The Wonk Room

Congress Dismayed By The Direction Of Paulson’s ‘$700 Billion Plane’»

Today, Treasury Secretary Henry Paulson appeared before the House Financial Services Committee — alongside Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair — to explain his implementation of the $700 billion Troubled Assets Relief Program (TARP).

During the hearing, Congress voiced its displeasure with Paulson. Rep. Gary Ackerman (D-NY) told Paulson, “you seem to be flying a $700 billion plane by the seat of your pants.” Both Rep. Barney Frank (D-MA) and Rep. Maxine Waters (D-CA) chastised Paulson for not providing aid to homeowners, even though he could under the TARP legislation. Watch a compilation:

Paulson defended himself by saying, “The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties.” But the TARP legislation does have clear language allowing the Treasury to facilitate home loan modification; Paulson has just shown no inclination to do so.

Underscoring the extent of the housing crisis, currently “one in 11 mortgages is delinquent or in foreclosure”:

In the second quarter of 2008, the share of mortgages that were delinquent reached 6.4%, and the share of mortgages that were in foreclosure hit 2.7%. The share of new mortgages going into foreclosure continues to new record highs, with 1.1% in the second quarter.

In her testimony, Bair said that “more than 4.4 million non-GSE mortgages are estimated to become delinquent” by the end of 2009. Paulson, though, has proposed buying up just about everything but mortgages, including credit card debt. But as Andrew Jakabovics explained, “it is certainly questionable to promote increased lending for credit cards. Outstanding revolving consumer debt is approaching a trillion dollars. Encouraging further household indebtedness is hardly responsible.”

Bair has put forth a plan that — for $24.4. billion — could prevent 1.5 million foreclosures, which Bernanke called a “very promising approach.” If Paulson would come around as well, then some of the bailout funds might actually be directed at the root cause of the financial crisis.

Kucinich: In ‘What Country’ Is The Treasury Secretary ‘Passionate’ About Helping Homeowners?»

Yesterday, the Wonk Room noted Treasury Secretary Henry Paulson’s reversal in regards to the aim of the $700 billion Troubled Assets Relief Program (TARP). Today, the Domestic Policy Subcommittee of the House Oversight Committee — chaired by Rep. Dennis Kucinich (D-OH) — held a hearing to find out whether TARP is being used to prevent home foreclosures, “as Congress intended.”

Kucinich questioned Interim Assistant Secretary for Financial Stability Neel Kashkari — who is charged with administering the $700 billion — as to why the Treasury has not focused more on helping homeowners facing foreclosure. When Kashkari replied that the Treasury Secretary is “passionate” about helping homeowners, Kucinich asked “He is? Where? What country?” Watch it:

Kucinich was absolutely right to be skeptical. As Andrew Jakabovics explained, Paulson “yesterday made it absolutely clear that he had no intention of using the authority granted to him by Congress” to stem foreclosures. “The message was clear to homeowners facing foreclosure and their neighbors watching the value of their homes plummet — drop dead,” wrote Jakabovics.

It’s not as if legitimate plans to help homeowners don’t exist. Today, Federal Deposit Insurance Corp. Chairman Sheila Bair released a plan that could “prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans. ”

The estimated cost of this program is $24.4 billion, a drop in the bucket relative to the entire $700 billion program. Treasury and the White House, though, have made it clear that they are not interested.

In testimony before the subcommittee, Center for American Progress Action Fund Senior Fellow Michael Barr explained what Treasury needs to do to aid homeowners:

Under Section 109 of the [Emergency Economic Stabilization Act], the Treasury secretary is authorized to ‘use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.’ Under Section 101 of the act, the secretary is authorized to ‘make and fund commitments to purchase’ troubled assets, including home mortgage loans. These authorities can be deployed now to help homeowners and stabilize our markets.

As Jakabovics wrote, “The solution is simple: Focus on the mortgages. Gain access to home mortgages and restructure them. Now.”

Paulson Flails About With His TARP»

Yesterday, Treasury Secretary Henry Paulson announced that the Treasury Department has altered the way in which it is going to implement the $700 billion Troubled Assets Relief Program (TARP). Paulson has now “officially abandoned his original plan to buy troubled assets from financial institutions,” and instead aims “to reinforce the stability of the financial system by providing sorely needed capital to banks, and even non-bank institutions that securitize credit card, auto and student loans.”

As Matthew Yglesias noted, “On the policy merits, I think Paulson’s shift into recapitalization was the right idea.” Indeed, this was the path recommended by many economists, including Nobel Laureate Paul Krugman.

But Paulson’s shift does lead to an important question, laid out at Economist’s View: “[W]hy are they still trying to figure out how to design the program? This program shouldn’t be in the design phase, it should already be in place.”

