Analysts point not to greed, but to social activist politics
Posted: September 19, 2008
6:19 pm Eastern
By Drew Zahn
© 2008 WorldNetDaily
 Stan J. Liebowitz |
While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn’t too little government intervention that cased the mortgage meltdown, but too much,
in the form of activists compelling the government to pressure Freddie
Mac and Fannie Mae into unsound – though politically correct – lending practices.
"Home mortgages have been a political piñata for many decades,"
writes Stan J. Liebowitz, economics professor at the University of
Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.
Liebowitz puts forward an explanation that he admits is "not
consistent with the nasty-subprime-lender hypothesis currently
considered to be the cause of the mortgage meltdown."
In a nutshell, Liebowitz contends that the federal government over
the last 20 years pushed the mortgage industry so hard to get minority
homeownership up, that it undermined the country’s financial foundation to achieve its goal.
"In an attempt to increase homeownership, particularly by minorities
and the less affluent, an attack on underwriting standards was
undertaken by virtually every branch of the government since the early
1990s," Liebowitz writes. "The decline in mortgage underwriting
standards was universally praised as ‘innovation’ in mortgage lending
by regulators, academic specialists, (government-sponsored enterprises)
and housing activists."
He continues, "Although a seemingly noble goal, the tool chosen to
achieve this goal was one that endangered the entire mortgage
enterprise."
"As homeownership rates increased there as self-congratulation all
around," Liebowitz writes. "The community of regulators, academic
specialists, and housing activists all reveled in the increase in
homeownership."
An article in the Los Angeles Times
from the late ’90s praised the sudden surge in homeownership among
minorities, calling it "one of the hidden success stories of the
Clinton era."
John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.
According to Lott, the Federal Reserve Bank of Boston produced a manual in the early ’90s that warned mortgage lenders
to no longer deny urban and lower-income minority applicants on such
"outdated" criteria as credit history, down payment or employment
income.
Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and
praised lenders – like Countrywide and Bear Stearns – for adopting the
slackened policies toward minority applicants.
"Given these lending practices mandated by the Fed and encouraged by
Fannie Mae and Freddie Mac," writes Lott, "the resulting financial
problems for financial institutions such as Countrywide and Bear
Stearns are not too surprising."
(Story continues below)
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Liebowitz’ contention that lenders were under pressure to loosen
their standards for racial and political goals was confirmed years ago
by the companies at the heart of today’s crisis: Fannie Mae and Freddie
Mac.
A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
An ominous paragraph of the article reads, "In moving, even
tentatively, into this new area of lending, Fannie Mae is taking on
significantly more risk, which may not pose any difficulties during
flush economic times. But the government-subsidized corporation may run
into trouble in an economic downturn, prompting a government rescue
similar to that of the savings and loan industry in the 1980s."
Liebowitz likewise predicted in a 1998 paper the risk of sacrificing sound financial policy for social activism.
"After the warm fuzzy glow of ‘flexible underwriting standards’ has
worn off," Liebowitz wrote, "we may discover that they are nothing more
than standards that led to bad loans. … It will be ironic and
unfortunate if minority applicants wind up paying a very heavy price
for a misguided policy based on a badly mangled idea."
And though some have speculated that lenders in the ’90s dove into
sub-prime mortgages in an effort to gouge new markets, the president
and chief operating officer of Freddie Mac in 1999, David Glenn,
confessed his company was pushed by a federal agenda.
"The mortgage industry intends to pursue minorities with greater
intensity as federal regulators turn up the heat to increase home
ownership," Glenn said in his remarks at the annual convention of the
Mortgage Banker Association of America.
"The federal government in the meantime has increased pressure on
lenders to seek out minorities, as well as low-income groups and
borrowers with poor credit histories," Glenn said. "Fannie Mae recently
reached an agreement with the U.S. Department of Housing and Urban
Development to commit half its business to low- and moderate-income
borrowers. That means half the mortgages bought by Fannie Mae would be
from those income brackets."
In that same year, Freddie Mac warned of the logical pitfalls of
pursuing loans on the basis of skin color and not credit history.
