Republican report puts blame for housing on Fannie, Freddie

Republicans on the House Oversight panel are trying to re-energize debate over the role Fannie Mae and Freddie Mac played in causing the housing crisis continuing to ripple through the U.S. economy.

Staff for ranking member Darrell Issa (Calif.) and other committee Republicans on Tuesday will release a 26-page report that blames the government’s drive to increase homeownership, particularly among minority groups and low-income households.

The report criticizes members of both parties, but by emphasizing Fannie Mae and Freddie Mac, it tries to put the focus of the debate on turf more comfortable for Republicans.

“The housing bubble that burst in 2007 and led to a financial crisis can be traced back to the federal government intervention in the U.S. housing market intended to help provide home ownership opportunities for more Americans,” declares the first sentence of the GOP Oversight and Government Reform report.

The report tries to center debate on government involvement, rather than Wall Street.

“In recent months, it has been impossible to watch a television news program without seeing a Member of Congress or an Administration official put forward a new recovery proposal or engage in a public flogging of a financial company official whose poor decisions, and perhaps greed, resulted in huge losses and great suffering,” the report states.

“Ironically, some of these same Washington officials were, all too recently, advocates of the very mortgage lending policies that led to the economic turmoil.”

The report continues the theme of Republicans seeking to pin the housing crisis on Fannie and Freddie, now completely owned by the government. The GOP sees the two mortgage giants as having pumped air into the housing bubble by offering and subsidizing high-risk loans in an effort driven by Democrats and the Clinton administration to increase homeownership, particularly among minorities and low-income households.

Democrats have defended Fannie and Freddie for trying to increase homeownership, while criticizing various polices at the two firms. They’ve put more of the blame for the housing crisis on poorly regulated Wall Street banks.

House Financial Services Committee Chairman Barney Frank (D-Mass.), who comes under some criticism in the GOP report, has said more foreclosures were caused by unregulated entities rather than Fannie and Freddie. He has also noted that Republicans were in control of Congress from 1995 to 2007, when the housing bubble was created.

The GOP staff report ties the Obama administration to Fannie and Freddie by noting its connections to former Fannie Mae President Jim Johnson, who was involved in President Obama’s search for a vice president, as well as White House Chief of Staff Rahm Emanuel’s appointment to Freddie Mac’s board.

It also points to a paper co-authored in 2002 by Office of Management and Budget (OMB) Director Peter Orszag that, according to the GOP report, minimized the risk Fannie and Freddie were taking on in terms of the capital the housing firms had to back their loans.

Orszag’s paper said that “risk to the government from a potential default on GSE [government-sponsored enterprise] debt is effectively zero,” and that “the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.”

Orszag was commissioned by Fannie Mae to write the paper with his brother and Nobel prize-winning economist Joseph Stiglitz, the paper’s lead author. A copy of the paper can be found on Orszag’s bio page on the website of the Congressional Budget Office, which he led before joining the Obama administration.

However, the GOP report does not mention several caveats Orszag and the other authors included.

Their paper said Fannie and Freddie “would likely require government assistance only in a severe housing market downturn.” It also said Fannie Mae’s lending practices could be hurt by a “Great Depression-like scenario,” a rare event that is “often quite difficult to analyze accurately.”

OMB spokesman Kenneth Baer defended Orszag’s finding, noting the caveat.

“This paper, written seven years ago with Nobel Prize winner Joseph Stiglitz, was based on applying well-established econometric techniques to historical data,” Baer said in an e-mailed statement. “Even so, the authors highlighted the risks of ‘another Great Depression-like scenario’ or severe housing market downturn — and time has unfortunately proven this caution well-founded.”

 Baer said Orszag has forgotten how much Fannie Mae paid him and the others to write the report. He referred the question to the consulting firm Orszag worked for at the time. The company’s spokeswoman said she couldn’t release that information for client confidentiality reasons.

The GOP paper notes that the federal government has doled out $700 billion in GSE bailouts, including “$59.8 billion of capital injections by the U.S. Treasury, $73 billion of GSE debt purchases by the Federal Reserve, and $567.3 billion of direct purchases of GSE mortgage-based securities by both the Fed and Treasury.”

GOP politicians criticized by the report include former Speaker Dennis Hastert (R-Ill.), whom the report suggests caved to pressure from Fannie and Freddie lobbyists by stripping Rep. Cliff Stearns (R-Fla.) of his subcommittee’s jurisdiction over the GSEs after he scheduled hearings on Freddie Mac’s use of improper accounting procedures in 2004.

Hastert instead handed the task over to then-Rep. Michael Oxley (R-Ohio), “for whom Freddie Mac held at least 19 campaign fundraisers.”