May 6th, Fairfax, VA—Americans for Limited Government President Bill Wilson today urged the U.S. Senate to adopt an amendment to the Dodd bill proposed by Senator John McCain (R-AZ) that he said would “directly address one of the root, government causes of the financial crisis by finally setting out a plan for unwinding Fannie Mae and Freddie Mac from government control.”
“The McCain amendment is the very definition of leadership,” Wilson declared. “It is an example of a mature adult examining a problem, and offering the only responsible solution. The McCain amendment simultaneously addresses many of the root causes of the crisis and takes taxpayers off the hook for the ongoing bailout of Fannie and Freddie, which has already cost $126 billion.”
Wilson appealed to Senators, “This is the line in the sand. If you are for the McCain amendment, you truly are standing with American taxpayers in addressing the root causes of the crisis and steadfastly against the unlimited bailout of the Fannie and Freddie. To be against it is, on the other hand, is to declare yourself a looter and unindicted co-conspirator in the theft of America.”
Wilson outlined the policies pursued by the GSE’s that he said contributed to the crisis, citing research by former Chief Credit Officer of Fannie Mae, Edward Pinto. Those include taking on some $1.835 trillion in higher-risk mortgages and mortgage-backed securities just before they were nationalized. This included high risk loans in whole loan form, most of which, $1.646 trillion, were GSE-issued mortgage-backed securities, and $189 billion of subprime and Alt-A private mortgage-backed securities.
According to Pinto, because of the implicit backing of taxpayers, Fannie and Freddie securities were automatically given AAA credit ratings. Because of that shielding from scrutiny, Fannie and Freddie were able to misrepresent the quality of mortgages that underlined those securities.
Wilson added, “Because of the implicit backing of taxpayers, Fannie and Freddie crafted a marketing plan that enabled them to sell some $4.7 trillion of mortgage-backed securities, $1.5 trillion of which were sold overseas to investors, as reported by the New York Times.”
“By promising a higher rate of return than treasuries, but with the same risk associated with a taxpayer guarantee, the sales flooded the GSE’s throughout the housing bubble. As more securities were sold, Fannie and Freddie bought more mortgages and bundled them into securities. As a direct result, Fannie and Freddie were able to acquire about half of all mortgages as of July 2008,” Wilson explained.
According to the Wall Street Journal, the McCain amendment “mandates that the current government conservatorship of Fan and Fred will end within 30 months. In the meantime, the companies will have to reduce their mortgage portfolios by 10% each year” and if the conservatorship failed the GSE’s “would then go into receivership and be liquidated.”
If the GSE’s can be rendered solvent and “can survive on their own, they would have three years before the expiration of their federal charters, during which time they would have new operating restrictions” including reducing “mortgage assets held on their books by nearly 50% within two years and raise their capital standards.”
The McCain amendment would also “repeal the affordable housing goals previously legislated for Fan and Fred and which contributed to their terrible mortgage bets,” reports the Journal. According to Pinto, from 1992 onward, the Department of Housing and Urban Development (HUD) loosened lending standards by imposing “affordable housing goals” on Fannie Mae and Freddie Mac, adopted “Fair Lending Best Practices” requiring low-income lending, and promulgated new Community Reinvestment Act “regulations applicable to all insured banks, in particular a change from a qualitative standard to a quantitative.”
Also, under the amendment, as reported by the Journal, the GSE’s would “have to start paying state and local sales taxes, lose their exemption from full registration at the Securities and Exchange Commission when they issue securities, and start paying fees to repay the taxpayer for the value of federal guarantees.”
The amendment would also reinstate the $400 billion limit of assistance from the government and “for as long as they are in federal conservatorship or receivership, they would have to be included in the federal budget.”
Wilson said that including the GSE’s on the federal budget was “essential to preserving creditworthiness of the United States.”
Wilson concluded, “The only responsible act for Congress is to rein in and unwind the government control over Fannie Mae and Freddie Mac, to restore honesty to the nation’s balance sheet, and require that taxpayers are paid back for the ongoing bailout of the GSE’s that has cost more than $126 billion since it began in 2008. Senator McCain’s amendment accomplishes these goals.”
Attachments:
SA 3839, McCain amendment to the Dodd bill, May 5th, 2010.
Interview Availability: Please contact Rebekah Rast at (703) 383-0880 or at rrast@getliberty.org to arrange an interview with ALG President Bill Wilson.
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