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What Happened to the Market?

October 2008

Everyone has by now heard of Fanny Mae and Freddy Mac. Fanny Mae started as a government
agency in 1938 as part of Franklin D. Roosevelt's New Deal. It was created not to make loans to
individuals but to provide liquidity in the mortgage market. It does this by buying mortgage loans and
repackaging them to sell to investors with a promise that the principal and interest will be passed onto
them. In 1968 Lyndon Johnson, in a large social expansion of the government known as The Great
Society,1 wanted Fanny Mae's activity off of the federal balance sheet and was able to privatize Fanny
Mae. (Some felt that President Johnson's motive was to help finance the Vietnam War.) Of course
everyone knew that the government was still in the shadows waiting to pick Fanny Mae up if she fell.
Fanny Mae appeared to be so successful on paper that in 1970 Freddie Mac was created to give Fanny
Mae "competition."

In 1970 ACORN (Association of Community Organizations for Reform Now) was formed. It started
helping welfare recipients to get basic needs such as clothing and food. But it soon spread across the
country and ACORN's aspirations grew to include the belief that everyone has the right to own his or
her own house including the poorest who normally would never qualify for a loan.

In 1977 Jimmy Carter signed the Community Reinvestment Act (CRA) into law. This was just the tool
that AHC (ACORN Housing Corporation, supposed to be a non-political non-profit organization), a
spin-off of ACORN, needed to start signing up people with questionable credit. Also ACORN was able
to use it as a club to intimidate banks and lending institutions. The abuse of the CRA by liberals caused
banks to make loans to minorities without regard for the risks involved, including people who very
likely would be unable to repay. These practices were supposedly intended to end race discrimination
or redlining.2 Today's housing crisis started here with a Democratic Congress, a few Democratic
Presidents, and organizations like ACORN. The seeds had been sown for the housing market
meltdown.

But ACORN at first was having trouble in getting poor people qualified on loans for homes. During
this time Obama came on board to work his four-year tenure as a trainer for ACORN. (This is the same
ACORN currently in the news for voter fraud.3)

With Obama's help in training people in how to intimidate others, ACORN started putting pressure on
banks and lending institutions to get them to make loans to poor minorities. They used personal
intimidation (which they called Direct Action) and law suits. In one instance, they burst into a board of
directors' meeting, surrounded the businessmen, stood there for a while, and then left without saying a
single word. This tactic of intimidation has been credited to Obama himself as the mastermind.4
Obama also worked for ACORN as a lawyer using the CRA to win cases for ACORN to further their
extreme liberal causes.5 When a lending institution seeks to expand through merger, acquisition, or
branching, its CRA compliance record can be taken into account by the banking regulatory agencies.
Obama would then hold up the institution's expansion with an injunction on the grounds of they were
not meeting the CRA standards. He was able to prevail and get credit standards lowered all across the
country. Many institutions would settle out of court. Many others promised to give more loans to risky
clients and / or donated money to ACORN. It was calculated as the cost of doing business.
Fast forward to the end of Bill Clinton's term.

It was HUD (Housing and Urban Development) Secretary Andrew Cuomo, the youngest ever
appointed to that position, who proposed to President Clinton the final disastrous policy change for
Fanny Mae and Freddie Mac.
Then-Housing and Urban Development Secretary Andrew Cuomo investigated Fannie
Mae for racial discrimination and proposed that 50 percent of Fannie Mae's and Freddie
Mac's portfolio be made up of loans to low- to moderate-income borrowers by 2001.
Instead of looking at "outdated criteria," such as the mortgage applicant's credit history
and ability to make a down payment, banks were encouraged to consider nontraditional
measures of credit-worthiness. Threatening lawsuits, the Federal Reserve demanded that
banks treat welfare payments and unemployment benefits as valid income sources to
qualify for a mortgage. . . .
In 1999, liberals were bragging about extending affirmative action to the financial sector.
Los Angeles Times reporter Ron Brownstein hailed the administration's affirmative action
lending policies as a "hidden success" story, saying that "black and Latino
homeownership has surged to the highest level ever recorded.
Pittsburgh Tribune-Review 6
President Clinton signed the orders for Fanny Mae and Freddie Mac to substantially increase these
kinds of loans. Suddenly Fanny Mae was buying and packaging weak mortgages. After 2004, this sent
a signal to the market that here was a lot of government money available for sub-prime mortgages.
Everywhere lending institutions were selling sub-prime mortgages to Fanny Mae. It started with
European companies creating lending institutions to make sub-prime loans to sell to Fanny Mae. Then
American Wall Street companies jumped on the band wagon. It became a feeding frenzy. Real estate
agents couldn't have been any happier because they then had the means to sell to high-risk clients.
These practices continued till Fanny and Freddie had half of their portfolios made up of sub-prime
mortgages. They had a trillion dollars of sub-prime mortgages on their books!

