In the world of investment, one of the main methods of moving a project forward is called “leveraging.” By committing a modest sum of money, a funding source can be a catalyst for funds from other sources.
Leveraging also can bring to fruition projects of the wrong kind — like the perpetual project of nonprofit far-Left groups to socialize the risks and rewards of mortgage lending.
Actually, the risk side already is heavily socialized. What the nonprofits want to do is rein in the rewards as well. The massive housing bill just passed by the House and Senate gives them that chance.
The legislation, already signed by President Bush, is the bitter harvest of political leveraging. Nobody seems to have fallen prey to it, ironically, more than the measure’s two main beneficiaries.
The secondary-market mortgage firms Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, better known as “Fannie Mae” and “Freddie Mac,” have brought on themselves a whole world of trouble.
WHILE THE DONATIONS to the Left by these mortgage giants haven’t amounted to much, they’ve produced enormous costs.
There is nothing new about capitalists “donating the rope” (as Lenin would say) to their avowed enemies. That’s how radical nonprofit networks such as Neighborhood Assistance Corporation of America (NACA), the Association of Community Organizations for Reform Now (ACORN), and the National Council of La Raza have become major players in policy-making.
These groups parlayed donations, on occasion obtained through methods legally resembling extortion, into political power.
Such groups regularly employ (or threaten) boycotts, lawsuits and media campaigns to wring concessions from their corporate targets. Business leaders who donate funds may think they are buying peace. But this “feed the beast” strategy works only in the short run.
Over the long run, these grants enable beneficiaries to ratchet up ongoing campaigns whose consequences diminish company productivity.
This dynamic can extend to an entire industry — such as mortgage lending.
AGAIN, THIS IS ironic because the ongoing mortgage meltdown is very much a product of Fannie Mae and Freddie Mac’s misguided philanthropic impulses.
These firms now own or guarantee a combined more than $5 trillion in residential mortgage debt, a figure representing nearly half of the nation’s outstanding balance of $12 trillion. Their critics on the Left know they are loaded and vulnerable. And these critics play hardball.
Case in point: Jesse Jackson. His Rainbow/PUSH Coalition and offshoot Citizenship Education Fund (CEF) held their annual conference in Chicago this past June and early July.
The program listed Freddie Mac as a “Platinum Sponsor” and Fannie Mae as a “Diamond Sponsor.” That means that they (or more accurately, their tax-exempt foundations) gave, respectively, at least $150,000 and $100,000.
This largesse goes back more than a decade. Since 1996, the Fannie Mae and Freddie Mac Foundations have given the CEF alone a combined $500,000. This pattern of generosity received a major boost in 1998, when Jackson accused Fannie Mae and Freddie Mac of racial discrimination and called upon major shareholders to sell their stock.
What has this money bought? In Freddie Mac’s case, it would seem mainly bad publicity.
NOT LONG AFTER Jackson’s shakedown attempt, the Freddie Mac Foundation provided $1 million for a Rainbow/PUSH “economic literacy” program. Reports eventually surfaced that Rainbow/PUSH were charging participating churches $1,000 to enroll — a classic double-cross.
In a separate instance several years later, an independent report commissioned by the Freddie Mac board cited questionable company accounting practices, many centering on a major Jackson financial supporter, Ron Blaylock. Apparently, Blaylock received $250,000 for making a handful of phone calls to execute trades worth billions of dollars between Freddie Mac and his company, Blaylock & Partners.
Fannie Mae and Freddie Mac also have given generously to nonprofit housing groups. The corporations last year donated a combined $3.5 million to the Boston-based Neighborhood Assistance Corporation of America, or NACA, headed by one Bruce Marks, a self-described “bank terrorist,” for counseling services. (The federal government, not to be outdone, chipped in another $15 million.)
NACA hasn’t been the only recipient. The Fannie Mae Foundation during the course of 1980-2007 contributed nearly $800,000 to ACORN Housing Corp.
Such outlays might seem like pocket change for a major corporation. But remember, what matters in political leveraging is not the size of the grant, but the capacity of the recipient to affect costly institutional change.
This ripple effect has everything to do with new legislation that amounts to a bailout, even if certain persons (like President Bush) refuse to call it that.
Let’s connect the dots.
FANNIE MAE AND Freddie Mac, based respectively in Washington, D.C. and McLean, Va., are known as “Government-Sponsored Enterprises,” or GSEs. Though shareholder-owned corporations, the federal government considers their mission of maximizing homeownership to be of critical national importance.
Thus, the GSEs operate under an implied tradeoff. On one hand, each firm enjoys advantages unavailable to potential competitors, such as state and local tax exemption, and a $2.25 billion line of credit with the Treasury Department. In return, these firms subject themselves to stringent federal regulation.
Fannie Mae and Freddie Mae were created to provide mortgage market liquidity. As “secondary” lenders, their job is to buy mortgages from primary lenders — e.g., banks, thrifts — and then either hold them or package them into mortgage-backed securities (MBSs).
