The financial meltdown we are experiencing was NOT caused by Wall Street but was caused by a cadre of dedicated left wing ideologues.  The truth of this statement follows.

You may already know that the event that brought the world's largest economy to its knees was the skyrocketing foreclosure rates on subprime and Alt-A junk loans.  

You may already know that Fannie Mae and Freddie Mac were the leading actors in this crisis and that they are now under government conservatorship.  

As a taxpayer you might expect the regulator/conservator would work to rehabilitate them so this does not happen again.

Well, not exactly: On September 25, 2008 James B. Lockhart, Fannie and Freddie's federal regulator and conservator, in a statement to the House Committee on Financial Services chaired by Rep Barney Frank, acknowledged that poor underwriting and credit concerns were the main causes of their collapse1.

He then made the seemingly odd observation, given his role as their safety and soundness regulator: "Freddie Mac and Fannie Mae, in order to try to build capital, may have raised prices and tightened credit standards beyond what was necessary for sound underwriting."

He assured the committee that he had corrected this perceived shortcoming: "As the companies operate in conservatorship, I have already instructed each new CEO to examine the underwriting standards and pricing. They have begun to do so, and I expect any changes to reflect both safe and sound business strategy and attentiveness to the Enterprise's [affordable housing] mission."

In a soliloquy aimed directly at Chairman Frank, he stated: "The market turmoil of this year resulted in a tightening of underwriting criteria for the purchase of new, unseasoned loans used by individual lenders..., thereby reducing the availability of traditionally goal rich high loan-to-value home purchase loans [emphasis added]. In addition, the collapse of the private label, secondary mortgage market [meaning non-Fannie/Freddie securities backed by subprime lending and Alt-A junk loans] further reduced the share of home purchase loans qualifying for goals. Finally, the rise of FHA as a market force means fewer high-LTV, goal-rich borrowers for Fannie Mae and Freddie Mac [note: FHA was the original subprime lender]. Even if some or all of these goals are found to be unattainable, I will expect each Enterprise to develop and implement ambitious plans to support the borrowers and markets targeted by the goals.  We have begun to meet with affordable housing advocates, seeking their perspective on implementation of the new goals structure (emphasis added)."

Why would Fannie and Freddie's conservator be acting like they are the victims rather than the perpetrators?   Why would Lockhart go out of his way to assure Rep. Barney Frank that he will force Fannie and Freddie to continue making low/no down payment, sub-prime FICO loans, and other "goal rich" loans?   Let's start with the usual explanation given for a financial crisis - Wall Street.  

Well, not exactly:  Losses on junk loans have bankrupted many financial institutions and placed Fannie Mae and Freddie Mac in receivership.  Actions by Fannie and Freddie are at the center of this crisis.  Fannie and Freddie, as "government sponsored enterprises" (GESs), can't be liquidated except by Congress, so they were nationalized by their regulator.   

But Fannie and Freddie only deal in high quality loans.  

Well, not exactly: What you may not know is that Fannie and Freddie own or guarantee over $1.7 TRILLION in junk subprime (FICO<660 and/or minimal down payment), Alt-A loans (no doc/low doc, minimal down payment and other high risk characteristics) and interest only and pay option ARMs).  This totals about 37% of their entire mortgage risk portfolio.

But isn't Wall Street responsible for even more junk loans.  

Well, not exactly:  HUD's Federal Housing Administration, the original subprime lender, insures about another $650 billion in loans (and now growing at a record pace).

But that still leaves a lot of junk loans due to Wall Street because junk loans total about $4 trillion and Fannie, Freddie, and FHA account for only about $2.4 trillion.  

Well, not exactly:  The GSEs had such superior advantages conferred by their charters that they constituted a duopoly that squeezed out any private competitors that dared try to enter any market segment in which they desired to enter or control.  In 1991, the private market was left with the meager leftovers either not wanted (Alt-A/low doc-no doc loans) or beyond their reach by the original terms of their charters (jumbo and subprime).  These areas tended to be the higher risk portions of the market.  Overtime Fannie and Freddie would decide that they needed to enter or reenter these markets so as to gain back market share.  