This led to a frenzy of "predatory" sub-prime loans being made and mortgages sold which created an
inflated housing boom. This inflated housing bubble, which couldn't last forever, did burst, and, like a
house of cards, everything came tumbling down. One example of a predatory loan is the "expert"
encouraging a buyer to take a loan and explaining it can be paid off by just following his plan. The
expert's plan is very low payments up front and with larger payments later or a very large balloon
payment. Before the low payments run out, the buyer can refinance using the equity he has built up in
his house. The problem is that when the inflated housing bubble burst, the house values fell. People
who were counting on their equity to help them suddenly were told they didn't have enough equity to
refinance their loans. They weren't able to make the new payments, and then they lost their homes.

The sub-prime loans were being packaged together into what is called MBS's (Mortgage Backed
Security). These were then sold to insurance companies, pension funds, or investment banks. The
investment banks would then take a bunch of MBS's and repackage them into what they called CMOs
(Collateralized Mortgage Obligations). Afterward the CMOs were broken down into different risk
category packages and then sold to different investment firms. All of these practices led to such a
convoluted mess that even some of the sharpest minds on Wall Street had trouble following them. It
isn't any wonder that firms like Lehman Brothers and Morgan Stanley got themselves into trouble.
Many investors who were buying the packages believed they were backed by the U.S. government.
Although prospectuses for GSE debt are required by law to say that such instruments are
not backed by the full faith and credit of the U.S. government, investors have concluded
that the government will not allow GSEs [Government Sponsored Enterprises referring
to Fanny Mae & Freddie Mac] to default. . . . However, if legislation takes only these
actions and does not limit GSE portfolios, we run the risk of solidifying investors'
perceptions that the GSEs are instruments of the government and that their debt is
equivalent to government debt. Alan Greenspan7

The Wall Street firms that bought into the MBS and CMO packages were dependent on buyers to keep
making their payments. Then a large percentage of the people who had bought houses with sub-prime
mortgages at high prices (before the housing values peaked) defaulted on their mortgages after the
bubble burst rather than pay for a house with a negative equity (house is worth a fraction of the amount
borrowed). The built-in credit insurance failed when so many mortgage failures overwhelmed the
system. Now, no one knows how much the MBS packages are even worth or how much the companies
are worth that hold them. This is one of the reasons their stocks are tumbling.
Were there any warning signs when President Clinton signed the order for Fannie Mae and Freddie
Mac to increase their high risk portfolios?
• Congressional Republicans warn that if the loosely regulated Fannie Mae stumbles
financially, it could require a taxpayer bailout on par with the savings and loan crisis.
Rep. Richard Baker, R-La., chairman of the banking subcommittee that oversees
Fannie Mae, is trying to pass a bill that would end its line of credit with the
Treasury. . St. Petersburg Times 8
• The proposed new regulations would be very costly to the economy, to the banking
system, and to the communities they serve. Congress should be most critical of
proposals to use regulatory powers to reallocate credit, either across neighborhoods or
among groups. The primary long term effect of such measures would be to further
contract the banking system, increasing the number of neighborhoods dependent on
check cashing outlets and pawnshops. . . . The Community Reinvestment Act was the
wrong solution to a genuine problem, for the most part created by other government
regulations. . . . Don't try to fix the Community Reinvestment Act. It can't be done.
Repeal it. William A. Niskanen, chairman of the Cato Institute, March 8, 1995.9
[NOTE: Fanny Mae did try to give the Cato Institute a $100,000 grant during this time
but it was rejected.10]
• In moving, even tentatively, into this new area of lending, Fannie Mae is taking on
significantly more risk, which may not pose any difficulties during flush economic
times. But the government-subsidized corporation may run into trouble in an economic
downturn, prompting a government rescue similar to that of the savings and loan
industry in the 1980's.

From the perspective of many people, including me, this is another thrift industry
growing up around us, said Peter Wallison a resident fellow at the American
Enterprise Institute. If they fail, the government will have to step up and bail them out
the way it stepped up and bailed out the thrift industry. New York Times, 1999. 11
Democrats seem to have been blind to the dangers; all they seemed to care about was "affordable
housing" for high risk homeowners. Some of the Republicans saw the dangers and sounded the
warning, but were unable to do anything due to the fact that their numbers were too small. Besides,
there were other issues commanding attention at the time (like terrorism), and many of the Republicans
didn't want to open themselves to accusations of being against the poor or the underprivileged.

Senator Barney Frank 12 served as Chairman of the House Financial Services Committee, and during
his service he repeatedly dispelled the warnings and said everything was just fine. But the question has
been raised: did Barney Frank help cover for Fanny Mae due to his relationship with Herb Moses, a
Fanny Mae executive? Also there is the question of the $42,350 Barney received in campaign
contributions. Some may point out that this isn't a lot of money, but as Chairman of House Financial
Services Committee, he shouldn't have taken a single cent from Fanny Mae.