As Joshua Zumbrun wrote in the Financial Times:

Maybe it’s the right way to go, maybe not. But as the government’s efforts to shore up the nation’s economy and financial system continue to balloon, the man running those efforts is putting the most important asset he possesses right now–his credibility–at increasing risk. By changing tactics and communicating poorly, he may be inadvertently recreating the same failed ad-hoc approach to the crisis he’s been trying to escape.

Indeed, in September Paulson told Congress that the original bailout plan was “the single most effective thing we can do to help homeowners, the American people, and stimulate our economy.”

Furthermore, this plan, while potentially better than the original bailout plan, still does nothing to address the root cause of the financial crisis: the failure of the housing market. As Sen. Chris Dodd (D-CT) explained:

[I]t is becoming increasingly apparent that a robust and aggressive program to stem the tide of foreclosures sweeping across the nation is critical to any policy to put our economy back on track…it is my sincere hope that Secretary Paulson collaborates with [FDIC] Chairman Bair to get this program up and running as soon as possible. There is no legitimate reason why they would be unable to do so.

The Wonk Room noted yesterday that Fannie Mae and Freddie Mac took an important first step towards restructuring bad mortgages. Now, an across the board mortgage restructuring plan needs to be implemented, instead of Paulson throwing money at, seemingly, anything that moves.

Fannie And Freddie Take The First Step, But Far More Must Be Done To Help Homeowners»

Today, the Wall Street Journal reported that mortgage giants Fannie Mae and Freddie Mac “said they would help streamline the modification of loans for potentially hundreds of thousands of homeowners who are 90 days or more behind on their mortgage payments.” This is a move by the Bush administration that is meant “to help troubled homeowners“:

To qualify, borrowers would have to be at least three months behind on their home loans and would have to owe 90 percent or more than the home is worth…Qualified borrowers would get help in several ways: The interest rate would be reduced so that they would not pay more than 38 percent of their gross income on housing expenses. Another option is for loans to be extended to 40 years from 30, and for some of the principal to be deferred, interest-free.

The plan focuses only on loans that Fannie and Freddie own or guarantee. While Fannie and Freddie are “the dominant players in the U.S. mortgage market,” they hold “only 20 percent of delinquent loans.” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages.”

Despite the criticism from Bair and others, like Sen. Charles Schumer (D-NY), this plan is a step in the right direction for an administration that has been woefully hesitant to take any action that would aid homeowners. However, Bair and Schumer are absolutely right to say that the plan does nowhere near enough. Far more must be done to include lenders outside of Fannie and Freddie in a widespread mortgage restructuring plan.

As part of a new book entitled Change for America: A Progressive Blueprint for the 44th President, Center for American Progress Senior Fellow Michael Barr lays out how the federal government can “create a process for the rapid and transparent repricing and restructuring of existing home mortgages themselves”:

The Federal Reserve would run auctions, in which Treasury and the private sector would purchase mortgages from current lenders and investors at discounts determined by the auction process. These mortgage holders would take a hit, trading a reduction in asset value and yield in exchange for liquidity and certainty.

The Bush administration has been quick to bail out troubled financial institutions (in the case of AIG, repeatedly). Action aimed at helping troubled homeowners was long overdue, and can not end with Fannie and Freddie.

McCain Doesn’t Really Know ‘The Criticism’ Of His Mortgage Plan»

During the third and final presidential debate last night, Sen. John McCain (R-AZ) was asked about his plans for the economy. In response, McCain outlined his Homeownership Resurgence Plan, which he said will help “put the homeowners first.” McCain also addressed what he called “the criticism” of his plan:

Now, I know the criticism of this. ‘Well, what about the citizen that stayed in their homes? That paid their mortgage payments?’ It doesn’t help that person in their home if the next door neighbor’s house is abandoned.

However, this is not the main criticism of McCain’s plan. The main criticism is that the plan rewards bankers who made bad loans by directing the federal government to buy bad mortgages at their original market value, instead of at their current depreciated value.

Testifying today during a Senate Banking and Housing Committee hearing on “The Genesis of the Current Economic Crisis,” Cuyahoga County Treasurer Jim Rokakis explained that “if you buy them at face value…you’re guaranteeing yourself, I believe, tens of billions of dollars of losses.” Watch it:

As Matthew Yglesias noted at the time, “instead of having the lenders take a haircut in order to avoid mass foreclosures, McCain wants the taxpayers to bear all the costs of doing so.” “The plan rewards those who took on the risk — banks that made loans, and homeowners that bit off more than they could chew — at the entire expense of taxpayers,” wrote Morgan Housel at The Motley Fool. “McCain’s proposal comes about as close to a get-out-of-jail-free card as it gets.”

McCain initially included in the plan that he would force lenders to “recognize the loss that they’ve already suffered,” but he flipped - overnight - to place the bill back on the taxpayers. This is the criticism that McCain needs to address.