By linking mortgage and capital markets, this arrangement effectively ensures a steady flow of cash for primary lenders and a steady flow of bond income for Wall Street investors. What’s more, it partly subsidizes the cost of borrowing, thus creating more homeowners. Everyone wins.
That’s the official story anyway. The workability of this setup depends on one massive precondition being met: that borrowers make timely payments.
And what if they don’t? What if instead large numbers of homeowners default on their loans — like, say, now?
Then Fannie and Freddie’s ability to pay back note holders becomes severely compromised.
FURTHER COMPLICATING the situation is that Fannie Mae and Freddie Mac have to answer to their shareholders. The looming likelihood of severe undercapitalization might trigger a sell-off.
But staying solvent runs counter to another cherished goal: fulfilling federally driven “affordable housing” goals. A risky portfolio, by definition, raises the likelihood of an equity shortfall. Simultaneously meeting these goals is kind of like hitting two targets with one arrow.
Fannie Mae and Freddie Mac bought large volumes of mortgages to “underserved” borrowers. Stripped of euphemism, these are the borrowers most likely to go into default or foreclosure. These households typically have low or unsteady incomes, few assets and limited credit histories.
Expanding loan volumes to these borrowers, heavily black and Hispanic, for years has been an obsession with GSE executives. Back in 1999, for example, then-Freddie Mac CEO David Glenn remarked, “We need to push into these underserved markets as much as we can.”
(As poetic justice, Glenn was terminated in 2003 in the wake of a federal probe into company accounting irregularities. He eventually settled out of court for $400,000.)
Doesn’t getting knee-deep in such mortgages violate market logic? Indeed, it does. The numbers certainly suggest severe miscalculation at work. Each company’s share price, at least until Congress saved their bacon, had been down more than 80 percent from a year ago. And their debt-to-income ratios equal or exceed 20-to-1.
But Fannie Mae and Freddie Mac operate in a political hothouse in which owning a home is an assumed right and being turned down for mortgage credit constitutes “discrimination.”
Market logic, in other words, does not apply.
Nonprofit groups such as ACORN, NACA and the National Low Income Housing Coalition, having been instrumental in creating this situation, are fully aware they have Fannie Mae and Freddie Mac over a barrel.
Executives of these companies, soft socialists that they are, rather than fight, have chosen to lower the bar for loan purchase standards. This in turn has given primary lenders every incentive to underwrite risky loans, especially with Fannie and Freddie’s current congressionally approved loan limit of $417,000.
NOW, HOPEFULLY, you are beginning to see why during second-quarter 2008, nearly 740,000 homes in the U.S. received at least one foreclosure notice. The pileup of troubled subprime and even prime loans gone sour is a legacy of the affirmative-action principle applied to mortgage lending.
The cost at the primary level is staggering. Five major commercial banks — SunTrust, Fifth Third, Regions Financial, Washington Mutual, and Wachovia — recently posted combined second-quarter 2008 losses of $11.6 billion.
The loss for the Charlotte, N.C.-based Wachovia alone was $8.86 billion, triggering a company announcement to slash its share dividend by 87 percent and eliminate through layoffs and attrition more than 10,000 jobs. The company’s current dilemma in large measure is a product of its acquisition in 2006 of the Oakland, Calif.-based Golden West Financial Corp. for $25.5 billion, an albatross around Wachovia’s neck from the get-go.
Let us not forget, of course, hedge funds that invested heavily in high-risk mortgages, often with adjustable interest rates resetting higher after a couple years. The collapse of Bear Stearns this year was preceded last year by the collapse of a pair of MBS-heavy hedge funds it operated.
Formerly high-flying primary lenders such as Countrywide, New Century, Ameriquest and IndyMac, often predisposed toward boiler-room business practices, now either have collapsed or have been sold at fire-sale prices. Full-service investment firms such as Merrill Lynch (with over $46 billion in mortgage asset write-downs since June 2007) and UBS (now facing civil fraud charges in New York State) also have been burned badly.
Such is the result of promoting “affordable housing” at any cost, with Fannie Mae and Freddie Mac acting as middlemen and the federal government, aided by nonprofit activists, prodding them.
THAT PROD HAS gotten stronger over time.
In 1992 Congress mandated the creation of a regulatory agency that would operate under the roof of U.S. Department of Housing and Urban Development (HUD). Known as the Office of Federal Housing Enterprise Oversight (OFHEO), this agency has ridden herd on Fannie Mae and Freddie Mac to reach out to “underserved” populations.
The Clinton administration’s initial quota of targeting underserved areas (i.e., low-to-middle-income Census tracts with high nonwhite populations) was 21 percent; the Bush administration, obsessed with promoting an “ownership society,” has upped this floor to 39 percent.
