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In the back-and-forth campaign blame game going on over the financial crisis, Sen. John McCain pointed the finger at Democrats and Obama for failing to support a plan to exert regulatory control over Fannie Mae and Freddie Mac in 2005 and 2006.
"But you know, one of the real catalysts, really the match that lit this fire was Fannie Mae and Freddie Mac," McCain said at the second presidential debate on Oct. 7. "I'll bet you, you may never even have heard of them before this crisis. But you know, they're the ones that, with the encouragement of Senator Obama and his cronies and his friends in Washington, that went out and made all these risky loans, gave them to people that could never afford to pay back.
"And you know, there were some of us that stood up two years ago and said we've got to enact legislation to fix this. We've got to stop this greed and excess.
"Meanwhile," McCain said, "the Democrats in the Senate and some ? and some members of Congress defended what Fannie and Freddie were doing. They resisted any change."
Set up decades ago by the federal government to underwrite mortgages and promote home ownership, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.) became major players in the domestic mortgage market. They don't make loans to homeowners directly, but they purchase mortgages, bundle them into securities, and sell some of them on the open market. Together, Fannie and Freddie owned or guaranteed about $5-trillion in mortgages, about half of the U.S. market.
After years of rapid growth in home prices, foreclosures and mortgage delinquencies began rising by 2006. Some homeowners had adjustable-rate mortgages that were resetting to higher rates they could no longer afford. In other cases, speculators were overextended and dumping properties. Outright fraud had some role: people who took out loans never intending to pay them back.
Regardless of the reasons, by 2008 foreclosures were affecting Fannie and Freddie. The agencies didn't have enough money to meet their financial obligations, and the U.S. government took them over on Sept. 7.
When McCain points an accusing finger at the Democrats for encouraging Fannie and Freddie to make too many risky loans, he's talking about the Federal Housing Enterprise Regulatory Reform Act initiated by Republican Sen. Chuck Hagel in 2005. In 2006, McCain signed on to the Republican-led attempt at regulatory overhaul of the mortgage-financing firms, which both went through multibillion-dollar accounting scandals earlier in the decade.
The occasion that prompted McCain’s involvement was the release of a 340-page report from the Office of Federal Housing Enterprise Oversight that concluded that Fannie Mae had manipulated earnings and violated basic accounting principles. It describes an “arrogant and unethical corporate culture” in which executives were more concerned about their bonuses than meeting the company’s housing mission.
The findings, based on a 27-month investigation and resulting in a $400-million fine paid to the government, prompted McCain to join other critics and call for more scrutiny of Fannie and its sibling, Freddie Mac."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," McCain declared in a May 26, 2006, news release.
While McCain is quick to blame Democrats for opposing the legislation — they did — the Republicans controlled Congress at the time, and there was a Republican in the White House. Yet the bill languished in the Senate, and it wasn't until earlier this year that Congress and the Bush administration, shaken by the extent of the subprime crisis, completed a regulatory overhaul by combining OFHEO and the Federal Housing Finance Board into a new regulatory body, the Federal Housing Finance Agency.
We should also note that prior to 2000, support for Fannie and Freddie was more bipartisan. In the late 1990s, the Republican-controlled Congress — with the blessing of Democratic President Bill Clinton — eased the credit requirements on loans that Fannie and Freddie purchased.
"It's a bipartisan problem," said Bill Beach, director of the Center for Data Analysis at the conservative Heritage Foundation.
McCain rightly notes that the 2005-2006 efforts to regulate Fannie and Freddie were Republican-led, and opposed by the Democrats, but McCain's current attempts to depict those efforts as an early warning that could have lessened the current credit crisis don't wash. McCain was talking mostly about potential fallout from accounting troubles, not freewheeling lending standards based on a housing bubble. And he said nothing about major financial institutions becoming badly leveraged on bad loans and new securities products.
Even if the 2006 effort to strengthen oversight had succeeded, it’s debatable whether it would have averted the subprime crisis. The extent of the problems was not yet fully known, and it’s a leap of faith to suggest that regulators granted expanded power would have noticed a deterioration in Fannie and Freddie’s loan portfolios soon enough and would have sounded an alarm.
So first, when McCain talks about this legislation, it's not the cure-all he suggests it may have been; the focus then was on corruption in Fannie and Freddie, which isn't really what the financial crisis is about. Democrats may have opposed it, but it didn't appear to have all that many champions in a Republican-controlled Senate, either. And last, if you look back in time, Democrats and Republicans supported an easing of lending standards in the late 1990s. So for McCain to lay Fannie and Freddie woes entirely at the feet of the Democrats is unfair. We rate his statement Half True.
Reuters, Timeline: Government takes over Fannie Mae, Freddie Mac , Sept. 7, 2008
Brookings Institute, Lessons from the Financial Crisis , Oct. 6, 2008
CBS News, Transcript: Second Presidential Debate , Oct. 7, 2008
Wall Street Journal, Blame Fannie Mae and Congress For the Credit Mess , by Charles W. Calomiris and Peter J. Wallison, Sept. 23, 2008
PolitiFact, McCain's Warning on Fannie and Freddie , Sept. 17, 2008
Congressional Research Service, Government-Sponsored Enterprises (GSEs): Regulatory Reform Legislation , by Mark Jickling, Specialist in Public Finance, Government and Finance Division, Oct. 27, 2005
Interview with Charles Calomiris, a professor at Columbia Business School and a scholar at the conservative American Enterprise Institute, Oct. 10, 2008
Interview with Bill Beach of the Heritage Foundation, Oct. 10, 2008
Interview with Dean Baker, an economist and co-director of the Center for Economic and Policy Research, Oct. 10, 2008
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