Mad Maxine, the Housing Bubble and the Road to Ruin

SUMMARY

• In October 1992, the Federal Housing Enterprise Financial Safety and Soundness Act was passed. 
• The act's namesake "federal housing enterprise" were the enormous government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. 
• From the standpoint of the housing bubble, the act can be likened to the key the Clinton administration used to open Pandora's Box.  The act had two primary provisions.
• First, it mandated that the Department of Housing and Urban Development, (HUD), set numerical targets for GSE mortgages offered to low and moderate income borrowers; this was the "affordable housing mandate."
• Second, the act created the Office of Federal Housing Enterprise Oversight (OFHEO).  OFHEO was charged with monitoring the GSEs. 
• As events would prove, many members of Congress - chief among them, Maxine Waters - went to great lengths to stymie the work of OFHEO. 
• Meanwhile, Pres. Clinton's two HUD secretaries - Henry Cisneros & Andrew Cuomo - directed the GSEs to greatly increase their lending to low and moderate income borrowers. 
• GSE lending to low and moderate income borrowers increased from 30% of GSE lending to 50%.
• The combination of congressional protection of the GSEs and the gross stupidity of the Clinton administration was toxic; GSE losses would soar into the hundreds of billions!
• Among the political power brokers who have never been taken to task for their enormous role in causing the financial crisis is "Mad Maxine," Maxine Waters. 

DISCUSSION:

Just before Bill Clinton won the 1992 presidential election, congress passed a law that Bill Clinton would use to completely alter the mortgage market, and thus precipitate an enormous financial crisis.  The act was the Federal Housing Enterprise Financial Safety and Soundness Act.  This act revolved around the “government sponsored enterprises” (GSEs) Fannie Mae and Freddie Mac.  Fannie and Freddie were essentially mortgage banks that made mortgage loans.  They were both capitalized with government money but operated – supposedly – as private companies.  However, the GSEs had long been subject to all sorts of political influence peddling.  Indeed, immediately before the financial crisis hit – Fannie Mae, the larger of the two – was run by two political cronies of Bill Clinton with virtually no experience in the mortgage industry.  These two cronies, Franklin Raines and Jamie Gorelick – along with their four degrees from Harvard – would earn tens of millions of dollars while Fannie lost tens of billions!

The act was a classic Washington DC “deal.”  As a deal, it had something for the people who thought the GSEs had become far too large, and something for those others who thought the GSEs weren’t big enough.  As a sop to the GSE’s numerous critics, the act required a new office to be established – the Office of Federal Housing Enterprise Oversight (OFHEO).  OFHEO would act essentially like a banking regulator and monitor the GSEs.  On the other hand, the act required the GSEs to establish targets for the number of mortgages to be issued to low and moderate income borrowers.  This aspect came to be called the “affordable housing mandate."

Some idea of the significance of the affordable housing mandate to the financial crisis can be seen in just a few statistics; specifically, the huge increase in GSE lending to low and moderate income borrowers.  In 1993 - and before President Clinton's central plan for housing took off - only about 30% of all GSE mortgages went to low and moderate income borrowers. (1) However, President Clinton's two useful idiots masquerading as HUD secretaries - Henry Cisneros and Andrew Cuomo - used the affordable housing mandate to direct the GSEs to greatly increase their lending to low and moderate income borrowers.  Cisneros increased the lending to 42% of all GSE loans (2), and then, most disastrously, Cuomo increased the total to 50% (3).  In doing so, Cuomo sealed the fate of the US economy.  Of course, the only way for the GSEs to increase their lending to so many borrowers who would not have qualified for a mortgage under the "pre-Clinton" lending standards was to greatly reduce these standards. 

Ostensibly, OFHEO was tasked with keeping the GSEs from getting out of hand.  However, because the GSEs had so ingratiated themselves with the Washington political establishment – see Franklin Raines and Jamie Gorelick – OFHEO was always fighting an uphill battle.  However, in September 1999, Armando Falcon was appointed head of OFHEO, and from the start of his tenure it became clear that he was no pushover.  It took him five years, but in September 2004 Falcon issued a damning report that was highly critical of the GSEs.  This report would eventually force Fannie Mae to admit that over $6 billion dollars in supposed “profits” were nothing more than accounting artifice.  In addition, Franklin Raines was forced to resign in disgrace – at least as much disgrace as a political insider can ever be subjected to. (4)  Gorelick – a Harvard law graduate – apparently read the tea leaves and resigned months before.

The enormous risks being incurred by the GSEs had been a topic of discussion for years.  Even someone as doltish as ex-Goldman Sachs CEO Henry Paulson was aware of the dangers posed by the GSEs.  In the aftermath of the crisis Paulson stated, "Fannie and Freddie were the most egregious example of flawed policies that inflated the housing bubble and set off the financial crisis." (5) Nevertheless, OFHEO was fought every step of the way by the GSEs many backers in congress.  Among the most prominent of these backers were Kit Bond, Barney Frank, Gregory Meeks and, of course, "Mad Maxine," Maxine Waters.

Here is "Mad Maxine" in October 2004 - unknowingly it hardly needs to be added - succinctly capturing her - and her congressional allies - role in causing a huge number of mortgage defaults and an enormous financial crisis;
"Through nearly a dozen hearings we were trying to fix something that wasn't broke.  Mr. Chairman, we don't have a crisis at Freddie Mac and particularly Fannie Mae, under the outstanding leadership of Franklin Raines....What we need to do is focus on the regulator, (OFHEO), and this must be done in a manner so as not to impede the affordable home mission.  That mission, as you noted, has seen innovation flourish from desktop underwriting to 100% loans." (6)

The quote - which celebrates the economic wisdom of mortgages with no down payments - was from the congressional hearings sparked by Armando Falcon's September 2004 report.  While Maxine Waters wasn't the GSE's only congressional stooge - quotes just as damning can be found for Kit Bond and Barney Frank - the short discussion here should demonstrate the "humungus" (7) role played by "Mad Maxine" in helping to cause the financial crisis.  Amazingly, she has never been taken to task by anyone in the mainstream media for this "humungus" role. 

Peter Schmidt
09 JUL 2018
 

ENDNOTES
(1) U.S. Housing Market Condition Summary: HUD Prepares to Set New Housing Goals (See Table 1), https://www.huduser.gov/periodicals/ushmc/summer98/summary-2.html

(2) Ibid. See the bullet list under Figure 1

(3) HUD News Release 00-317, October 31, 2000 https://archives.hud.gov/news/2000/pr00-317.html

(4) David Hilzenrath, "Fannie Mae's Top Executives Leaving Firm - Raines, Howard Out Under Pressure," Washington Post, December 22, 2004  http://www.washingtonpost.com/wp-dyn/articles/A17241-2004Dec21.html?noredirect=on

(5) Henry Paulson, On the Brink, Business Plus, New York, 2010, p. xxxiii

(6) A brief portion of Maxine Waters' speech can be seen here (starts at the 40-second mark); https://www.youtube.com/watch?v=UIjoW_IXos4

(7) The villian in the second "Mad Max" movie was, "the warrior of the wasteland, the ayatollah of rock and rolla - the Lord Humungus."