But weren't Fannie and Freddie prohibited by charter from entering the subprime market.  

Well, not exactly: When Congress set up Fannie Mae as a shareholder owned company in 1968, the charter provided that "so far as practicable, [mortgages purchased by it shall] meet, generally, the purchase standards imposed by private institutional mortgage investors (emphasis added)."  This had long been interpreted to restrict Fannie to "A" quality or "prime" paper; subprime did not meet this test.  However Fannie and Freddie were given tacit if not explicit permission to enter the subprime market under Congress' 1992 affordable housing mandate.  HUD was only too happy to increase the GSEs' affordable/subsidized housing goals every couple of years, eventually jacking them up to over 50% of their loan purchases. The eligibility of subprime as meeting the mandate was reinforced by a 1995 decision by President Clinton's HUD.  Fannie and Freddie would eventually go head to head with Wall Street and claw back turf they now felt was rightfully theirs.  Fannie and Freddie as usual were able to beat any private competitor and during the 2005-2007 period dominated junk lending.  While Wall Street's actions place it in the misdemeanor category, Congress, Fannie, and Freddie are the real felons in this story.  Ironically Congress in 2007 gave Fannie and Freddie expanded powers to move into the jumbo marketplace.

But many of these loans helped further the goal of affordable housing.

Well, not exactly:  Many of the GSEs' $1.7 trillion in junk loans were made to real estate speculators, unqualified borrowers (either horrible credit and/or little or no income), and borrowers with little or no down payment.  For example, the GSEs now hold over $500 billion of "liar" loans - stated income and "NINJA" loans - no income, no job or assets.  The GSEs developed 100% loan-to-value loans to compete with FHA (and help meet government set quotas) and today hold over $400 billion on loans with down payments of 5% or less.

But aren't all types of homeowners having trouble with making their payments?

Well, not exactly:  Borrowers who got their loans the old fashioned way - with a real downpayment, good credit, and a verified job and income have a serious delinquency rate of about 1.25%.   There are 35 million such homeowners.  Add to this the 30 million homeowners without any mortgage and we are talking about 65 million homeowners.  Compare this to the perhaps 20 million homeowners with junk loans - at least one-half of which are the responsibility of FHA, Fannie, and Freddie.  For example, the serious delinquency rate on the 3.1 million subprime borrowers with an ARM loan is over 26%.   

But Fannie and Freddie and others could not have possibly foreseen this.

Well, not exactly: In an unguarded moment in 1991 Angelo Mazilo (head of Countrywide, the largest junk loan producer and Fannie's largest customer) stated: "At one time, I was a prophet of low-doc. The problem is that it went much too far.  Human beings are basically rotten.  If you give them an opportunity to screw up, they will." Countrywide's president Angelo Mazilo's observation in 1991 Wall Street Journal article entitled "Haste Makes... Quick Home Loans Have Become Another Banking Mess"

It turns out that the loan products Mazilo refers to in 1991 are virtually identical to the junk loans of today called Alt-A: low-doc and no-doc ARMs with low start rates, the potential for negative amortization, and rampant fraud - resulting in incredibly high foreclosure rates.2   The 1991 article goes on to report "Last October [1990], Fannie Mae stopped buying no-doc and low-doc loans [Fannie Mae's vice chair and CEO-designate at the time was Jim Johnson].  On April 1 [1991] so did Freddie Mac."  Countrywide (with still Mazilo at the helm) was Fannie's largest customer for most of this decade.  It specialized in Alt-A and subprime loans. During the 2nd quarter of 2008, 49% of Fannie's losses were on Alt-A loans, however only 10% of its outstanding mortgage risk was comprised of Alt-A loans.  Jim Johnson, Fannie's CEO from 1991-1998, mastermind of Fannie's multi-trillion dollar foray into affordable/subsidized housing loans and an advisor to Barack Obama, set Fannie on the junk loan road in the early 1990s.   

But Congress could not have intended for this to happen.

