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December 02, 2011

Second Day of Freddie Coverage

For all of you who've been wondering "What will it finally take for the media to report on FM's role in the collapse?," we've got an answer: Republican involvement with FM, sillybeans.

That said, Sexton was right about this particular bit of public advocacy for the program. In the article Verum Serum uncovers, Gingrich does not endorse Fannie's/Freddie's practices. Instead, he endorses the model of a government-backed enterprise for handling functions that the government has gotten into.

Functions the government probably shouldn't have gotten into, but it did, and so given that it did, is it better to have a purely government division handling this, or one with some kind of responsiveness to market forces?

Newt's calculation on FM was in error, because, as circumstances would prove (and he would later state), FM was so consumed with the typical problems of government -- no matter what the decisions, someone's getting paid off for it; and of course it existed not to turn a profit, or engage in sound underwriting, but as a piggybank for its clients -- that the "market forces" part of his formulation turned out to be absent.

But even so, the basics of his article were completely unobjectionable in 2007. This goes back to that that "domination of neoconservative thinking" thing I was just discussing, where many proposals for streamlining government (federal, state, and local) in the 90s and 00s involved privatizing or, as with FM, half-privatizing some government function.

A conservative objection can be leveled: Privatizing or semi-privatizing through GSEs might be a conservative solution when we're discussing a function that has always been a purely governmental one; that is, if the government has always done something, it is conservative to push it towards private execution.

On the other hand, if a function is of much more recent vintage, like the Freddie and Fannie programs, the most conservative solution would be to simply end the programs entirely.

Things really have changed. I know I have. Two years ago I would have been much more aggressive about claiming ending this or that program (like NPR) was "unrealistic" and politically poisonous, and I would have counseled people to not overreach and set the cause back by demanding too much.

But these things do not seem unrealistic anymore. They seem merely difficult.

“While we need to improve the regulation of the GSEs, I would be very cautious about fundamentally changing their role or the model itself,” he said. It “marries private enterprise to a public purpose.”

At the time of his comments, Freddie Mac and its larger rival Fannie Mae were under fire from Republicans, who said their government charters allowed them to make profits for shareholders while putting taxpayers at risk. Gingrich, a former U.S. House speaker, has voiced criticism of the companies in recent years.

He does state there that regulation needs to be tightened up; and yet the general thrust is don't over-fix what's not over-broken.

But Fannie and Freddie were over-broken.

Obviously Gingrich's position was the dominant one, including in Republican circles, as the effort to reform these institutions died, and it never became known to me as a higher-order priority of the conservative movement.

This may be partly my fault, as I just never did much reading on it myself and doubt I posted at all on the issue prior to the collapse. Since I never foresaw the collapse (and few did; some, but only a few) I guess I can't fault Gingrich too much for having missed it.

Could this possibly be an issue in a general election? Well, in 2008, I expected McCain to make an issue of it. He didn't. Further, Obama claimed in a debate that he had written a letter to then-Secretary Treasury Paulsen warning him about the dangers of subprime loans (a lot of them facilitated by Fannie's and Freddie's subsidization of them) and a coming wave of foreclosures.

I couldn't believe that. I thought he was lying.

He wasn't... sort of. Although Obama would later cast his letter as having been about the need for tighter regulation and an examination of Fannie's and Freddie's practices, in fact the letter did not mention Fannie and Freddie at all, and seemed to be about... further subsidizing loans for people who couldn't repay their old loans.

There is grave concern in low-income communities about a potential coming wave of foreclosures. Because regulators are partly responsible for creating the environment that is leading to rising rates of home foreclosure in the subprime mortgage market, I urge you immediately to convene a homeownership preservation summit with leading mortgage lenders, investors, loan servicing organizations, consumer advocates, federal regulators and housing-related agencies to assess options for private sector responses to the challenge.

We cannot sit on the sidelines while increasing numbers of American families face the risk of losing their homes. And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.

Working together, the relevant private sector entities and regulators may be best positioned for quick and targeted responses to mitigate the danger. Rampant foreclosures are in nobody’s interest, and I believe this is a case where all responsible industry players can share the objective of eliminating deceptive or abusive practices, preserving homeownership, and stabilizing housing markets.

The summit should consider best practice loan marketing, underwriting, and origination practices consistent with the recent (and overdue) regulators’ Proposed Statement on Subprime Mortgage Lending. The summit participants should also evaluate options for independent loan counseling, voluntary loan restructuring, limited forbearance, and other possible workout strategies. I would also urge you to facilitate a serious conversation about the following:

* What standards investors should require of lenders, particularly with regard to verification of income and assets and the underwriting of borrowers based on fully indexed and fully amortized rates.

* How to facilitate and encourage appropriate intervention by loan servicing companies at the earliest signs of borrower difficulty.

* How to support independent community-based-organizations to provide counseling and work-out services to prevent foreclosure and preserve homeownership where practical.

* How to provide more effective information disclosure and financial education to ensure that borrowers are treated fairly and that deception is never a source of competitive advantage.

* How to adopt principles of fair competition that promote affordability, transparency, non-discrimination, genuine consumer value, and competitive returns.

* How to ensure adequate liquidity across all mortgage markets without exacerbating consumer and housing market vulnerability.

Of course, the adoption of voluntary industry reforms will not preempt government action to crack down on predatory lending practices, or to style new restrictions on subprime lending or short-term post-purchase interventions in certain cases. My colleagues on the Senate Committee on Banking, Housing and Urban Affairs have held important hearings on mortgage market turmoil and I expect the Committee will develop legislation.

With the exception of the bolded text -- which does mention a "conversation" about standards for securing a loan, in a CYA manner -- everything else is about protecting these poor people from "predatory loans," and offering even more taxpayer-funded help (helping non-payers with "workouts," that is, paying less than they agreed but keeping their home).

He seems to mistake who exactly was preying on whom. He casts this in terms of the people taking out mortgages they couldn't afford, and often falsified their applications to secure, as the victims.

Rather than the taxpayer subsidizing other people's homes, and being left with a huge bill for that service (let alone a demolished economy), being the victims.

Nevertheless, he did insert that CYA bit into there, and so his narrow ass is somewhat covered.

Of course, as the PUMA blog No Quarter notes, when it came down to actually voting for reforms, he sided with Democrats and blocked them.

Sure, he can write a cover-your-ass letter mentioning, briefly, a "conversation" about increasing the standards for subprime loans. But when it's time to do more than have a "conversation" about this, he sides with Barney Frank.

I mention all of this because Obama will in fact attempt to get to Gingrich's "right" on the issue, and will once again proclaim, "I wrote a letter," as he did with McCain.

So I do want to know the exact services Gingrich provided for Fannie or Freddie. If it really was just a public defense of the basic model of the GSE, combined with, as he claims, private criticism offered to them about their lending practices being "insane," that's one thing. That's not so bad at all, really. Not good, certainly, but not so bad.

But if it's more than that, we need to know that.

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posted by Ace at 10:47 AM

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