The Washington Post reported that the company conducted a study in which it was found that far more black people have bad credit
than white people, even when both have the same incomes. In fact, the
study showed a higher percentage of African Americans with incomes of
$65,000 to $75,000 had bad credit than white Americans with incomes of
below $25,000.
Such data demonstrated that when federal regulators demanded parity
between racial groups in lending, the only way to achieve a quota would
be to begin making intentionally bad lending decisions.
The study, however, came under brutal attack in the U.S. Congress and was ridiculed with charges of racism.
A few years later, when Greg Mankiw, chairman of President Bush’s
Council of Economic Advisers, voiced a warning about weakened
underwriting standards, Congress rebuffed him as well.
The Wall Street Journal quoted Congressman Barney Frank, D-Mass., in
2003 as criticizing Greg Mankiw "because he is worried about the tiny
little matter of safety and soundness rather than ‘concern about
housing.’"
Frank, Chair of the House Financial Services Committee, rejected a
Bush administration and Congressional Republican plan for regulating
the mortgage industry in 2003, saying, "These two entities – Fannie Mae
and Freddie Mac – are not facing any kind of financial crisis."
According to a New York Times article, Frank added, "The more people
exaggerate these problems, the more pressure there is on these
companies, the less we will see in terms of affordable housing."
Visit http://www.wnd.com
Updated Sunday September 21, 2008 By Bob Barney – The Plain Truth
The following is the total research that I did for the wnd post above, but first I want to make something clear: I understand that some may think this string is racist. Racism is when
you are attacking a race based on hatred for that race (my def). The
facts are plain and simple. Big Brother government policies over the
past 50 years has caused a condition where many minorities expect
things to be given to them by the Feds, and everyone else has been
condition to except it and pay for it. This is wrong. There are many
black Americans who have worked hard, fought for this country and are
true good Americans and deserve to live the American dream free of
discrimination and bigotry. The unfortunate fact is many others have
been conditioned to expect and not to repay society and this has led to
our present day mess and will lead to our defeat as a country. We are
not doing anyone a favor looking the other way on bad behavior.
Many hard working Americans, who have played the game, worked hard and
who did not have favored status have been forced to get unsecured
credit card loans and because banks were losing what appears to be
TRILLIONS and not BILLIONS have been killing the hard working middle
class (white or black) with high interest rates to make up for the
losses. Some credit cards today have raised their rates on cards to 35%
even when the person has never paid late!
Millions are going broke today because credit cards used to buy
businesses houses, etc. went from 4.9% rates to 30-35% rates within a
year or two! No government agency was there to bail them out. There is
a difference between those who suffer because of economic conditions
and those who never intended to pay back any loans. Millions of good
people now are losing their homes because others took advantage of a
flawed system. That is what this story is really about. It is not up to
our government to determine who should go broke and who should not
based on their skin color!
This is not our fault. This could not have been foreseen by most regular folk
because our government and our bankers LIED to us all about the condition of
their loans for 10 years! Think about it. It can happen to everyone!
Retired people are losing their homes that they own FREE and CLEAR
because of taxes and runaway insurance claims. Insurance companies rape
the consumer, try and not pay claims, and when they go broke, Uncle Sam
bails THEM out and not those they just screwed!
Take a look at the research. Make up your own mind. BE INFORMED! Wake Up America.
Research Links:
Mortgages
(National): Mortgage Lenders to
Step Up Pursuit of Minorities (10/13/99)
BOSTON, Oct. 13, 1999 (Reuters) – "The mortgage industry intends to pursue
minorities with greater intensity as federal regulators turn up the heat to
increase home ownership in under served groups.
"’We need to push into these under served markets as much as we can,’ said David
Glenn, president and chief operating officer of Freddie Mac. Glenn made his
remarks at the annual convention of the U.S. Mortgage Banker Association of
America (MBA) this week.
"Freddie Mac, like its sister agency Fannie Mae, is a government-chartered
corporation that buys mortgages from banks and packages them into securities for
investors.
"In September, Freddie Mac launched a new lending program, based on research
done in collaboration with five black colleges, to bring more African-Americans
into the market.