Well, not exactly:  After massive cases of accounting fraud are discovered at both Freddie and Fannie, their Congressional supporters come to their defense:

Rep. Barney Frank (D-MA) stated: "I do think I do not want the same kind of focus on the safety and soundness [of Fannie Mae and Freddie Mac].  I want to roll the dice a little bit more in this situation towards subsidized housing.... (Emphasis added)" Rep. Barney Frank, House Financial Services Committee hearing, September 25, 2003.
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"Partnerships like this [$35 billion national affordable housing alliance between JP Morgan Chase and Fannie Mae] are vital to ensure that all home buyers are given fair and equal opportunities," said U.S. Senator Charles E. Schumer (D-NY). Business Wire, Jan. 17, 2002.
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Sen. Christopher Dodd (D., Conn.) - 2003: "I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here."

Rep. Clay (D) states in his opening statement "This hearing is about the political lynching of Franklin Raines [CEO of Fannie Mae at the time]," Clay went on to say that lawmakers had no business holding the hearing -- "unless this is truly a witch hunt."

Rep. Barney Frank (D-MA) "Last point, and Fannie and Freddie are to some extent criticized from both ends. There was an article by Gretchen Morgenson in the New York Times on Sunday that said the problem is that they have done too much to bring housing to people who really cannot afford it and should not be given this chance to own the housing. Her article said the problem here has been they have overextended by lending money to people who were below the economic level that should be there3.

On the other hand, they are criticized by the chairman of this subcommittee for not doing enough for lower-income people. Both obviously cannot be right." Rep. Barney Frank, House Financial Services Subcommittee hearing, October 6, 2004

Things got particularly uncomfortable for Fannie in October 2004 after its regulator accused it of accounting irregularities.  After these members and other4 members of Congress put it all on the line for Fannie and Freddie, it was time to return the favor.

Later on that month, Fannie CEO Frank Raines told the America's Community Bankers (ACB) convention that Fannie Mae intends to purchase subprime loans much more aggressively: "Fannie is moving ahead with a concerted effort to serve the subprime market."
 
The next month Fannie and Freddie's CEOs both speak at the Mortgage Bankers Association's annual meeting.  Each vows to boldly enter the subprime lending marketplace.   Frank Raines, Fannie's CEO, asserts that Fannie and its lender customers need to learn from the subprime market.  He takes pains to praise nonprime lenders for their expertise as marketers.   

These steps were necessary to rebuild the bond with primarily Democratic members of Congress, so as to prevent the adoption of a strong regulatory regime.5

Rep. Frank was correct that "both obviously cannot be right."  He rolled the dice and the American taxpayer lost big. 6


But the big bailout just approved will fix all this.

Well, not exactly:  Rep. Frank is now chair of the House Financial Services Committee.  Senator Dodd is now chair of the Senate Banking, Housing and Urban Affairs Committee. Senator Schumer is the chair of the Joint Economic Committee.  All are architects of the 450+ page $700 billion bailout package.

Congress's failure to create a strong regulatory regime for Fannie Mae and Freddie Mac was no fluke.  It was a conscious choice by the GSEs' supporters in Congress--mostly liberal Democrats--to permit continued use of the GSEs' financial resources (all of which are outside the normal budget process) for their political benefit.

As noted at the beginning of this article, the takeover of Fannie and Freddie by a government conservator does not end the problem of government financing of affordable housing. In fact, it might open a new and more costly era.6 Lockhart makes no mention of the trillion dollars of 0% down loans, payment shock prone ARMS, loans on investor properties, NINJA and liar loans (no income, no job or assets) or loans to borrowers with little or horrible credit, all made in the name of affordable housing, 

If this is what a Republican administration says about how Fannie and Freddie will be used in the current conservatorship, one can only imagine what a Democratic administration might have in mind. Taxpayers should understand that the losses already embedded in Fannie and Freddie are just the beginning of the costs they will eventually have to bear.

So this is the cast of characters responsible for this assault on our middle class?