McCain Incorrectly Calls Fannie Mae and Freddie Mac ‘The Catalyst For This Housing Crisis’»

During the presidential debate last night, Sen. John McCain (R-AZ) attempted to explain America’s financial meltdown by saying that “the catalyst for this housing crisis” was Fannie Mae and Freddie Mac (although he botched the delivery by saying Freddie Mae). McCain then claimed that the two GSEs “caused the subprime lending situation.” Watch it:

McCain, however, does not have his story straight. As McClatchy reported this week “federal housing data reveal that the charges [against Fannie and Freddie] aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.”

In 2006, during the height of the subprime boom, “more than 84 percent of the subprime mortgages…were issued by private lending institutions.” That same year, Fannie and Freddie’s regulator - the Office of Federal Housing Enterprise Oversight - “imposed new restrictions…that led to Fannie and Freddie losing even more market share in the booming subprime market.”

In fact, back in 2002, Freddie Mac “announced that it will no longer purchase subprime loans that include a variety of onerous features commonly associated with predatory financing.” Realty Times called this “a strategy that has the potential to seriously impact abusive lenders.”

Today, Dean Baker, the co-director of the Center for Economic and Policy Research, noted that “while Fannie and Freddie, as huge actors in the mortgage market, certainly contributed to the bubble, it is absurd to point to them as principle culprits.” He pointed out that “their market share actually fell as the bubble grew to ever more dangerous levels, dropping from 50.1 percent in 2002 to just 34.8 percent at the peak of the bubble in 2006.”

This was not the first time that McCain tried to incorrectly blame Fannie and Freddie for the financial crisis. But repeating this claim doesn’t make it any more true.

UPDATE: During a Senate Banking Committee hearing today, Sen. Chris Dodd (D-CT) explained that those blaming Fannie and Freddie are “wrong” and the crisis is a “direct consequence of years of regulatory failures by government officials.” Watch it:

McCain: The Plan To Make Lenders Accept Losses Was ‘A Simple Mistake’»

During the second presidential debate, Sen. John McCain (R-AZ) unveiled a mortgage plan which would enable the federal government to buy bad home loan mortgages and renegotiate them, allowing financially troubled homeowners to stay in their homes.

Today, the New York Times reported that the plan “would allow millions of financially stretched Americans to refinance their mortgages with government help, but it would leave taxpayers to cover the losses, rather than the financial institutions that hold the original mortgages.” The plan favors bankers over taxpayers because it states that the government buy mortgages at their original market value, instead of buying them at their depreciated current value and forcing lenders to accept the loss.

The plan, though, wasn’t always designed this way. As the Politico reported, the initial version of the plan - posted by the McCain campaign Tuesday night - included a provision that lenders “must recognize the loss that they’ve already suffered.” However, “when McCain reissued the document on Wednesday, that sentence was missing.” The campaign said that the inclusion of the provision forcing the banks to accept losses was “a simple mistake“:

That language was mistakenly included in the initial draft and it’s been corrected. It doesn’t reflect the intentions of the initiative, which necessitated the correction and the removal of the sentence. A simple mistake.

So the McCain campaign evidently thinks it is a mistake to help taxpayers without throwing in $100 billion for the bankers. As Matthew Yglesias noted, McCain’s decision to nix the provision “transforms would could be a win-win measure to prevent mass evictions and a total collapse of housing prices into a strangely unmotivated subsidy to the people who issued bad loans.”

Of course, throwing a bone to the banking industry is nothing new for McCain, who has received More »” to sort it out:

We should also convene a meeting of the nation’s top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers. They should pledge to do everything possible to keep families in their homes and businesses growing.

As The Wonk Room noted yesterday, the goal of McCain’s plan - helping homeowners with decent credit who are burdened by bad mortgages - is laudable. But his Tuesday night plan, which forced bankers who made bad loans to swallow the loss, was much better than its Wednesday morning counterpart.

McCain Proposes A Progressive Housing Policy, But Still Wants To Reward Bankers Who Made Bad Loans»

During the presidential debate last night, Sen. John McCain (R-AZ) announced that, if elected President, he “would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes,” in order to enable troubled homeowners to stay in their homes:

I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes - at the diminished value of those homes and let people be able to make those - be able to make those payments and stay in their homes.

Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy. And we’ve got to give some trust and confidence back to America.

McCain’s plan - the American Homeownership Resurgence Plan - is a good step because he recognizes what he failed to understand before: the mortgage crisis is at the root of the current financial trouble. As the Associated Press noted today, McCain’s plan is akin to one proposed by the Center for American Progress (CAP), which has “been pushing a similar idea for some time.”

In December, 2007, CAP’s Andrew Jakabovics proposed a plan modeled on FDR’s New Deal era Home Owners Loan Corporation. Under the CAP proposal, the government “would issue new, fixed-rate mortgages to those borrowers ‘underwater’ and facing default or foreclosure,” while buying “the old adjustable-rate mortgages from lenders and investors” at current value.