"The call for greater efforts to broaden minority home ownership comes at a time
when interest rates are pinching mortgages. A record $1.5 trillion mortgages
were granted in 1998 in a refinancing boom fueled by the lowest interest rates
in nearly three decades.
"The federal government in the meantime has increased pressure on lenders to
seek out minorities, as well as low-income groups and borrowers with poor credit
histories.
"Fannie Mae recently reached an agreement with the U.S. Department of Housing
and Urban Development to commit half its business to low-and moderate-income
borrowers. That means half the mortgages bought by Fannie Mae would be from
those income brackets." Disturbingly, neither Fannie Mae nor Freddie Mac have
instituted programs to enable disadvantaged non-minorities (European Americans)
to qualify for a home mortgage. (Based on Reuters, via Builders On-Line
10/13/99, by Richard Leong)
[link
http://builder.hw.net/news/1999/oct/13/mort13.htx
]
Bad
Credit by Minorities is Inherently Racist!
(10/05/99 – dead link)
Like Fannie Mae, Freddie Mac is a federally chartered agency that provides loans
and capital for home mortgages.
"A Freddie Mac study concluding that far more black people have bad credit than
white people, even when both have the same incomes, has come under attack in
Congress, and some experts have questioned whether it oversimplifies a complex
[racial] issue.
"The study’s [Freddie Mac] authors defended their conclusions but said they
probably should have chosen language other than "bad credit" or "good credit"
because they were trying to say whether people had trouble paying their
bills.
"The study of 12,000 Americans with incomes up to $75,000 received wide media
coverage when it was released last month by Freddie Mac
…"
"[The Freddie Mac study] is one part of a new program to teach minorities how to
improve their credit, in partnership with the NAACP, the National Urban League
and five historically black colleges, including Howard University." [No such
programs are offered by Freddie Mac for the benefit of "white" mortgage
applicants.]
"The [Freddie Mac] researchers, relying on data from credit reports, designated
people as having "bad credit" if they had two bills overdue more than 30 days in
the past two years, one bill more than 90 days late, a lien, a judgment or a
bankruptcy. Their data showed that a higher percentage of African Americans with
incomes of $65,000 to $75,000 had "bad credit" than whites with incomes below
$25,000.
U.S. Rep. Maxine Waters (D-Calif.), who strongly supports preferential credit
and mortgage policies for designated minorites, said: "In other words we
[minorities] are a credit risk because no matter how much money we make, we are
also too stupid and undisciplined to know how to spend, plan and save."
(Washington Post 10/05/99 by D’Vera Cohn)
Fannie Mae, NAACP Join in Minority Mortgage
Plan (01/21/99
– dead link)
"Fannie Mae Chairman Franklin Raines last week called for continued efforts by
Fannie Mae and mortgage lenders to reach out to those ‘at the margins’ of home
ownership. Blacks, Hispanics and immigrants trying to buy homes would be a
major focus of outreach, Raines said." Raines made no mention of assistance for
the millions of white families who have difficulty purchasing homes.
"Raines, a former White House budget chief (ed. note: and Now an adviser to Obama), noted that home ownership by white
families is close to peak levels, now at 73 percent. Only 45 percent of
U.S. homeowners are minorities, suggesting an untapped market, he said."
[Raines ignores the fact that ‘minorities’ account for far less than 45
percent of total U.S. population.]
"Fannie Mae, the largest source of financing for U.S. home mortgages, and the
NAACP, the oldest U.S. civil rights organization, said they will join forces on
Thursday to help more black families buy homes." [Notably absent from the NAACP
/ Fannie Mae press release was any mention of assistance for the significantly
larger number of non-minority families who have difficulty purchasing homes.]
(FoxNews, 01/21/99)
NEW YORK, Sept. 29, 1999 (Reuters) – "The government-chartered mortgage
securities company Fannie Mae pledged Tuesday to commit more than $1 billion to
boost minority home ownership in Chicago by expanding a program to create more
affordable housing.
Fannie Mae’s CEO Franklin Raines stated he believes such a race-based program is
necessary to increase the rate of homeownership by
minorities.