Speaking of Fanny Mae contributions, Obama received $126,349 since being elected in 2004. That
only comes second to Democratic Senator Christopher Dodd from Connecticut, who is chairman of the
Senate Banking Committee ($165,400+). Compare that to John McCain's total of $21,550 received in
all the years he served in the Senate (since 1986). John McCain was one who saw the dangers and
repeatedly sounded the alarm, but was ignored.13
"For years I have been concerned about the regulatory structure that governs Fannie Mae
and Freddie Mac . . . and the sheer magnitude of these companies and the role they play
in the housing market. . . . [The] GSE's need to be reformed without delay." Senator
John McCain, Senate Floor, May 25, 2006.

What does Barack Obama have to say about the CRA?


Subprime lending started off as a good idea helping Americans buy homes who
couldn't previously afford to. Financial institutions created new financial instruments that
could secularize these loans, slice them into finer and finer risk categories and spread
them out among investors around the country and around the world.

In theory, this should have allowed mortgage lending to be less risky and more
diversified. But as certain lenders and brokers began to see how much money could be
made, they began to lower their standards. Some appraisers began inflating their
estimates to get the deals done. Some borrowers started claiming income they didn't have
just to qualify for the loans, and some were engaging in irresponsible speculation. But
many borrowers were tricked into glossing over the fine print. And ratings agencies
began rating bundles of different kinds of these loans as low-risk even though they were
very high-risk. Barack Obama 14

If you take his words at face value, then you would have to say Obama is very naive or has
questionable judgment. Surely he should have known that if something like this was put forth, it would
be abused with dire consequences. If he had only studied his history, he could have seen that this sort of
thing had been tried several times since the mid-1800s with disastrous results.
Barack Obama is always speaking of the need for change but we need to take a closer look at the
change he has already helped bring about in this great country. The change he helped
engineer with the use of the CRA. The change he helped bring to the banking industry. The
change he brought about with his contribution to our current economic crisis and the need of the
$700 billion bailout. This is change that we could have lived without and change that America's
generations to come will be paying for.
He is certainly not the person we need to try and help America out of its current economic crisis,
when it was his very own polices are what got us in this situation in the first place.

~~~~

Footnotes
1. The Great Society included many programs like Head Start, the Food Stamp program, the
National Teachers Corps, Medicare, Medicaid, the National Endowment for the Arts, the
National Endowment for the Humanities, and the Public Broadcasting Act, to mention a few.
http://en.wikipedia.org/wiki/Great_Society
2. Redlining is a practice of denying or increasing the cost of services to residents in certain (often
racially determined) areas.
3. Indianapolis registered 105% residents to vote. Video: http://www.foxnews.com/video-
search/m/21171537/fraud_fears.htm?q=indiana
4. Stanley Kurtz, National Review, on FOX news commented on Obama in his early days with
ACORN.
5. Buycks-Roberson v. Citibank Fed. Sav. Bank. Plaintiffs filed their class action lawsuit on
July 6, 1994, alleging that Citibank had engaged in redlining practices in the Chicago
metropolitan area in violation of the Equal Credit Opportunity Act.
http://clearinghouse.wustl.edu/detail.php?id=10112
6. http://www.pittsburghlive.com/x/pittsburghtrib/news/mostread/s_590487.html
7. Alan Greenspan, April 6, 2005.
http://www.federalreserve.gov/boarddocs/testimony/2005/20050406/default.htm
8. "Questions raised about Fannie Mae" by Mary Jacoby July. 17, 2000.
http://www.sptimes.com/News/071700/Worldandnation/Questions_raised_abou.shtml
9. William A. Niskanen. Quote taken from a Congressional testimony.
http://www.cato.org/testimony/ct-ni3-8.html
10.Washington Post article. http://www.washingtonpost.com/wp-
dyn/content/article/2008/09/19/AR2008091903183.html
11."Fannie Mae Eases Credit To Aid Mortgage Lending," by Steven A. Holmes, Sept. 30,
1999, New York Times http://query.nytimes.com/gst/fullpage.html?
res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&amp
;amp;amp;pagewanted=all
12.Senator for Massachusetts and Founder of National Stonewall Democrats, the national gay,
lesbian, bisexual, and trans-gender Democratic organization.
13."McCain warned us of financial debacle," by Owen Nelson, Sept. 23 2008, Las Vegas Sun
http://www.lasvegassun.com/news/2008/sep/23/mccain-was-warned-financial-debacle/
"McCain tried to help avert crisis" by Randy Kniebes, Oct. 21, 2008 Livingston Daily
http://www.livingstondaily.com/article/20081021/OPINION03/810210313/-1/NEWSFRONT2
14.Obama speaking on Sept. 17 2007, in the NASDAQ Media Room. See video on YouTube:
http://www.youtube.com/watch?v=FewmvkaTXHU

I dedicate this article to this great country and may it be always be blessed with great
leaders, who will continue to stand fast at the tiller, keeping this country secure and free
from oppression.