McCain should be applauded for embracing the progressive goal of helping homeowners with decent credit, who are nevertheless burdened with bad mortgages. However, he wants to buy the mortgages at full face value, which means he “wants to give $100 billion of taxpayers’ money to America’s worst-behaving mortgage financiers.”

Here’s how McCain’s proposal works:

- If a homeowner bought a house for $300,000 - and the value then fell to $200,000 - McCain would have the government purchase the mortgage for $300,000, instead of forcing lenders to accept the loss and renegotiate the loan.

- The only way in which the government then makes a profit is if the house’s value rises above its original market value of $300,000, which is possible, but unlikely.

As Matthew Yglesias wrote, “instead of having the lenders take a haircut in order to avoid mass foreclosures, McCain wants the taxpayers to bear all the costs of doing so.”

Brad DeLong noted that McCain plans to “give a present of $100 billion to the bankers who made the loans,” and “acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.”

McCain’s idea to buy and restructure mortgages is a good one, but he can accomplish it without overpaying and rewarding bankers who made bad loans.

Cross-posted at Think Progress.

House Conservatives Against Regulations Because Bankers Will Just ‘Find Ways Around’ Them»

Today, the House Oversight Committee held a hearing on the causes and effects of the failure of Lehman Brothers, the investment bank that filed for bankruptcy on September 15. This is the first of five hearings aimed at unraveling the causes of the current financial crisis.

Prior to the hearing, Republican members of the Oversight Committee released a report in which they concluded that deregulation is not to blame for the current trouble in the financial system.

The report goes on to discuss the net-capital rule, which is a regulation limiting the amount of debt that financial institutions are allowed to take on. In the report, House Republicans argue that there should be no such rule, because bankers will just “find ways around” it:

Banking regulations require financial institutions to limit their asset risk per unit of capital, but writing regulations that simply mandate an appropriate level is unlikely to work for very long because it is in the interest of bankers to find ways around these requirements in pursuit of profit.

However, the report completely fails to note that financial institutions carrying huge debt-to-capital ratios contributed to the recent meltdown. Furthermore, it was the Bush administration, through the auspices of the Securities and Exchange Commission, that actively relaxed the debt-to-capital regulation.

In 2004, the SEC loosened the rule mandating “that broker dealers limit their debt-to-net capital ratio to 12-to-1.” The five investment banks that qualified for an alternative rule - Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley - were allowed “to increase their debt-to-net capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.”

According to the New York Times, the investment banks themselves lobbied for the rule change, because it would “unshackle billions of dollars held in reserve as a cushion against losses on their investments.” However, when the subprime mortgage bubble burst, the investment firms no longer had enough cash on hand “to weather the storm.”

Chairman of the Oversight Committee, Rep. Henry Waxman (D-CA), said this lax regulation “proved to be a temptation” that the investment firms “could not resist,” but “when asset values decline — as the subprime market did — leverage rapidly consumes a company’s capital and jeopardizes its survival.

Barry Ritholz wrote that the SEC exemption is “in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind“:

The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms. You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules.

So bankers don’t really need to “find ways around” regulations, when the Bush administration is willing to knock the regulations out of the way.

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WSJ Writer Blames CRA And Fannie/Freddie For Crisis, But Isn’t Sure If The Case Is ‘Sturdy or Just Suggestive’»

Our guest blogger is Tim Westrich, a Research Associate at the Center for American Progress Action Fund.

On the Wall Street Journal’s opinion page today (“How Government Stoked the Mania”), Professor Russell Roberts is the latest on the conservative bandwagon blaming the Community Reinvestment Act, Fannie Mae, and Freddie Mac for the subprime mortgage mess, a claim that is simply not true. Roberts seems to be shoveling numbers to conservative pundits who have been making the case on TV, radio, and in columns.

Problem is, Russell Roberts admitted in his own blog just today that he’s not even sure if “the case is sturdy or just suggestive” and that he’s “working on getting more data“:

Here is my piece in the WSJ on government’s role in the mess. It’s a work in progress. I am working on getting more data to see if the case is sturdy or just suggestive. And of course this is an ex post narrative. I tried to be careful to say that it is part of the story and perhaps the essential part. The people who are saying it ISN’T Fannie and Freddie, or it isn’t the CRA or it isn’t the Taxpayer Relief Act of 1997 or Greenspan’s role in cutting interest rates are probably right. No one of these is THE cause. But I think the combined effects are potentially as compelling once I dig up all the numbers. And I certainly prefer the combined effects to the one cause explanation of greed or markets failed.

Of course, his blog post — where Roberts is careful to say the case is “a work in progress” — will be seen by a lot fewer people than his opinion piece in the WSJ’s print and online versions, where Roberts is much more certain about his facts.