Fannie Mae’s "HouseChicago" program served as a model for the race-based
mortgage plan. "HouseChicago" has funded $10 billion in affordable housing
over the course of four years. (Based on Reuters 09/29/99 via Home Building and
Remodeling Network)
Mortgage
Group Joins NAACP to Help Blacks Purchase Homes (01/22/99)
"The Federal National Mortgage Association and the NAACP have formed a
partnership that will provide up to $110 million in financing for families who
cannot afford big down payments. Under the partnership announced Thursday,
Fannie Mae will provide financing for qualified black borrowers who will be able
to put down as little as 3 percent to 5 percent of a home’s
value.
"The new program also is designed to help at least 20,000 black families get
information on home ownership. While 73 percent of white families own their own
home, only about 45 percent of black and Hispanic families are homeowners,
officials said.
"The mortgage giant also pledged to finance an unlimited amount of mortgages for
qualified families recommended by the NAACP, the nation’s oldest civil rights
organization. Traditional credit requirements will be eased for black families
whose credit histories were marred by burdensome medical expenses." (Chicago
Tribune, 01/22/99)
Monday, May 31, 1999
Minorities’ Home Ownership Booms Under Clinton but Still Lags
Whites’
It’s
one of the hidden success stories of the Clinton era. In the great housing boom
of the 1990s, black and Latino homeownership has surged to the highest level
ever recorded. The number of African Americans owning their own home is now
increasing nearly three times as fast as the number of whites; the number of
Latino homeowners is growing nearly five times as fast as that of
whites.
http://articles.latimes.com/1999/may/31/news/mn-42807
STEVEN A. HOLMES
Published:
September 30, 1999
In
a move that could help increase home ownership rates among minorities and
low-income consumers, the Fannie Mae Corporation is easing the credit
requirements on loans that it will purchase from banks and other lenders.
The
action, which will begin as a pilot program involving 24 banks in 15 markets —
including the New York metropolitan region — will encourage those banks to
extend home mortgages to individuals whose credit is generally not good enough
to qualify for conventional loans. Fannie Mae officials say they hope to make it
a nationwide program by next spring.
Fannie
Mae, the nation’s biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage loans
among low and moderate income people and felt
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260
Many
of the most egregious cases involved clearly predatory lending practices in
which there was never any possibility that the borrowers could afford to pay off
their loans.
In
one example from 2006, Suzette Francis, a woman with two young children, no
assets, working as a $10-an-hour security guard and living in a homeless
shelter, obtained a mortgage for $470,000 that, as the report stated,
"exhibited…every characteristic and feature associated with dangerous subprime
loans."
Francis
had down payment and no proven income or assets. Her adjustable rate mortgage
started at 10.8% and was capped at 16.85%. At that rate, even her initial
monthly payment came to more than $4,400. She would have to work 400 hours a
month just to pay her loan.
"I’m,
like, in a million dollar debt in housing and cash poor," Francis told the
Commission while testifying earlier this year. http://money.cnn.com/2008/07/31/real_estate/NY_needs_more_lending_ovesight/index.htm
The mortgage shakeout could
widen this gap because for various reasons, minority families have a
disproportionate share of subprime loans. The Center for Responsible Lending —
citing federal data — said that about 52 percent of loans made to African
Americans in 2005 were subprime and 40 percent made to Latinos were subprime.
That’s over twice as high as the 19 percent of whites with subprime
loans.
Fannie
Mae Pledges to Help Raise Minority Homeownership
Fannie
Mae’s new commitment to first-time home buyers is part of the next stage of the
company’s "American Dream Commitment," a plan announced in 2000 to provide $2
trillion in private capital for 18 million minority and underserved Americans to
own or rent a home by the end of the decade.Having met the $2 trillion goal and
the company’s previous Trillion Dollar Commitment launched in 1994, Fannie Mae,
along with many others — including its lender,mortgage insurer, non-profit,
real estate, home builder, housing finance agency, and other federal, state, and
local government partners — has now provided over $3 trillion in funds for over
28 million underserved families in 10 years.In 2003 alone, these strong
partnerships allowed Fannie Mae to achieve a record level of more than $240
billion in mortgage purchases serving minority families.