Why did Congress create the oversight agency? Because lawmakers believed the line that Fannie Mae and Freddie Mac had been “neglecting” their commitment to promote affordable housing. It was radical nonprofit activist groups who sold that line, with ample help of homebuilders, banks, realtors, and most of all, Fannie Mae and Freddie Mac. Captors and captives have bonded!
And political influence ensures more of the same. Nobody has mastered the art form quite like the two GSEs, having contributed a combined roughly $200 million in lobbying and campaign contributions over the past decade.
That’s bought them immunization from public accountability. Democrats in Congress in particular are adamant about keeping things this way.
During debate over the housing legislation, Senate Majority Leader Harry Reid, D-Nev., refused to allow a vote on an amendment sponsored by Jim DeMint, R-S.C., to bar political donations and lobbying by Fannie Mae and Freddie Mac.
For nonprofit radicals such as ACORN and NACA, this is good news. The last thing they want to see are these corporations competing on an even footing with other firms.
BECAUSE FANNIE MAE and Freddie Mac are politically driven organizations, they tend to draw their executive talent from the left side of the political spectrum. To run a Government-Sponsored Enterprise, one already has to be comfortable with the idea of large-scale government intervention.
Experience, if not necessarily integrity, counts for a lot. Franklin Raines, Fannie Mae’s CEO for most of the six years that the company cooked its books to the tune of $10.6 billion, previously had been Clinton White House budget director. Raines pulled in $52.8 million in bonuses during his 1999-2004 stay at the company, a fact not unrelated to the suspect accounting.
This past April, in an out-of-court settlement with the government, he agreed to give back $24.7 million of that money and forego another $15.6 in stock options.
In addition to paying off their nonprofit tormentors, the GSEs may hire them. Barry Zigas, for example, for several years had headed the National Low Income Housing Coalition. Then, in 1993 Fannie Mae brought him aboard as its senior vice president for corporate and regulatory housing goals, the same year — small coincidence — that OFHEO went into operation. He, like many others, left a couple years ago, and is now a private consultant.
The GSEs and its nonprofit “adversaries” share a pair of root assumptions: 1) everyone in America has the right to be a homeowner; and 2) nonwhite minorities and/or low-income households have been denied this right.
In the face of extensive testimony, lobbying and campaign contributions, Congress, fearful of bad publicity over “insensitivity,” has preferred to intimidate Fannie Mae and Freddie Mac into boosting the nation’s homeownership rate. That rate rose from 64.2 percent in 1990 (where it had been “stuck” for some time) to about 69 percent in 2006. But there’s a downside to this “success,” as manifest in all those “Foreclosed” signs popping up on front lawns around the country.
SINCE FANNIE MAE and Freddie Mac are “too big to fail,” they know government will ride to the rescue. And that is precisely what has happened. The House of Representatives on July 23 passed by a 272-152 margin a “stabilization” plan that serves as a virtual candy store for Fannie Mae, Freddie Mac and the rest of the lending industry. The Senate three days later approved the measure by 72-13. Then, in the early morning hours of Wednesday, July 30, and with very little fanfare, President Bush signed the bill into law.
The law temporarily raises the Treasury Department’s line of credit to Fannie Mae and Freddie Mac from $2.25 billion to an unlimited amount (the Bush administration was the prime mover behind this one). It gives the Federal Housing Administration (FHA) special three-year authority to refinance up to $300 billion worth of mortgages and prevent about 400,000 evictions.
Worse, the law raises the Fannie Mae/Freddie Mac loan purchase limit from $417,000 to $625,000 and creates a new “affordable housing” fund to be drawn from Fannie Mae and Freddie Mac profits. It provides $3.9 billion in grants to state and local governments to buy and repair foreclosed property, which is likely to lead to more eminent domain abuse. It provides $4.6 billion in tax credits for first-time homebuyers.
It also raises the federal debt limit from $9.8 trillion to $10.6 trillion and creates a new regulator to replace OFHEO, which would work closely with the Federal Reserve System.
The Congressional Budget Office has estimated the total cost of the package at $25 billion. Continuing declines in house prices, however, could lead to far more foreclosures and another bailout.
Rep. John Boehner, R-Ohio, and Sen. Jim Bunning, R-Ky., men of common sense, have been publicly critical of the legislation. “We must take responsible steps to ensure our financial and housing markets are sound, but the Democrats’ bill represents a multi-billion-dollar bailout for scam artists and speculative lenders at the expense of American taxpayers,” Boehner remarked after House passage.
Such words, unfortunately, did not win the day.
Speaking of scam artists, radical nonprofit organizations practically are salivating. Not only does the measure prop up Fannie Mae and Freddie Mac, it assures nonprofit progressive groups a large chunk of the $230 million that would go for “counseling.”
This, in essence, is how political leveraging works. A little bit goes a long way — and the wrong way.
Carl F. Horowitz is director of the Organized Labor Accountability Project at National Legal and Policy Center, a Falls Church, Va.-based nonprofit organization dedicated to promoting ethics in American public life. He is a former professor of urban and regional planning at Virginia Tech.