Well, not exactly:  This could not have been accomplished without the help of ACORN® (Association of Community Organizations for Reform Now), one of Fannie's, Freddie's and Barney Frank's favorite groups.  Hasn't Barney Frank wrought enough damage on our nation's economy with his affordable housing fiasco at Fannie and Freddie?  He recently placed a $500 million annual tax on them to fund another one of his pet projects, The National Housing Trust Fund (if they are unable to pay, the US Treasury Department has agreed to pay). ACORN would be an eligible recipient. 

"In December 1978, ACORN held its first national convention in Memphis, TN to discuss and initiate a national platform for low- and moderate- income people. The convention was planned to coincide with the National Democratic Party conference or "miniconvention", which was conducting hearings to develop issues for the upcoming Democratic National Convention. At the end of the platform-drafting conference, ACORN convention delegates marched on the Democratic Party conference with the basics of a nine-point "People's Platform." They demanded a meeting with President Carter but were only allowed to demonstrate in the street. ACORN, however, had created a permanent presence in national politics, that reached the highest levels of power." ACORN's history as related on its own web site.

Over time that would change.  It would become the most prominent group working to accomplish massive increases in affordable/subsidized housing no matter what the cost or damage to innocent homeowners and the US economy.  It had friends in very high places - Barney Frank and Barack Obama just to name two. 
 
By 1990 ACORN felt it had begun "playing the insiders' game in American politics. Congressional lobbying is practiced by ACORN staff. Leaders and members became a central part of the insiders' games, too. ...Instead of confronting opponents in actions (something ACORN will never stop doing), members could trade and negotiate from inside positions of power. ACORN's work on the savings and loan bailout provided effective means of developing and applying power for low- and moderate- income people. ACORN members won appointment to the Resolution Trust Corporation (RTC) to help determine the management of the billions of dollars of assets the government seized."  ACORN's history as related on its own web site.

"[I]n 1992, the "ACORN-Bank Summit," was organized to hammer out deals with giant banks like Continental, First Fidelity, Mellon, PriMerit, and Chemical. Representatives signed agreements to establish programs for low- and moderate-income people to qualify for mortgages in their communities. Citibank, the nation's largest bank, did not participate. In response, the conventioneers held a lively action at Citibank's downtown Manhattan headquarters, and won a meeting to negotiate for similar programs. The meeting also led to increased Fannie Mae and Freddie Mac funding from the secondary mortgage market to ACORN neighborhoods. These efforts led to billions of dollars of primary and secondary mortgage money flowing into ACORN communities over a period of several years." ACORN's history as related on its own web site.

"With a Democratic President and Congress, the national government became more receptive to reforms promoting the political power of low- and moderate-income people. ACORN played an important role in the passage and implementation of the 1993 National Voter Registration Act, or "Motor- Voter," Act. After its passage, ACORN members attended President Clinton's signing ceremony."  ACORN's history as related on its own web site. 

Note: ACORN states it has registered over 1.7 million voters since 2004.  What it does not state is that ACORN members have been accused and/or convicted of voter registration fraud in numerous states over many years.. Missouri has 8 ACORN guilty pleas on record (for 2006 violations of federal voting laws) just this year.   Many other states are investigating many hundreds of cases of voter fraud in their jurisdiction.

"Democratic control of the federal government meant that ACORN had increased access to top officials with more sympathetic ears. ACORN members began regular meetings with Henry Cisneros, HUD Secretary under President Clinton, on a variety of issues." ACORN's history as related on its own web site. 7 

Preamble to ACORN's platform: "Our riches shall be the blooming of our communities, the bounty of a sure livelihood, the beauty of homes for our families with sickness driven from the door, the benefit of our taxes rather than their burden, and the best of our energy, land, and natural resources for all people. ... We will live in richness and freedom." 8

Instead of these platitudes, ACORN has actively worked to bring our country to its knees economically.

