Framing the Dialogue

Pweditowy Wending

Barney Frank (D-MA) may be the quintessential corrupt (allegedly) politician on Earth.  That’s saying something these day with the likes of Rangell, Waters, and Jefferson evading taxes, helping friends and hiding cash in the freezer.  Countless journalists have investigated and provided a significant amount of proof of Frank’s fingerprints all over the implosion of the housing market resulting in a global economic meltdown.  In his chutzpah he and equally sleazy Chris Dodd (D-CT) had the unmitigated gall to write financial regulations.  Even sicker was watching this bill pass and get signed into law. 

Imagine my horror when I recently heard a clip of Rep. Frank actually blaming the housing bust on pweditowy wending (predatory lending).  In other words it’s the banks’ fault.  It’s as if Frank has one of those Staples’ “Easy” buttons and we’ll all accept this paper-thin explanation.  Let’s take a look at his predatory lending scenario.

Predatory lending, according to Rep. Frank, happened when evil lending institution decided to go out and offer loans to folks who could not afford the payments.  Rich bankers preying on unsuspecting people just trying to achieve the American Dream of home ownership.  I am sure that this happens, but the facts do not bear this out as a major problem.  Anecdotally it does not make much sense to loan money to someone who cannot pay it back.  Banks are banks not real estate companies.  How can it be routinely profitable to tie up an asset for months or even years as they proceed through bankruptcy proceeding without income generated by that asset.  We should also consider what happens to the house inhabited by people who have no ownership pride.  The Wall Street Journal has a great piece on this subject.

In a report by the Department of Housing and Urban Development research is provided for the following:

“the more fundamental cause of the foreclosure crisis was the surge beginning in 2003 in the origination of loans that were at high risk of foreclosure due to a combination of unaffordable initial payment levels relative to borrower incomes coupled with loan terms that would make these loans even more unaffordable over time.”

An earlier HUD study found:

“Research on the effects of neighborhood characteristics on default has been somewhat limited in the past, and this study’s contribution to the literature is the inclusion of credit history data. The analysis finds that lower tract income and higher tract black composition are associated with higher rates of default, whereas individual borrower race or income are unrelated to default.” [emphasis added.  Kind of puts the lie to any “predatory lending” claim]

I found this informative time-line in a recent publication:

  • First, Bill Clinton broadened the Community Reinvestment Act (CRA), bypassing the Republican-led Congress and ordering the Treasury Department to rewrite the CRA rules to force banks to fulfill loan “quotas” in low income neighborhoods. 
  • Eventually, Fannie Mae and Freddie Mac were required by HUD to show that 55% of their mortgage purchases were to low and moderate income borrowers, and lending standards were lowered to meet those goals.  This story by the New York Post is a great illustration of this process.
  • Intense competition caused by Fannie and Freddie’s increasing appetite for loans caused investment and commercial banks to compete for borrowers, and the looser lending standards eventually spread to higher-income and prime borrowers as well.
  • Then came Clinton’s most disastrous decision: he legalized the securitization of subprime mortgages that allowed the market to soar from $35 billion in risky loans in 1994 to $1 trillion by 2008, thus poisoning the entire mortgage industry.
  • Republicans tried to rein in Fannie and Freddie’s purchases of subprime mortgages. In both 2003 and 2005, they introduced legislation that would have required Fannie and Freddie to eliminate their investments in them. Both times their attempts were opposed by the Democrats on the Senate Banking
  • The repeal of the Depression-era Glass–Steagall Act in 1999, allowing banks and securities firms to be affiliated under the same roof, was supported by the Clinton administration and signed into law by the president.
  • Moreover, that was not the cause of the financial crisis. The crisis was caused by banks and investment firms purchasing vast numbers of bad mortgages and mortgage-backed securities.
  • What contributed to such a high volume of purchases? In 2004, the Securities and Exchange Commission (SEC) and Democrat Annette Nazareth, who ran the market regulation division at the time, unanimously adopted a rule change known as Basel II.
  • Adopted by all of the world’s central bankers, Basel II was an attempt to provide greater regulation of investment firms by more accurately evaluating the types of assets they held.
  • Unfortunately, AAA-rated mortgages were incorrectly considered to be some of the safest assets an institution could own. As a result, Basel II allowed investment banks to leverage their assets of mortgage-backed securities at a ratio as high as 30 to 1. Thus, although Basel II wasn’t the cause of the financial crisis, it certainly contributed to the size of it.

There is plenty of blame to go around and much of it lies directly at the feet of Mr. Frank.  The evidence against the “predatory lending” accusation of Mr. Frank is pretty strong and shows his use of this tactic of “class envy” as nothing more than typical Democrat politics.  Even if you dislike Rush Limbaugh, this link to his website has the transcript for many of the conflicting statements made by Rep. Frank.  I am not sure how these politicians often forget that this stuff is taped these days, there is a strong alternative media, and there are a bunch of us looking for answers not sound bytes.

So where does that leave us?  Since Dodd and Frank wrote the financial reform bill you can expect nothing to really change, but it get better and by “better” I mean worse.  In Frank’s state of Massachusetts will make NO INTEREST LOANS to unemployed workers:

“Unemployed homeowners in Massachusetts will be able to take out interest-free loans of up to $50,000 to help them make mortgage payments, under a $1 billion federal program unveiled today in Roxbury by the US Department of Housing and Urban Development.”


And leave you with more good news, Fortune magazine reports that:

“Bearing the risk that soaring mortgage defaults will again kneecap Fannie Mae and Freddie Mac could cost taxpayers $97 billion over the next decade. – The Congressional Budget Office said in a report Thursday that propping up Fannie (FNMA) and Freddie (FMCC), the government-sponsored mortgage investors, is expected to cost taxpayers $53 billion between 2011 and 2020.”

At least it’s not a trillion dollars.

We can still rest assured that Washington has NOW learned their lesson.  I am guessing that the story that Obama has just picked as his National Security Advisor a man, Tom Donilon, who has ties to the housing crisis.  It seems that Mr. Donilon worked for Fannie Mae as a lobbyist.

Have a nice day!

October 18, 2010 Update:  

A remarkable thing happened.  CNBC actually ran a story criticizing Barney Frank!  I am not going to get all giddy that they finally got it, but Frank is just so brash in his claims that even the left media has to point it out.  Pay particular attention to the conversation between the anchors at the end of the clip as they explain why they did not point out Frank’s lies to his face.

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