The root cause of the financial mess is the failure of Bush administration officials to take action when they saw what was happening in the U.S. housing market and the overall economy to prevent disasters from happening. They need to accept the fact that their cries for less government persuaded regulators they appointed to their posts to turn the other way as lending abuses piled up in the subprime mortgage market.

Conservatives’ Fearmongering Over ACORN ‘Slush Fund’ Prevents Funding For Low-Income Housing Program»

Tonight, the Senate plans to vote on a reconstituted version of the $700 billion bailout bill that failed to pass the House earlier this week. Included in the bill are new provisions, including “a one-year increase in Federal Deposit Insurance Corp. caps for bank and credit union accounts, extensions of numerous business tax breaks that have expired and a fix to the alternative minimum tax for individual taxpayers.”

No longer in the bill is a provision stating that 20% of the government’s profits from the sale of a troubled asset be deposited, with 65% of the deposit directed to the Housing Trust Fund. The Housing Trust Fund is a federal housing program that provides “funds to state governments for the purpose of building and rehabilitating homes for the very lowest income people in the United States.”

The provision was removed because, for the last week, conservatives have been harping against it. They called it a “slush fund” for ACORN, the Association of Community Organizations for Reform Now. ACORN is “the nation’s largest grassroots community organization of low- and moderate-income people,” engaged in initiatives to prevent predatory lending, develop affordable housing, and build funding for public schools. Watch a compilation:

Rep. John Boehner (R-OH) called the provision a “left-wing giveaway Democrats are pushing to force taxpayers to bankroll a slush fund for a discredited ally of the Democratic Party.” Michelle Malkin wrote that it’s “$100 million more in funding for the left-wing housing entitlement thugs and heavily tax-subsidized fraudsters at ACORN.”

But conservatives are completely mischaracterizing this part of the bill. Directing funds to the Housing Trust Fund does not mean that money is being given to ACORN. In fact, state and local governments - not the federal government - choose which organizations receive money from the fund.

While it is conceivable that ACORN would receive money, it “was not specifically directed any funds in the previous proposal.” For its part, ACORN, in order to maintain independence, “does not accept government funding and is not tax exempt.”

Conservatives have already tried to dodge responsibility for the financial crisis by blaming it on the poor. Now, they have refused funding for a program specifically set up to aid the poor just two months ago:

The Housing Trust Fund is the first new federal housing production program since 1974 that is specifically for extremely low income renter households. The need for this new program is acute. Today in the United States, there are 9 million extremely low income renter households and only 6.2 million homes with rents these families can afford.

Consequently, 71% of extremely low income renters spend more than half of their income for housing, leaving them without enough money for other essentials and at high risk of losing their homes and joining the ranks of the homeless. This is a housing crisis of major and longstanding proportions that the federal government must address.

It seems that the only bailout conservatives can get behind is one that leaves homeowners and the poor out, while giving tax cuts to corporations and the wealthy.

Conservatives Explain How To Salvage The Bailout: Add Tax Cuts»

Yesterday, the Bush administration’s proposed $700 billion bailout was defeated in the House, after the Republican leadership failed to deliver their 70-100 promised votes from the conservative side.

Following the bill’s defeat, congressional conservatives took to the airwaves, explaining what should be included in the legislation in order to persuade other conservatives to vote for it. Their additions: cutting the capital gains tax and cutting corporate taxes. Watch a compilation:

From the beginning of the bailout process, conservatives have been advocating tax cuts, claiming that they will fix the current financial crisis. Today, the Washington Times editorial board reiterated this idea, saying that tax cuts will fix “some of the structural problems behind the mortgage meltdown.”

But these tax-cutting proposals do nothing to address the mortgage crisis and don’t help troubled homeowners. They amount to little more than a conservative hand-out to the wealthy and corporations.

As the Wonk Room has previously noted, most capital gains flow to millionaires. Conservatives argue that a cut in cap gains will cause capital to “flood” into the market again, thus solving the crisis. But as Michael Ettlinger notes, this wouldn’t happen because “this money would have to come from somewhere. If it’s interest bearing accounts, More » by as much as Wall Street benefited.”

As for corporate taxes, the U.S. rate is already in line with the G-7 average, and the U.S. raises below the OECD average in corporate tax revenue. An analysis by the Center for American Progress found that corporate profits do not trickle-down, and thus giving corporations tax breaks would not alleviate any of the pressure on the economy.

The legislation that failed to pass yesterday was already short on provisions actively aimed at helping those facing foreclosures. Any restructuring of the bill should address that shortfall - and focus on the root of the crisis - instead of turning the legislation into a gift for corporations and the richest Americans.

Digg It!

