Friends of Fannie Mae and Freddie Mac

In yesterday's New York Times, David D. Kirkpatrick and Charles Duhigg's article revealed another example of the connection between John McCain, his 2008 campaign manager Rick Davis, and the ultimate government bailout of Fannie Mae and Freddie Mac.

What are Fannie Mae and Freddie Mac? Fannie Mae (Federal National Mortgage Association) was a US. publicly traded government-sponsored enterprise. A stock-holder owned corporation, Fannie Mae was authorized to make loans and loan guarantees. A leader in the secondary mortgage market, Fannie Mae provided mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies funds to lend to home buyers. Freddie Mac (Federal Home Loan Mortgage Company) was created in 1970 to expand the secondary market for mortgages in the US. Freddie Mac bought mortgages on the secondary market, pooled them, and sold them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.

In 2000, Fannie Mae and Freddie Mac set up Homeownership Alliance (HA), an advocacy group organized to defend against federal regulations of the mortgage industry. For five years, Rick Davis made more than $30,000 per month as president of the HA. According to former HA executives, Davis's compensation level was not unusual for companies with well-connected consultants. Davis ran HA out of his Alexandria, VA lobbying firm. As HA lobbied for political support to beat back federal regulations, Fannie Mae and Freddie Mac bought riskier mortgages and increased their profits and commissions.

Homeownership Alliance included non-profits Habitat for Humanity and The Urban League, but current and former executives report that HA was set up mainly to defend Fannie Mae and Freddie Mac by promoting their roles in the housing market. The cost of HA's operations was largely financed by Fannie Mae and Freddie Mac. A broadly recognized Republican, Rick Davis became the face of the organization. Davis's added value was his closeness to John McCain and the senator's future run for president. Davis drew McCain to the group's 2004 awards banquet to bloster clout and credibility, and McCain's photo appeared in the group's 2004 annual report.

When Homeownership Alliance recruited Davis in 2000, it was under pressure from private industry rivals and deregulation legislators who argued that Fannie Mae and Freddie Mac's federal sponsorship gave them unfair advantage and put taxpayers at risk. Although John McCain backed legislation to increase oversight of Fannie Mae and Freddie Mac, it did not result in changing their unusual structure. Critics of rival companies formed their own Washington group, FM Watch, that pushed for regulations to deter the two companies from expanding into new areas, including riskier and more profitable mortgages. HA hired Public Strategies, a communications firm that included former Bush advisor, Mark McKinnon. Davis wrote letters and made speeches for the group. Deregulation, encouraged and supported by Treasury Secretary, Alan Greenspan and the Republican administration, enabled the excesses of the mortgage banking industry. Once HA had outlived its usefulness it was disbanded.

In late 2004, Fannie Mae and Freddie Mac were under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report in September of 2004, alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses. Fannie Mae expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The necessary restatement was expected to cost $10.8 billion, but was completed at a total cost of $6.3 billion in restated earnings. Concerns with business and accounting practices at Fannie Mae predate the scandal itself. In June of 2006, the House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises held hearings on Fannie Mae.

In 2007, the the subprime mortgage crisis began. An increasing number of borrowers, often with poor credit, that were defaulting on their mortgages caused a precipitous decrease in demand for any mortgage-backed securities that weren't guaranteed by Fannie Mae or Freddie Mac. Home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses. In July of 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations. Despite these efforts, shares of both Fannie Mae and Freddie Mac tumbled more than 90%.

As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. As a result, the corporations were particularly affected by the housing market downturn and credit crunch that began in 2007. On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), annouced that Fannie Mae and Freddie Mac were being placed into the conservatorship. The action was "one of the most sweeping government interventions in private financial markets in decades".

As I see it, deregulation supported by lobbyist Rick Davis, led to shameful excesses in the mortgage banking industry. Rick Davis and John McCain influenced the laissez-faire policies of deregulation that led to the government bailout of Fannie Mae and Freddie Mac. Much touted self-regulation became an oxymoron.