Subprime Meltdown

Subprime Meltdown

Blue Collar Commentary

With Dale McCoy

This commentary will help expose the government’s role in the sub prime loan fiasco. All sources are “hot linked,” and I strongly encourage readers to visit them. They are the heart of this story.

It is generally accepted by many economists that the sub prime mortgage meltdown and subsequent collapse of the housing market led to our current recession. It should come as no surprise that the federal government played a large part in creating the problem. The feds have a proven track record of phenomenal failure. Social Security is insolvent, and the “trust fund” is long gone.

Medicare and Medicaid are insolvent, and the $100 trillion in unfunded liabilities poses a huge threat on the future of all Americans.   The Post Office is insolvent, and hopelessly saddled with entitlement debt.  If these entities were private businesses, they would cease to exist, but since they are government agencies, they continue to operate despite exponential losses. Perpetual spending deficits are the norm for federal programs.

This brings us to the subject of Fannie Mae and Freddie Mac, two of big government’s greatest failures. The Federal National Mortgage Association (Fannie Mae) was created in 1938 during FDR’s administration.  Fannie’s original purpose was to buy mortgages from lenders, thus freeing up capital for other borrowers (If that sounds familiar, look up the original justification for TARP).   In an effort to reduce federal debt, Fannie Mae was converted into a publicly traded company in 1968. The Federal Home Mortgage Corporation (Freddie Mac) was created two years later to help keep Fannie Mae from functioning as a monopoly. My what a tangled web we weave! Together these two government sponsored enterprises (GSE’s) hold or guarantee more than $5 trillion in debt. They are considered “too big to fail” by our current administration.  Fannie and Freddie enjoy the benefits of being closely aligned with the federal government. Congress supports them, and they support congress. Between January 2007 and May 2008, the political action committees (PAC) for Fannie and Freddie contributed over $820,000 dollars to members of congress. During the prior two congressional cycles, these PACs donated almost 2 million dollars to federal candidates,  and these candidates are the people in charge of overseeing Fannie and Freddie. But I’m getting ahead of myself.

In 1977 the US Congress and the Carter administration passed and signed the Community Reinvestment Act (CRA).  Ostensibly, the CRA’s purpose was to help meet the credit needs of low-income and minority borrowers. The only way to accomplish this goal was to lower the financial standards for individuals receiving a loan, and to make these loans more affordable by artificially lowering interest rates and creating sub-prime mortgages.  Unfortunately, reality dictates that if you can’t afford a house… you shouldn’t buy a house regardless of the incentives offered as part of the purchase.  In 1999 the Clinton administration doubled down on a bad idea by increasing pressure on Fannie Mae to expand sub prime loans.  Franklin D Raines, CEO of Fannie Mae at the time, was happy to oblige President Clinton. More business meant more “profit” and higher compensation. It is worth noting that Mr. Raines had been Bill Clinton’s White House budget director up until 1998. And so the bad lending practices continued (helped along with a little shady bookkeeping).  Since issuing sub prime loans to people who can not really afford them is an inherently risky business, it was only a matter of time before Fannie and Freddie came under increased scrutiny.

In 2003 the Bush administration recommended creating a new agency to oversee these GSEs. Democrats in Congress resisted the idea. Barney Frank, ranking Democrat on the House Financial Services Committee said: “These two entities….Fannie Mae and Freddie Mac…are not facing any kind of financial crisis”  (see video above).  Mr. Frank went on to say that he wanted to “roll the dice a little bit more in this situation towards subsidized housing.”  Senator Chris Dodd called the GSE’s “one of the great success stories of all time.”  Senator Dodd was the largest beneficiary of Fannie and Freddie’s political donations. In January 2007, Barney Frank became chairman of the House Financial Services Committee, and Chris Dodd became chairman of the Senate banking committee. Both men continued to defend Fannie and Freddie right up through late summer of 2008.  In July of that year, Barney Frank stated “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under.. I think they are in good shape going forward.”  During the same month, Chris Dodd said, “the economics are fine in these institutions and people need to know that.”

Two months later, the bottom fell out.

In September of 2008, Fannie Mae and Freddie Mac were placed into conservatorship at the Federal Housing Finance Agency (FHFA).  At the time, it was estimated that federal bailout costs could be as high as $200 billion.  Later, the Obama administration doubled that figure to $400 billion. Then, on Christmas Eve 2009, the Obama administration and the treasury department lifted the limits altogether.  You may have missed that since it was the same Christmas Eve that the Senate voted on healthcare reform.

Even the Huffington Post found the cap removal offensive.  But be careful of this last link. The author takes more than a little creative liberty when assigning blame. If you have read this article and checked the links, you know this problem did not originate in 2008. You also know that the democrats have controlled congress from January 2007 right up to the present time.

So here we are, trillions in debt while politicians who put us here continue to live well on our dime. I will withhold my opinion on whether or not our massive financial problems are the result of good or bad intentions. It doesn’t matter. The results of these failures look the same. If you didn’t find enough information in this commentary to make your blood boil, please feel free to refrain from voting on November 2nd. If you did find enough to make your blood boil…vote for new blood in our government.



Comment from Ryan Saari
Time: October 29, 2010, 12:11 pm

Barny Frank makes me sick.

Simply put, under Democratic influence in 2008, as the mortgage market deteriorated, Fannie and Freddie could no longer conceal their questionable accounting practices. As the write-offs mounted, it became clear that the companies would become insolvent and since the government backed the mortgages, the government would have to step in and bail out the lenders.

Unfortunately for us, these were badly run politically influenced companies with privatized profits and socialized losses. Probably the worst combination you could dream up.

Comment from Dale
Time: October 31, 2010, 9:16 am

Your last sentence sums it up well.
Thanks for the comment,

Comment from Debbie
Time: October 31, 2010, 2:09 pm

The trillions in debt will have to be paid back. So everyone with a 401k who thought they would be paying less in taxes when they begin withdrawals in retirement, could end up paying more.
Another government plan that won’t work out as promised.

Comment from Don Kerr
Time: November 2, 2010, 9:13 am

Just as we already knw, time to get the Dems OUTTA HERE!!!

Comment from Annette
Time: November 13, 2010, 6:24 pm

Would like to remain hopefull that we can turn this around.

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