part6
SPECIAL INTERESTS: THE RISE OF THE “AFFORDABLE” HOUSING COALITION
Under continuing political and economic pressure, the trend toward lowering mortgage lending standards continued apace throughout the 1990s. The GSEs altered their automated mortgage underwriting criteria to encourage banks to make loans to borrowers with damaged credit, in large part to satisfy the Clinton Administration’s demand that the GSEs do more to increase homeownership among low-income and minority borrowers as laid out in the Administration’s affordable housing strategy.28 In this vein, Johnson’s successor, Fannie Mae CEO Franklin Raines said that the company had “expanded home ownership for millions of families in the 1990s by reducing down payment requirements.” Raines told the Mortgage Bankers Association that he and Freddie Mac CEO Richard Syron “made no bones about their interest in buying loans made to borrowers formerly considered the province of nonprime and other niche lenders.” Raines said his goal was, “to push products and opportunities to people who have lesser credit quality.”
Fannie Mae and Freddie Mac would ultimately announce over $5 trillion in affordable
housing initiatives. Many of these loans came increasingly from large non-bank mortgage lenders like Countrywide Financial Corporation, the country’s largest mortgage lender and a major innovator in pushing subprime loans. These non-bank lenders rose to fill the void in mortgage lending left in the wake of the savings and loan crisis, and they grew rapidly in response to government policies that encouraged lower lending standards. A symbiotic relationship developed between these non-bank lenders and the GSEs. For example, Fannie Mae under CEO Jim Johnson reached a “strategic agreement” with Countrywide CEO Angelo Mozilo, under which “Countrywide agreed to deliver a large portion of Fannie’s annual loan volume in exchange for special financing terms.” In fact, Countrywide regularly accounted for 10 to 30 percent of all the loans purchased by Fannie Mae in a given year. In the words of Mozilo: “If Fannie and Freddie catch a cold, I catch the fucking flu.”
Freddie Mac also joined in the subprime action, according to internal documents obtained by the Committee. For example, Freddie developed a plan to partner with non-bank mortgage lender Ameriquest by installing its automated underwriting software on-site. Fannie and Freddie both used their automated underwriting software to divert subprime and Alt-A loans from private label securitizers on Wall Street, driving up demand for risky junk mortgages. By 1997, Fannie Mae was offering to buy loans with only a 3-percent down payment, and by 2001 was offering to buy zero-down payment loans. Not only could these loans be used to satisfy the government’s demand for more low-down payment affordable mortgages, they turned out to be highly profitable as well. Combined with the value of their government subsidies and their ability to operate without far-flung retail operations, the GSEs were phenomenally profitable. Fannie Mae enjoyed perhaps the highest level of net income per employee in the world – about $900,000 per employee according to one estimate.35 The GSEs paid their executives handsomely as well. Fannie CEO Franklin Raines earned over $50 million in compensation during his six-year tenure. Fannie and Freddie paid billions more to their shareholders every year in dividends. Thus, government subsidization of GSE operations amounted to little more than corporate welfare. Indeed, both the Congressional Budget Office and the Federal Reserve found that only about half of this taxpayer subsidy ever came back to the taxpayers in the form of lower mortgage rates. Similarly, Wall Street investment houses like Lehman Brothers, Bear Stearns, and Merrill Lynch, which came to specialize in packaging and investing in the lowest-quality tranches of mortgage-backed securities, profited hugely from the increased volume that government affordable lending policies sparked. Private-label securitization of subprime mortgages grew from $60 billion-a-year in 1997 to nearly $500 billion-a-year by 2006. These firms could not compete in any segment of the market Fannie and Freddie chose to close off to them because the GSEs could always undercut Wall Street’s costs by virtue of their government-granted competitive advantages. However, as with the GSEs’ relationship to non-bank lenders such as Countrywide, Wall Street formed its own
symbiotic relationship with Fannie and Freddie. Wall Street firms profited from buying