ACORN is where Barack Obama cut his community organizing teeth. Senator Obama taught ACORN members organizing tactics. Obama not only worked closely with ACORN in South Chicago but was their lead lawyer.  Obama sued banks who denied home loans to those unable to pay and forced Chicago banks to grant home loans to the poor and minorities. Obama, as a board member of the Woods Fund, gave grants to ACORN. His taxation, energy, and health care platforms follow ACORN's in many respects. 
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1Lockhart was led "to conclude that the companies each presented critical safety and soundness concerns pertaining to credit risk and to continued deterioration in the market environment. Importantly, key developments in July and August demonstrated market recognition of these heightened credit concerns and the effect of the deteriorating market environment on the Enterprises."

2The WSJ estimated that in 1988 low-doc and no-doc loans "accounted for 20% to 30% of the annual mortgage market." For marketing purposes this type of loan is now known as an Alt-A interest only or Option ARM.  These loans were known in the trade back then and now as "liar" loans. "In Massachusetts, [Dime Savings Bank's] delinquencies [in 1991] hit an astonishing 24% of the dollar amount outstanding.  Banks lost billions in the late-80's and early 90's as a combination of declining property values and increasing monthly payments sent defaults skyward. 

3"Still, the most damaging legacy of Fannie Mae's years of unchecked growth may not be evident until the next significant economic slump. Only then, argued Josh Rosner, an analyst at Medley Global Advisors in New York, will the effects of Fannie Mae's relaxed mortgage underwriting standards be felt. A result could be a more pronounced downturn in the real estate market and more stress on the consumer.

"The move to push homeownership on people that historically would not have had the finances or credit to qualify could conceivably and ultimately turn Fannie Mae's American dream of homeownership into the American nightmare of homeownership where people are trapped in their homes," Mr. Rosner said. "If incomes don't rise or home values don't keep rising, or if interest rates rose considerably, you could quickly end up with significantly more people underwater with their mortgages and unable to pay." A Coming Nightmare of Homeownership? New York Times, October 3, 2004, Gretchen Morgenson,

4Rep. Gregory Meeks, (D-N.Y.) - 2003: ". . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place."

Ofheo Director Armando Falcon Jr.: "Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers."
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Rep. Frank - 2003: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . .
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Rep. Maxine Walters (D - CA) to HUD Secretary Martinez (2003): "If it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?"

5Thus more affordable and subsidized housing became the key. A strong regulator might limit the growth of the GSEs profitable portfolios.  The loss of these profits would spell the end of the affordable housing program and their congressional supporters would no longer be able to get credit for dispensing immense amounts of taxpayer-backed funds back to their constituents (reverse earmarks). It was only with new and even greater affordable/subsidized housing investments (well over $1 trillion in fact) that continued congressional support--primarily from Democrats--could be assured.  It is the unprecedented rate of defaults these junk loans that will produce enormous future costs for the taxpayers. 

6But it bought the GSEs three more years of power.  Their massive show of support for affordable housing held off any new regulations for 3 years. A strong regulatory bill adopted by the Senate Banking Committee in 2005--with the unanimous support of committee Republicans and over the unanimous opposition of committee Democrats, could not be brought to a vote on the Senate floor. Not a single Democrat--including Barack Obama--would agree to limit debate and support the bill. 

7As the conservator/regulator told Rep. Barney Frank on September 25, 2008, he realized the continued importance of meeting the affordable housing goals required by HUD regulations: "The market turmoil of this year resulted in a tightening of underwriting criteria...thereby reducing the availability of goal-rich high loan-to-value home purchase loans...I will expect each Enterprise to develop and implement ambitious plans to support the borrowers and markets targeted by the goals."

8Preamble to ACORN's Platform:

"But we have nothing to show for the work of our hand, the tax of our labor. Our patience has been abused; our experience misused. Our silence has been seen as support. Our struggle has been ignored.
 
Enough is enough. We will wait no longer for the crumbs at America's door. We will not be meek, but mighty. We will not starve on past promises, but feast on future dreams.

We are an uncommon people. We are the majority, forged from all minorities. We are the masses of many, not the forces of few. We will continue our fight until the American way is just one way, until we have shared the wealth, until we have won our freedom."