UPDATE: On Hardball today, former Rep. Tom Delay proposed suspending the capital gains tax for two years. Host Chris Matthews responded by saying “you guys have wanted that forever…you’re going to reward the people that blew it.” Watch it:

Conservatives Try To Dodge Responsibility For Crisis By Blaming Poor People»

In the aftermath of the financial crisis, conservative commentators have blamed the Community Reinvestment Act (CRA), low-income people, minorities, and past Democratic administrations for the sub-prime mortgage meltdown:

- Laura Ingraham: “When Bill Clinton decided to tell Robert Rubin to re-write the rules the Community Reinvestment Act and push all of these institutions to lend to minority communities.”

- Neil Cavuto: “I don’t remember a blaring call that said, Frannie and Freddie are a disaster, loaning to minorities and risky folks is a disaster.”

- Gov. Mike Huckabee (R-AR): “It was their harsh regulation under the Community Reinvestment Act that started this ball rolling down the hill.”

Watch a video compilation:

Congress passed the Community Reinvestment Act in 1977, requiring banks “to lend throughout the communities they serve.” In the 1990s, greater “home mortgage lending to lower income households and in lower income communities by the banks and thrifts covered by the CRA,” increased the homeownership rate “for lower income and minority families.” As a result, “property values went up dramatically in low and very low income urban” communities, “reversing severe declines during the prior two decades.”

But the Bush administration ushered an end to CRA enforcement. In 2004, Bush “announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law’s toughest standards.” Ironically, conservatives are now blaming legislation that “was losing force and relevance” just as “sub-prime lending was exploding,” for the current crisis.

As CAPAF Senior Fellow Robert Gordon argues in The American Prospect, “the real problems came from the institutions beyond the reach of the CRA“:

- CRA Only Applies To Federally Insured Banks And Thrifts: CRA did not apply to independent mortgage companies, which were responsible for “half of sub-prime loans.” Only about “one in four sub-prime loans were made by the institutions fully governed by CRA.”

- CRA Institutions Engaged In Less Dangerous Lending: As the president of the San Francisco Federal Reserve points out, “independent mortgage companies, which are not covered by the CRA, made high-priced loans at more than twice the rate of the banks and thrifts.”

- CRA Does Not Encourage Or Condone Bad Lending: According to Ellen Seidman, Director of the U.S Treasury Department’s Office of Thrift Supervision from 1997 to 2001, CRA-covered institutions were warned “that badly underwritten subprime products that ignored consumer protects were not acceptable. Lenders not subject to CRA did not receive similar warnings.”

While most economists blame the current crisis on market failure and sparse regulation, conservatives are attempting to elude responsibility by smearing the victims of predatory lending. As Matt Yglesias points out, “it was conservatives who watched as the housing bubble developed and it was conservatives who blocked any action to try to ensure a soft landing once the bubble popped….It was conservatives who blocked efforts to curb predatory lending and it was conservatives who blocked efforts to investigate fraud more robustly.”

Now, the preachers of ‘personal responsibility’ are ducking for cover.

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Conservative Bailout Plans Don’t Address The Causes Of The Crisis»

Yesterday, negotiations over the $700 billion federal bailout imploded after House Republicans, led by Rep. Eric Cantor (R-VA) and Rep. John Boehner (R-OH) circulated an alternative plan that “advocates tax cuts and relaxed regulations.”

This is the second alternative plan offered by conservatives. This week, the Republican Study Committee (RSC) released its own plan, which is also being supported by former Speaker of the House Newt Gingrich.

Both of these plans are fundamentally flawed, and fail to address the causes of the current financial crisis.

The Boehner/Cantor Plan, among other provisions, calls for the removal of “burdensome regulatory and tax barriers” to pull capital into the market:

Instead of injecting taxpayer funds into the market to produce liquidity, private capital can be drawn into the market by removing burdensome regulatory and tax barriers that are currently blocking private capital formation. In short, too much private capital is sitting on the sidelines during this crisis, and it is well past time to unleash it.

This plan is essentially a non-starter. It doesn’t address the underlying problems in the mortgage market by allowing any restructuring of bad mortgages. Also, the plan’s provision to “insure mortgage backed securities (MBS) through payment of insurance premiums” is “akin to selling homeowners insurance in New Orleans after the dikes broke.” Only those financial institutions with the very worst assets would be willing to participate.

Cantor has admitted his plan has a problem, and said “he would support giving the Treasury secretary some authority to purchase the most troubled securities linked to failing mortgages,” because “some of the ‘exotic sliced and diced’ mortgage-backed securities at issue for the financial institutions are of such little value.” But the plan still does nothing to restructure the “sliced and diced” mortgages.

For its part, the RSC proposed cutting the capital gains tax to zero and privatizing Fannie Mae and Freddie Mac, in a “market based alternative” to the bailout. The RSC solution also calls for the suspension of mark-to-market accounting.

As previously noted on the Wonk Room, zeroing the capital gains tax would mostly benefit the wealthy and not draw capital into the market. Meanwhile, privatizing Fannie and Freddie incorrectly places the blame for the crisis on the GSE’s alone. While Fannie and Freddie did invest in bad mortgages, Bush administration regulators failed to prevent such practices.