MY
COMMUNITY MORTGAGE
In
2000, Fannie Mae introduced the MyCommunityMortgage program to help low- and
moderate-income borrowers purchase homes with a $500 down payment
HELP
FOR ISLAMIC AMERICANS
One
product developed in 2002 assists Islamic homebuyers. Islamic law prohibits
paying interest, so to encourage Islamic families to purchase a home, the
American Finance House-
Lariba
in California worked with Fannie Mae to develop a financing model that works as
a lease-to-purchase agreement. The homebuyer makes monthly rental payments equal
to the monthly payments on a conventional mortgage.
More Than 120,000
Chicago Families Benefit from Fannie Mae’s ‘HouseChicago’ Affordable Housing
Plan; Company Exceeds Goal with More Than $10 Billion Invested in Four
Years
Business Wire,
Sept 28, 1999
http://findarticles.com/p/articles/mi_m0EIN/is_1999_Sept_28/ai_55891708
Fannie
Mae Bending Financial System
to Create Homeowners, Says
Raines
Private
companies have an important role to play in promoting the good of society, says
Franklin Raines, chief executive officer of Fannie Mae, the nation’s largest
source of financing for home mortgages.
Raines
described Fannie Mae, a New York Stock Exchange company that started out as a
federal agency, as "a mediating structure that bends the financial system to
create homeowners."
As
a private company with a public mission, Fannie Mae supports more home ownership
than either government or the free market alone would, he said, and it plays a
pivotal role in the U.S. economy.
http://advance.uconn.edu/2000/001030/00103004.htm
TESTIMONY BY WILLIAM MICHAEL CUNNINGHAM
Before
the HOUSE BANKING SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES AND GOVERNMENT
SPONSORED ENTERPRISES. FOR RELEASE June 15, 2000 10am.
Thank
you, Mr. Chairman, Representative Kanjorski, Members of the Subcommittee, for
giving me the opportunity to testify on the supervision and regulation of
government sponsored enterprises, or GSE’s. Your bill, H.R. 3703, the Housing
Finance Regulatory Improvement Act, comes at a critical time. The bill proposes
a new regulatory structure for three government-sponsored enterprises (GSE’s).
Given the importance of this legislation, I am honored to have an opportunity to
comment. It is appropriate to note, however, that my comments represent my own
views and do not in any way represent the views of my employer, the Board of
Pensions of the Evangelical Lutheran Church in America. Nor do my views
represent opinions from the GSE’s themselves or Wall Street. I come before this
Committee as an unbiased, independent investment analyst.
I
will divide my remarks into four parts: first, a general discussion on social
investing; second, a description of the GSEs’ role in social investing; and
third, background information on my activities in both social investing and the
secondary mortgage markets, and finally, my concerns with how the GSE’s are
currently fulfilling their public purpose mission. I’ll end with my view on
certain aspects of the Baker bill.
Social
Investing
"Social
investing" describes a style of investing combining a desire to maximize
financial return with an attempt to maximize social good. Many believe social
investing began with the Religious Society of Friends, better known as the
Quakers. In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from
participating in the business of buying or selling humans. Religious
institutions have been at the forefront of social investing since.
In
general, social investors favor:
Environmentally
responsible corporate practices .
Corporate
practices that support workforce diversity.
Corporate
practices that increase product safety and quality.
According
to a study Environmentally responsible corporate practices . released by the
Social Investment Forum (SIF), a nonprofit professional association dedicated to
promoting socially responsible investing, more than $2 trillion (US) is now
invested in a socially responsible manner in the U.S. Social investments now
account for about 13 percent of the estimated $16.3 trillion under professional
management in the U.S.
Social
Investing Strategies
Social
investors use three basic strategies to maximize financial return and attempt to
maximize social good. These strategies are outlined below.
SCREENING
excludes certain securities from portfolios based on social and/or environmental
criteria. For example, many socially responsible investors screen out tobacco
company investments. Recently, CalSTRS (California State Teachers’ Retirement
System) announced the removal of more than $237 million in tobacco holdings from
its investment, portfolio after 6 months of financial analysis and
deliberations. This is an example of a social screen at
work.