and selling GSE mortgage-backed securities, which because of the government backing were deemed to be as safe as Treasury bonds – but with a higher yield. For their part, the GSEs became the largest purchasers of the “AAA”-rated tranches of Wall Street’s private-label securities, while Wall Street invested in the lower-quality portions. However, without the GSEs’ participation, it is unlikely that Wall Street could have formed these pools of toxic mortgages, making Fannie and Freddie the indispensable actors in the subprime market.39 This resulted in consistent downward pressure on down payments and on the credit quality of borrowers, fueling the housing bubble. The nexus of political advocates of affordable housing, non-bank mortgage lenders like Countrywide, the homebuilding industry, and Wall Street firms came together to create a powerful affordable housing coalition led by Fannie Mae and Freddie Mac and their congressional allies. This group of vested interests used its money, power and influence to protect its political prerogatives and profits, blocking repeated attempts at reform and distorting the relationship between government and business. Between 1998 and 2008, Fannie Mae and Freddie Mac spent over $176 million on lobbyists.40 They paid lobbyists to influence Members of Congress to block legislative proposals that would have stripped them of their preferential advantages. The GSEs even paid lobbyists just so they would not lobby against them. As one person who was offered money not to lobby against the GSEs noted, Fannie and Freddie could rely on a simple and politically powerful message touting their commitment to homeownership to blunt any efforts to rein them in. 41 If that failed, according to one congressional staffer who preferred anonymity, the GSEs could
take a tougher line:
Fannie has this grandmotherly image, but they’ll castrate you, decapitate you, tieyou up and throw you in the Potomac. They’re absolutely ruthless. When Congressman Jim Leach (R-IA) proposed assessing a fee on the GSEs to offset the federal subsidy they receive on their cost of borrowing, “it took just twelve hours for Fannie to blow the idea out of the water.”
Fannie Mae also forced then-Treasury Secretary Larry Summers to “tone down” a report that was originally going to criticize the cozy relationship between the federal government and the GSEs. When Congressman Paul Ryan (R-WI) sought to increase regulation of the GSEs, Fannie Mae sent lobbyists to harass him in his Wisconsin congressional district, going so far as to call his constituents and accuse him of seeking to increase mortgage rates, generating 6,000 angry responses to his office. When Ryan transferred to a committee without direct oversight of the GSEs, Fannie CEO Raines sent him a “congratulatory” note. “He meant good riddance,” said Ryan. When Congressman Christopher Shays (R-CT) introduced legislation to end the GSEs’ unique exemption from SEC registration, he “had lobbyists literally barging into my room,” while Fannie CEO Raines reportedly called the lawmaker to ask, “What the hell have [you] done?” The GSEs retaliated by ending their home-buying forums in Shays’ congressional district in an attempt to hurt him politically. Congressman Cliff Stearns (R-FL), who scheduled hearings on Freddie Mac’s use of improper accounting procedures in 2004, had his jurisdiction over the GSEs stripped by House Speaker Dennis Hastert (R-IL), who assigned the task to Michael Oxley (R-OH), for whom Freddie Mac held at least 19 campaign fundraisers. Just as the perils of opposing the vested interests of the affordable lending coalition were rife, so the rewards for supporting them were lucrative. From 1998 to 2008, GSE employees contributed nearly $15 million to the campaigns of dozens of Members of Congress on key committees responsible for oversight of Fannie and Freddie.48 At the time federal regulators seized the insolvent companies, sitting Members of Congress had received over $4.8 million in political contributions since 1989, with over $3 million of that coming from the GSEs’ political action committees. Of that total, 57 percent went to Democrats, and percent to Republicans.49 Not all of this fundraising was in compliance with federal law. In 2006, Freddie Mac paid the largest fine in Federal Election Commission history – $3.8 million – for improperly using corporate resources to hold 85 fundraisers for Members of Congress, raising a total of $1.7 million.