Moreover, the collapse of Fannie and Freddie “was patently not the beginning of the latest leg of this crisis.” Instead, that honor belongs to the unregulated credit default swaps issued by insurance giant AIG that AIG subsequently couldn’t back up. The elimination of mark-to-market accounting would simply allow U.S. financial institutions to continue pretending that their bad assets are good, which would not fix the underlying problem of toxic mortgages pervading the market.

All in all, the conservatives have proposed deregulation to get the U.S. out of a problem caused by deregulation - with some tax cuts for the wealthy thrown in as a bonus.

Top McCain Lobbyist-Adviser’s Husband, Kurt Pfotenhauer, Is Top Mortgage Industry Lobbyist»

Nancy Pfotenhauer, a senior economic adviser to Sen. John McCain (R-AZ), is the former top lobbyist for Koch Industries, the right-wing corporate polluter. Her current husband, Kurt Pfotenhauer, is the CEO and top lobbyist of the American Land Title Association, “the national trade association and voice of the abstract and title insurance industry.” Until this year, Kurt was the senior vice president and top lobbyist of the Mortgage Bankers Association (MBA), “the national association representing the real estate finance industry.”

Pfotenhauer, like his wife, is part of Washington’s revolving-door lobbyist culture. Prior to joining MBA in May 2002, Pfotenhauer was chief of staff to Sen. Gordon Smith (R-OR) for five years (in 2006, Smith received $14,000 in campaign contributions from the MBA PAC). Previously, Pfotenhauer was a lobbyist for United Parcel Service (UPS) for five years, and before that was chief of staff to Rep. Denny Smith (R-OR).

Kurt Pfotenhauer’s past and present clients are, of course, the real estate finance corporations that are at the center of the present financial crisis. Their predatory and deceptive lending practices in pursuit of irrational profit margins — in concert with hedge funds and investment banks who blew up toxic mortgages into towers of unregulated debt — have threatened the fiscal underpinnings of the global economy.

For years, they worked in concert with the Bush administration to block, weaken, and delay regulatory reform by Congress, such as the Predatory Mortgage Lending Practices Reduction Act of 2007, which died in the Senate. Last year, Pfotenhauer testified before Congress against the Emergency Home Ownership and Mortgage Equity Protection Act, a bill that would have allowed judges to restructure toxic mortgages to allow people to keep their homes — and would have helped prevent the current financial meltdown and bailouts. More »

Millions Of Americans ‘Financially Burdened’ By Mortgages, But Bailout Does Nothing For Homeowners»

Congress and the Bush administration are currently debating various forms of the $700 billion bailout aimed at stemming the financial crisis. One point of disagreement is whether the bailout will include benefits for troubled homeowners, or whether it will be a “clean bill,” focused solely on rescuing Wall St. financial institutions.

Emphasizing the trouble that homeowners are in, an analysis of Census Bureau data released today shows that 38% of homeowners with a mortgage - 19 million people - are spending 30% or more of their income on housing costs, which is the level of spending at which the government considers the homeowner “to be financially burdened.” 7.5 million people “are spending half of their income or more on housing costs.”

Despite this, the New York Times reported today that housing experts have warned “that the [bailout] plan might do little to help troubled borrowers stay in their houses”:

Henry M. Paulson Jr., the Treasury secretary, has put top priority on bailing out financial institutions by buying up soured mortgages and mortgage-backed securities, so banks and other lenders can clean up their balance sheets and get back to normal lending.

But Democrats are insisting that the Treasury Department also help restructure many of those loans, by lowering the interest rate or the loan amount, to make the mortgages affordable and reduce the number of people who lose their homes through foreclosure.

“We are literally spending hundreds of billions of dollars on subsidies for financial institutions,” said Christopher Mayer, a professor of real estate finance and vice dean at the Columbia School of Business. “This won’t do anything to help the housing market.”

Sen. Chris Dodd (D-CT) has proposed an alternative to the Paulson plan, which would give “bankruptcy judges the power to lower mortgages for distressed homeowners.” However, bank lobbyists are rallying to defeat Dodd’s bill. “We are vigorously opposing that,” said Steve Verdier, a lobbyist for the Independent Community Bankers Association (ICBA). “If that happens, then the mortgage rates for other consumers are going to go up.”

David Abromowitz and Andrew Jakabovics of the Center for American Progress have suggested that the Treasury have direct power to restructure mortgages. They wrote that “without provisions expressly aimed at helping these borrowers restructure their mortgages with the assistance of the federal government or through judicial modification, this grand plan to buy ‘toxic’ assets from the financial institutions that engineered this market meltdown will not help the U.S. housing market recover.”

Millions of Americans are paying enough to be considered “financially burdened” by government standards, yet the bailout, for now, does precious little to help any of them.