SHAREHOLDER
ACTIVISM. Shareholder Activism efforts attempt to positively influence corporate
behavior. These efforts include initiating conversations with corporate
management, or dialoging, on issues of concern, and submitting and voting proxy
resolutions. These activities are undertaken with the belief that social
investors, working cooperatively, can steer management on a course that will
improve financial performance over time and enhance the well being of the
stockholders, customers, employees, vendors, and communities.
POSITIVE
INVESTING involves making investments in activities and companies believed to
have a high and positive social impact. Positive investing activities tend to
target underserved communities. These efforts support activities designed to
provide mortgage and small business credit to minority and low-income
communities. It is in this area that Fannie and Freddie are most active.
According
to their web sites:
"Freddie
Mac is a stockholder-owned corporation chartered by Congress to increase the
supply of money that mortgage lenders, such as commercial banks, mortgage
bankers, savings institutions and credit unions, can make available to
homebuyers and multifamily investors."
and
"Fannie
Mae is a private, shareholder-owned company that works to make sure mortgage
money is available for people in communities all across America. We do not lend
money directly to home buyers. Instead, we work with lenders to make sure they
don’t run out of mortgage funds, so more people can achieve the dream of
homeownership. Fannie Mae is the country’s third largest corporation, in terms
of assets, and the nation’s largest provider of funds for home
mortgages."
Clearly,
these are positive investing activities. Carried out consistently and correctly,
these activities have a high social impact.
Background:
Socially responsible investing and the secondary mortgage markets
Let
me now speak about my efforts in both socially responsible investing and the
secondary mortgage markets.
In
a 1996 article in the Washington Post, I commented that "It seems their (Freddie
and Fannie’s) primary mission has been completed and completed successfully. Now
its time to look for a different mission, which could include finding mortgage
money for low income parts of the District and housing the homeless." Others
have echoed this sentiment. FRB Chairman Greenspan noted, in a letter to the
Chairman dated 5/19/2000, "(The GSE’s) were each chartered with the purpose of
smoothing out regional imbalances in mortgage supply and integrating regional
mortgage markets into the national capital markets. Much to their credit, they
succeeded in accomplishing this goal many years ago. It is time to assign a new
mission to the GSE’s. I have outlined some suggestions
below.
As
many who have come before this committee have noted, domestic housing finance
markets are broad and well functioning. In looking for a new mission, I suggest
the GSE’s focus on investment opportunities in housing markets populated by
minorities and women. These markets have been the beneficiaries of an
unprecedented increase in financial market activity and asset values. Devoting
even a small percentage of GSE mortgage financing activity to markets populated
by persons of low to moderate income, minorities and women will help even the
distribution of income and wealth, contribute to domestic political and economic
stability, and earn a competitive return. It is my belief that investors, women,
and minorities are all well served by these efforts. Further, I believe it is
possible to create investments and portfolios that perform well financially and
that address social concerns. I have uncovered many investment opportunities of
this type. Let me describe one such investment
opportunity.
I
currently work for the Board of Pensions of the Evangelical Lutheran Church in
America. There, I manage Social Purpose Investing and Customer Education
efforts. The Board of Pensions was one of the first socially responsible
investors of significant size in the United States.
Prior
to joining the Board of Pensions of the ELCA in 1999, I served as CEO of
Creative Investment Research, an independent investment research and management
firm I founded in 1989. The firm specialized in socially responsible investing.
My background in finance and investing led me to develop several socially
responsible community investment products over the past 10 years. One of these
was a set of mortgage-backed securities originated by financial institutions
owned by minorities and women and serving areas of high social need. As noted in
the American Banker Newspaper , I was the first investment advisor to create a
mortgage-backed security composed entirely of loans from minority and women
owned financial institutions. Working with G.E. Capital , I identified minority
owned lenders willing to participate in the program, arranged G.E. Capital’s
participation as aggregator of the loans originated by these minority owned
financial institutions, and worked to place the pools with a socially
responsible institutional pension fund as an investment
advisor.
Several
times, I approached Fannie Mae and Freddie Mac to further develop these types of
products. Unfortunately, at the time neither agency was interested or very
helpful.
