Responding Frank-ly—I Fire Back on Fannie Mae and Freddie Mac

Earlier today, Rep. Barney Frank, chairman of the Financial Services Committee, asked to respond to my Wednesday post concerning his revisionist take on his own efforts to reform Fannie Mae and Freddie Mac, the government-sponsored home-loan behemoths that recently went belly-up. After reading through his response, I see no reason to revise my earlier remarks. Indeed, the Massachusetts Democrat's comments only reinforce my view that he has played fast and loose with history.

First, Frank chides me for not reaching out to him before I wrote my original piece. That much is true. Frank's position with respect to Fannie and Freddie is so well known that I did not deem it necessary. What's more, his postmeltdown talking points are so at odds with his previous actions that I considered it would be a waste of time.

Now, on to the substance of Frank's letter:

Frank complains that I fail to mention that, despite former Treasury Secretary John Snow's prescience, reforming Fannie and Freddie was not among Snow's accomplishments. He notes that I failed to mention the Bush administration's opposition to House legislation in 2003 and 2005 that would have "reformed" the sibs. And he clarifies why he did not support the 2005 reform despite suggesting recently that he did.

Let's step back and take a look at what happened in the Fannie-Freddie debates of 2003-2005.

In 2003, a spate of warnings, investigations and scandals concerning Fannie and Freddie led Snow to three recognitions—that Fannie and Freddie had strayed well beyond their traditional investment roles; that the two lenders were grossly overextended relative to their capitalization; and that their bookkeeping was shoddy or crooked. Obviously, this was a problem; the siblings touched nearly half of all home loans, and in an unpredictable market their mismanagement was flirting with catastrophe. Since cutting off Fannie and Freddie from the government teat and forcing them to compete in the private sector would be politically impossible, Snow proposed to bring the giants under one authority that would rigorously limit their exposure and ensure they stayed within acceptable limits of risk.

A month after warmly receiving Snow's proposal, House Finance Chairman Mike Oxley unveiled a bill. It lacked two key components, however. First, the new regulator of the sibs would not be Treasury itself but a newly created "independent unit" within Treasury. That's the same arrangement that already existed—the sibs were presently under an "independent unit" that time and again proved incapable of detecting Fannie and Freddie shenanigans. Second, the bill would grant the Housing department oversight—largely toothless because it lacked the authority to contain the investment risks the sibs were taking. Faced with stiff opposition from the White House, the Ohio Republican pulled his bill the night before the committee's final vote.

In 2005, Oxley (with Frank) tried again. The legislation was stronger than before, but again failed to provide a regulator with the authority to curtail the kinds of assets Fannie and Freddie could hold. Indeed, the bill even expanded Fannie and Freddie's abilities to purchase mortgages. Financially responsible people saw the writing on the wall and threw their support behind a tougher Senate bill.

Regardless, Oxley's bill passed the House and Frank now leaves the impression that he supported it. After chiding the Bush administration for failing in its 2003 reform effort, Frank wrote in a Monday press release: "It was not until 2005, when the House, on a bipartisan basis, and over the President's objections finally passed a reform bill." And in a Tuesday interview with Fox News, Frank said: "I did collaborate with [Republican] Mike Oxley in 2005 in passing a bill which the Senate didn't act on."

In fact, praises for bipartisanship notwithstanding, Frank voted against the 2005 bill. As the chairman tells it, this is because "the Republican majority inserted language at the last moment that would prohibit religious organizations from participating" in providing low-income housing financing. "It is only because of this ridiculous action by archconservative Republicans that I cast my vote 'no.' "

That's a pretty loosey-goosey rendering of what went down. The provision Frank references was his pet project, which would designate 5 percent of the sibs' after-tax profits for grants to outside organizations to promote low-income housing. As Frank says, the grants could have gone to religious groups like the Catholic and Lutheran churches (it's good to see Frank now fully supports Bush's faith-based initiative, by the way) but also to decidedly secular and politically active organizations like the Child Welfare League of America and Volunteers of America.

Many in Congress opposed Frank's baby because it was a step backward in reform. After all, the whole point in reforming Fannie and Freddie was to submit control of the sibs to one authority—not divert their suspect profits to even more entities with limited accountability. Some voiced concerns that the outside groups would leverage the grants for political causes. What does a homeowner say, after all, if the fellow who got him his house says vote for so-and-so? Others worried about governance. What adequate safeguards would ensure these monies don't end up in other activities or pockets? But the larger concern was that primarily nonfinancial institutions would suddenly be in the position of extending home loans to the most vulnerable and unqualified—thus reinforcing the worst practices of what had already occurred elsewhere.

Frank is routinely described in the press as one of Fannie and Freddie's staunchest allies on Capitol Hill, and that support enabled the crisis in which Americans—both homeowners and taxpayers—now find themselves.

Due to lax oversight, Fannie and Freddie helped lull the gullible into purchasing homes far beyond their means, all the while threatening the companies' own financial health. In turn, that only put those homeowners and the sibs' shareholders at risk too. And just as critics of Fannie and Freddie had warned for years, the walls came tumbling down.

Frank now says he's all for riding herd on Fannie and Freddie. No doubt he'll prove an able No. 2 to Treasury, which now holds the sibs in conservatorship. But it's a shame Frank wasn't so reform-minded back when it might have mattered. I'll return now to that embarrassing quote from the New York Times in 2003 that kicked off this exchange—and which Frank never addressed.

"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."

At the time Frank spoke those words, a lot of questions were being raised about the sibs' financial health. Indeed, in the case of Freddie, both the Securities and Exchange Commission and a U.S. attorney had launched investigations. Five years and a catastrophic meltdown later, the only exaggeration seems to have come from Fannie and Freddie and their champions on the Hill.

The good news, though, is that now there's a surfeit of affordable housing. Too bad few have the money or credit to purchase some.