The McCain Blame Game Misfires»

Our guest blogger is Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund.

Sen. John McCain (R-AZ) this morning attempted to blame the entirety of today’s runaway global financial crisis on…Sen. Barack Obama (D-IL). The reason: the failure of U.S. home mortgage giants Fannie Mae and Freddie Mac due to their investments in subprime mortgages.

Problem is, Fan and Fred’s chief regulator — the Office of Federal Housing Enterprise Oversight (OFHEO) — is responsible for the government bailout of these two institutions because it failed to prevent them from investing in these toxic mortgages, despite its clear mandate to ensure “the safety and soundness” of the two institutions.

What’s worse, OFHEO (a unit of the Department of Housing and Urban Development) allowed Fannie and Freddie to invest in these mortgages when it was clear that abusive lending practices had created this toxic mess – practices that the Federal Reserve failed to prevent. If the Bush administration and a conservative Congress (including Sen. McCain) had not appointed or nominated and approved federal supervisors who made clear they planned to deliver less supervision over the financial services industry, the U.S. financial markets and economy might not be in such dire straits today.

The collapse of Fannie and Freddie, however, was patently not the beginning of the latest leg of this crisis, as McCain would have Americans believe. That moment in history is the collapse of U.S. insurance giant American International Group Inc., which issued over $40 billion in credit default swaps – a form of insurance on subprime mortgage-backed securities that turbocharged the sale of these securities because they seemed “safe and sound” — that it couldn’t honor, forcing the Federal Reserve earlier this week to buy control of the failing company for $85 billion. And who is the most responsible for the completely unregulated credit fault swap marketplace? Well, that would be Sen. McCain’s likely Treasury Secretary, former Sen. Phil Gramm of Texas, who made sure in one of his last legislative victories in 2000 that the now $60 trillion (yes, trillion) market for credit default swaps would remain unregulated.

Digg It!

March 2008: Conservatives Were For Deregulation Before They Were Against It»

Our guest blogger is Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund.

Six months ago, the U.S. housing and global credit crises seemed manageable to the Bush administration. So manageable, in fact, that U.S. Treasury Secretary Henry Paulson unveiled a widely discussed blueprint for U.S. financial regulatory reform that called for less supervision of Wall Street by the Securities and Exchange Commission, more of the same lax supervision of the financial derivative products at the heart of today’s global market meltdown by the Commodity Futures Trading Commission, and much more risk to taxpayers to be taken on board courtesy of expanded powers for the Federal Reserve.

Back then, Mr. Paulson said in a speech that the plan detailed the administration’s desire to ease financial regulation. Bush administration spokeswoman Dana Perino seems to have forgotten the details in the plan when she told reporters yesterday that the administration “had a regulatory blueprint for them to follow, and they declined not to”—the “they” being Congress.

Perino was responding to a question from a reporter about whether the ultimate responsibility for today’s massive financial meltdown rests with the deregulatory philosophy of the Bush Administration and Congress, under the leadership of conservatives for more than a decade until two years ago. She gamely tried to deflect the question by blaming the regulators—as if these officials were not proposed by conservatives and in large part confirmed overwhelmingly by a conservative Congress that wanted to know they would do as little supervisory work as possible.

Digg It!

Fannie and Freddie: Expect More Of The Same From John McCain»

Our guest blogger is Ed Paisley, Vice President of Editorial at the Center for American Progress Action Fund.

The Bush administration this weekend had to rescue home mortgage giants Fannie Mae and Freddie Mac after eight years of regulatory mismanagement of our home mortgage financial marketplace by administration appointees. Putting Fannie and Freddie into federal conservatorship is clearly the right step to take, yet Sen. John McCain (R-AZ) and his economic advisors embrace long-term changes to these two government-sponsored entities that are bad for the long-term interests of American homeowners and prospective homeowners.

For decades now, these two GSEs played an important stabilizing role in the home mortgage market, maintaining access to mortgage credit during periods of private market contraction and establishing good lending standards through “conforming” loans.” Under the Bush administration, however, financial regulators willfully took their eyes off unscrupulous mortgage originators, allowing the marketplace for home mortgages to grow in size and complexity without ever trying to match this growth with prudent regulation to protect the safety and soundness of the financial system, let alone consumers.

Now, Sen. McCain and his economic advisors are calling for more deregulation, not better regulation, in the wake of the takeover of Fannie and Freddie.

Imagine if the policy answer to the savings-and-loan crisis of the 1980s had been a $160 billion taxpayer rescue of the industry accompanied by further deregulation of the very financial institutions that got us into the problem in the first place. That, in essence, is what McCain economic policy advisor Douglas Holtz-Eakin is calling for when he demands that Fannie and Freddie be phased out of existence as GSEs so that the financial market players who brought us the subprime mortgage crisis can takeover the entire industry. More »