Social
Investing Concerns: GSE’s
Given
their public purpose and mission, social investors have long believed Fannie and
Freddie to be both positive investors and good corporate citizens. In the main
and for the most part, they are. But, I have been troubled by certain aspects of
GSE corporate behavior over the years. I am most deeply concerned with a
recently issued report on GSE home mortgage lending to minorities. The report,
issued by the U.S. Department of Housing and Urban Development, showed "the
share of GSE mortgages going to minorities trailed the national average of 15.3
percent. Fannie Mae lent only 14 percent and Freddie Mac lent only 12.2 percent
to minorities.
The
disparity is even more pronounced in mortgages to black Americans. While the
total market for mortgages to blacks is 5 percent, Fannie Mae only lent 3.2
percent and Freddie Mac lent only 3.0."
Both
Freddie and Fannie dispute these numbers. I expect the debate concerning GSE
performance in this area to be a lively one. However one views the statistics, I
think we can all agree that much remains to be done in this sector of the home
mortgage market. By reducing the flow of mortgages to minorities, GSE’s have
ignored profitable domestic lending opportunities. This behavior reduces GSE
income and stifles the flow of mortgage credit. This, I think we all agree, is
contrary to their public mission and is, in general, a bad
thing.
We
have seen other financial institutions repeat this behavior. On October 22,
1998, Freddie Mac Board member and economist Henry Kaufman, speaking of the
Russian financial crisis, noted in the Washington Post
that:
"All
the problems pervading Wall Street just can’t be blamed on outside
forces..Institutions have incorrectly assessed risk. If they had done their due
diligence, a lot of this (the Russian financial crisis) mess would not have
happened."
Likewise,
all of the uncertainty Freddie and Fannie now face cannot be blamed on outside
forces, like Congress or HUD, or incorrectly interpreted statistics. The GSE’s
have incorrectly assessed home mortgage loan risk in minority markets. We agree
with Federal Reserve Board Chairman Alan Greenspan when he
said:
"The
history of financial involvement in increasing home ownership is one of taking
risks – of designing new financial instruments and financial products to make
financial resources available so that more people can realize the goal of home
ownership. Taking prudent risks in lending so that others may attain an
objective is the essential role of a financial
intermediary…"
It
is certainly appropriate for Congress to review both GSE financial performance
and their public mission performance. We suggest Congress refocus Fannie and
Freddie efforts. We would like to see the GSE’s become much more active in the
affordable housing area. Needs in this area are great. According to
HUD,
The
housing affordability crisis facing very-low-income renters continues to worsen
as 5.4 million renter households, a record high, are experiencing worst case
needs for housing assistance.
The
number of working families with worst case housing needs has increased sharply
since 1991.
The
stock of rental units that are affordable to extremely low-income renters has
continued to shrink, with even sharper decreases in units that are both
affordable and available to these renters.
Worst
case needs have become more concentrated among families with extremely low
incomes.
Worst
case needs have increased most quickly in minority households, particularly
among working families with children.
Very-low-income
families remain most likely to face worst case problems when they live in the
suburbs.
Other
Concerns
Other
events have caused concern. On September 3, 1998, the Equal Employment
Opportunity Commission concluded there was widespread discrimination against
black employees at Freddie Mac. Acting on a complaint filed by Tony Morgan, a
person of color once employed in a professional capacity on Capital Hill and
Freddie Mac’s former director of corporate relations, the EEOC said the
Congressionally chartered, publicly held company created a “hostile work
environment.” This "hostile environment" may have impacted Freddie’s ability
and desire to make loans to African Americans. One way this is likely to
manifest itself is in the evaluation of risk. The perceived riskiness of loans
to African Americans is likely to be overstated.
In
addition, I have been discouraged by certain comments made by executives at both
Freddie and Fannie when questioned by members of Congress. It is critically
important that management at these agencies understand Congress has a legitimate
role in reviewing their activities, both from the standpoint of financial safety
and soundness and with respect to the public mission the organizations were
chartered to carry out.
I
note that the Chairman has been examining GSE activities since at least 1996.
Only recently I have seen a change in GSE attitude.
H.R.
3703
Mr.
Chairman, I would now like to turn to your legislative
proposal.