Fannie Mae and Freddie Mac regional partnership offices provided millions in additional contributions to politicians who supported them by funding affordable housing projects in congressional districts. For example, one press release from the office of Senator Charles Schumer (D-NY) read, “Schumer Announces up to $100 Million Freddie Mac Commitment to Address Fort Drum and Watertown Housing Crunch.” The release touted that, “Schumer has frequently partnered with Freddie Mac on creative, affordable housing initiatives around the state,” and that Freddie had committed to purchase $100 million of loans originated by HSBC bank, including “low-down payment loans.”These politicians could then claim credit with their constituents for bringing home these earmark-like subsidies which didn’t have to go through the scrutiny of the normal appropriations process. Fannie and Freddie also served as a revolving door for powerful former politicians, their aides and even their family members. Jim Johnson managed Walter Mondale’s 1984 presidential campaign, chaired the vice presidential selection committee for presidential
candidate John Kerry, and was involved in President Barack Obama’s vice presidential selection process. Franklin Raines had been President Clinton’s Director of the Office of Management and Budget. Former Clinton Deputy Attorney General Jamie Gorelick served as Vice-Chairman of Fannie Mae and earned over $26 million in compensation. Former Fannie Senior Vice President John Buckley had served as a Republican Congressional staffer and senior advisor to the presidential campaigns of Ronald Reagan in 1984 and Bob Dole in 1996. Another former Fannie Senior Vice President, Arne Christenson, had been a senior advisor to Republican House Speaker Newt Gingrich. The son of Republican Senator Bob Bennett worked for Fannie Mae’s Utah regional office, while Democratic Representative Barney Frank’s partner, Herb Moses, worked at Fannie Mae from 1991 to 1998 as Assistant Director for Product Initiatives while Frank sat on the House Banking Committee with responsibility for oversight of the GSEs.
Until President George W. Bush ended the practice, the President of the United States
appointed five members to the GSEs’ boards. This was a unique arrangement among
publicly-trade companies and solely a function of their hybrid public-private nature.
These board positions were highly lucrative sinecures with which Presidents could
reward their political allies. Typically, those appointed to the board by the President
served for very short periods of time and contributed very little to the day-to-day
operations of the company, yet were paid handsomely. For example, current White
House Chief of Staff Rahm Emanuel was appointed to the board of Freddie Mac by
President Clinton in February 2000, where he served for only 14 months and in return
received $320,000 in compensation. He also sold Freddie Mac stock worth between
$100,001 and $250,000. He did not serve on any of the board’s working committees and the board itself met no more than six times a year. Clinton also appointed lobbyist and golfing partner James Free and former aide Harold Ickes to the Freddie Mac board. Other members of the affordable lending coalition also were involved in buying influence among Washington figures. One of the most notable examples was Countrywide’s use of preferential mortgages to curry favor with so-called “VIPs.” Countrywide CEO Angelo Mozilo styled this the “Friends of Angelo” program. Officials with direct responsibility for overseeing GSE operations, including Senators Christopher Dodd and Kent Conrad and HUD Secretary Alphonso Jackson (responsible for setting the GSEs’ affordable housing quotas), received sweetheart mortgages from Countrywide. Key congressional staffers with responsibility for oversight of Fannie and Freddie also received sweetheart mortgages, including Clinton Jones III, Republican Chief Counsel of the House Financial Services Committee, which oversees the GSEs. Jones eventually left his job in Congress to join Fannie Mae as a vice president, Another staffer who received a sweetheart mortgage from Countrywide was Joyce Brayboy, Chief of Staff to Congressman Mel Watt. Watt is a member of the House Financial Services Committee and the Congressional Black Caucus, a group noted for its strong support of the GSEs’ affordable housing “mission.” High-level GSE executives were also beneficiaries of Mozilo’s largesse, including Fannie Mae CEO Jim Johnson, who also was a key conduit for referring other “VIPs” to the program, Franklin Raines, and Fannie Vice Chair and former Clinton Justice Department official Jaime Gorelick.
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