable housing” mandates are a key reason for the housing crisis and the massive number of defaulting borrowers.

But Obama plans to create a new “Consumer Financial Protection Agency” to stringently enforce Community Reinvestment Act regulations that require banks to make loans to low-income borrowers. Banks make pay-offs to left-wing “fair housing” groups to avoid charges that they have violated the CRA. Obama once represented ACORN, which pressures banks to make risky loans. Obama’s white paper complains that existing agencies do not enforce low-income lending requirements zealously enough because they have a “primary mission . . . to ensure that financial institutions act prudently.” (Pg. 54).

Obama’s demand for more low-income loans ignores the lessons of history. The current mortgage crisis came about in large part because of Clinton-era government pressure on lenders to make risky loans in order to make homeownership more affordable for lower-income Americans and those with a poor credit history, the DC Examiner notes. “Those steps encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions, loosening required debt-to-equity ratios to allow borrowers to make small or even no down payments at all, and encouraging lenders to use floating or adjustable interest-rate mortgages, including those with low ‘teasers.’”

The liberal Village Voice previously chronicled how Clinton Administration housing secretary Andrew Cuomo helped spawn the mortgage crisis through his pressure on lenders to promote affordable housing and diversity. “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 . . . Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.” (See Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Urban Development Secretary in History Gave Birth to the Mortgage Crisis,” Village Voice, August 5, 2008).

In drafting his financial regulation proposals, Obama has turned to Barney Frank and Chris Dodd, lawmakers who are among those most culpable in spawning the financial crisis. The New York Times reports that “the plan is largely the product of extensive conversations between senior administration officials and top Democratic lawmakers — primarily Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut.” Frank and Dodd were the lawmakers who defeated reform proposals to rein in the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which later had to be bailed out for hundreds of billions of dollars. Fannie Mae killed reform proposals by paying off liberal lawmakers and bullying critics. Dodd recently attracted criticism for financial and ethical lapses.

Liberal lawmakers have long pressured financial institutions to promote risky low-income loans, to a degree that even Fannie Mae and Freddie Mac eventually found unreasonable. For example, the New York Times reported that “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.”

As a Washington Post story shows, the high-risk loans that led to the mortgage crisis were often the product of regulatory pressure. Even after banking officials “warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending. Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers.”