Promoting
Private Market Discipline
I
support repealing the GSEs’ conditional line of credit with the Treasury. I
agree with Treasury Under Secretary Gary Gensler when he stated, in testimony on
March 22, 2000 before this Committee, that: "Repeal of the line of credit would
be consistent with the congressional requirement that all GSE securities carry a
disclaimer that they are not obligations of the U.S.
government."
Increasing
Transparency
I
support provisions in the bill that increase transparency. I also support
provisions in the bill that require the GSE’s to receive an annual credit rating
from nationally recognized statistical rating organizations. Such an examination
would significantly improve transparency by providing an independent and
objective opinion concerning the GSE’s financial
condition.
I
also suggest that the GSE’s be subject to a through "Social Audit." A Social
Audit is an examination of the performance of an enterprise relative to certain
social objectives. The GSE’s are currently subject to a limited social audit:
Central city and minority lending goals have been established and progress in
meeting those goals is reviewed each year. Reports on GSE performance in meeting
certain lending goals are then made public. I am suggesting, however, that the
GSE’s be subject to a more detailed and rigorous social audit covering all
aspects of their operations.
For
the GSE’s the major benefits of a social audit are:
Improved
accountability with respect to social and community investment activities
Increased
social efficiency and effectiveness
Ability
to effectively monitor and steer social performance
Social
achievements reported in an unbiased manner
Promoting
Market Competition
I
support provisions in the Bill to preserve market
competition.
Structural
issues
I
support the creation of a fully independent GSE regulator. I further suggest
this regulator not part of the executive branch. As an alternative, the Chairman
may wish to consider designating the Federal Reserve Board the primary GSE
financial institution regulator.
I
believe the Fed will, one day, need to oversee the activities of banks, thrifts,
pension funds, insurance companies, mutual fund companies, brokerage firms and
investment banks. Recent advancements in financial and computer technology
require the creation of such a strong central bank.
I
strongly suggest that the Executive Branch’s role be limited. Recent incidents
have reinforced my fear that political interference may limit Executive branch
regulatory effectiveness and objectivity. I refer the committee to one recent
incident:
"A
top federal bank regulator, responding to concerns over possible political
interference in bank examinations, has ordered his staff to quit fielding a list
of friendly bankers to support a controversial fair lending
law.
John
D. Hawke Jr., acting Comptroller of the Currency, told his staff in a memo
issued Friday that bank examinations must be ‘kept completely free from even the
appearance of being influenced by political considerations.’ The comptroller, an
arm of the Treasury Department, regulates 2,600 national
banks."
We
have observed this type of inappropriate behavior before, preceding the S&L
Crisis of the 1980’s, and more recently, with the Community Development
Financial Institution program, a financial institution program administered by
Treasury. According to the House Banking Committee:
"$37
Million Clinton Inner-City Loan Fund in Disarray and subject to Political
Cronyism. 1 in 3 Grants To First Lady’s Favorite.
A
$37 million Clinton Administration campaign centerpiece designed to overcome
perceived inequities in bank lending to poor and inner-city clients appears to
be in disarray, is without adequate standards for making grants, and has at
least the appearance of conflicts of interest that ‘raises questions concerning
the fairness of the system,’ a senior House Banking Committee member said
today."
In
this case, critical federal assistance and funding was determined to have been
distributed, in part, based on political ties and not on efficiency, market
requirements, performance or need. Given this, I believe making an executive
branch agency the chief GSE institution regulator may have quite negative
consequences. The Federal Reserve System, an independent body, is not subject to
and has not been shown to engage in this type of politically biased regulatory
interference
Conclusion
In
an interdependent financial world, with capital and information flows often
determining the short term fate of nations, it is entirely appropriate for this
committee to review the proper role and function of the GSE’s. Given the speed
with which capital market destabilization can occur, as shown during the Long
Term Capital Management (LTCM) incident, a strong, unbiased, and politically
independent GSE regulator can be an essential tool assisting Congress with its
GSE oversight responsibilities.
This
Committee has done the country a great service by focusing on the impact GSE’s
have on the long term stability of the U.S. financial system. I applaud the
Committee for doing so in a balanced, thoughtful manner.
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