Another opportunity lost

The Washington Post reports that we are on our way to the largest financial bailout in American history.  The Post has pictures, too.  Barney Frank stands at the podium with Nancy Pelosi, Harry Reid, and Chris Dodd in the background with grave expressions.  They pose as the rescuers.

The proposed legislation, which is scheduled for a vote today in the House, would authorize Treasury Secretary Henry M. Paulson Jr. to initiate what is likely to become the biggest government bailout in U.S. history, allowing him to spend up to $700 billion to relieve faltering banks and other firms of bad assets backed by home mortgages, which are falling into foreclosure at record rates.

Therein lies the problem.  The roots of financial mess are those home mortgages that are falling into foreclosure at record rates.  At the first presidential debate in Oxford, Mississippi Friday night, Barack Obama charged that the need for this financial bailout was caused by lax regulatory oversight of Wall Street.  He said Republicans were to blame since they are the ones who most often oppose government regulation.  John McCain missed an opportunity when he didn't challenge Obama on it.

Foreclosures are coming at a fast and furious rate because mortgage lenders were handing out mortgage money to people who were at high risk of being unable to pay it back.  These folks were able to qualify for the money based on a schedule in which mortgage payments were very low in the first years of the mortgage, but would increase as years went by.  It's a gimmick that works for people when housing prices are on the rise.  In a rising market, home values grow to the point where homeowners can convert to a conventional mortgage before the killer payments kick in.  Unfortunately home prices have been falling for the last couple of years, so at risk homeowners couldn't sell and they didn't have the equity in their homes to refinance.

So how did so many of these at risk homeowners get so much mortgage money?  Where was the regulatory oversight that would prevent it?  A New York Times article from September 11, 2003 provides helpful clues.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

George Bush, john McCain and others saw this coming back in 2003 and called for tighter regulations and stricter oversight of Fannie Mae and Freddie Mac.  So what happened?  It was opposed by Democrats.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Democrats and some Republicans had other incentives to overlook rather than oversee.

Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

''The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''

Over the years both Fannie Mae and Freddie Mac poured money into receptive political campaigns, with the most money going to Democrats.  Between 1989 and 2008 the top four money winners in the Senate were all Democrats:  Chris Dodd: $133,900, John Kerry: $111,000, Barack Obama: $105,849, and Hillary Clinton: $75,550.  In return Democrats have blocked every effort to reign in the mortgage giants.

Barack Obama's attempt to lay the current crisis at Republican feet was McCain's best opportunity to set the record straight in front of a national audience.  It was a huge mistake to let it go.