Lonnie Glessner

Besides the forcing of the Community Reinvestment Act or CRA on steroids onto Fannie and Freddie and thousands of banks by President Clinton's administration and the complete lack of oversight by Congress over Fannie and Freddie because of the $200 million doled out to Congress members and their favorite special interests by Fannie and Freddie, there are three more things those dastardly politicians did to help create this mess.

First, in 1999 Congress overwhelmingly passed the Gramm-Leach-Billey Act aka the Financial Service Modernization Act. This act partially repealed the Glass-Steagall Act of 1933 which had prohibited commercial banks from operating investment bank type operations which are considered riskier.

This bill's purpose was to allow U.S. commercial banks to better serve clients in the 21^st century and to compete more effectively in the 21^st century. However, the bill allowed banks to become too big to fail. This was predicted by the late Minnesota Democratic Senator Paul Wellstone in 1999.

But, the bill passed the House on a 362-57 vote and the Senate by a 90-8 vote and was immediately signed by President Clinton with the full support of his Treasury Secretary Robert Rubin.

Today, many Democrats who voted for this bill are now blaming this bill for today's problems. Personally, this bill has allowed some commercial banks to grow too big and has made this Mess worse; but it is a symptom and not a cause. Unfortunately, this trend continues today with the purchase of Wachovia by Wells Fargo and WAMU by Chase. But, the next bill that passed in 2000 probably deserves more blame in my opinion.

"In 2000 Congress passed the Commodities Futures Modernization Act, which deregulated the market for credit-default swaps" according to Greg Griffin writing in the Denver Post on 10/5/08. These derivative type financial instruments have led billions of dollars of losses especially at AIG that has been bailed out by the Treasury with a $85 billion loan. This bill was supported by both parties as a good thing.

Then in 2004 the SEC reduced the leverage constraints of the largest investment banks. Now a Bear Stearns or other Wall Street firm only needed $1 in assets for every $30 in liabilities. Previously the limit was $1 to $15. When Bear Stearns folded this year their ratio was at 33. OUCH!

This occurred under President Bush's watch and he or his administration can be rightly blamed for this; but honestly, according to Dean Baker, co-director of the liberal Center for Economic and Policy Research, who said, "the SEC showed little interest in regulating derivatives under Clinton or Bush." (Source: Sean Higgins writing in the Investor's Business Daily)

Stay tuned for the final reason for the Mortgage Mess tomorrow.

In 1999 Treasury Secretary under President Clinton, Lawrence Summers "warned Congress in 1999 of the ‘systemic risks' posed by Fannie and Freddie, Congress held hearings the next year" according to Terry Jones of Investor's Business Daily.

Nothing was done however.

In 2000 the Mr. Summers' UnderSecretary Gary Gensler testified in front of Congress on the need for more power by the regulator, OFHEO, of Fannie and Freddie and to seek an end to the "implicit" guarantee of their loan portfolio. (source: Terry Jones 9/25/08 article) Mr. Gensler was rebuffed by Congress and nothing was done.

President Bush entered the White House in January 2001 and in April his budget stated that the sheer size of Fannie and Freddie created potential problems for the financial system. According to several sources President Bush or his administration tried a total of 17 times to pass significant legislation reforming Fannie and Freddie. I will cite a few examples for you.

First, in September 2003 Treasury Secretary John Snow recommended to Congress a new regulator for Fannie and Freddie be formed. The NY Times called this "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." It was rejected.

Second, in February 2004 the President again asked for a new regulator and requirements that Fannie and Freddie have more capital to protect taxpayers. He was ignored again by Congress.

Third, in August 2007, after the subprime meltdown had started, President Bush again asked Congress to reform Fannie and Freddie. Each of these 17 times President Bush was rebuffed. Why? I will come back to that in a minute.

In 2005, Alan Greenspan told Congress, "We are placing the total financial system of the future at substantial risk" referring to Fannie and Freddie. He too was rebuffed by Congress.

Also in 2005, Senator John McCain was one of three sponsors of a new bill to reform Fannie and Freddie called The Federal Housing Enterprise Regulatory Reform Act of 2005. Senator McCain said, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole." (Source: Terry Jones writing in the Investor's Business Daily on 9/29/08)

This bill won approval in the Senate Banking Committee; but went no further.

In 2006 it was revealed that Fannie Mae had overstated their earnings from 2001-2004 by an estimated $9.3 billion! In comparison the Enron Accounting Scandal was a mere $1.1 billion. As a result Fannie Mae paid a $400 million civil fine to OFHEO and the SEC. In September 2008 Franklin Raines, Fannie's former CEO, and two other former chief executives of Fannie agreed to pay $24.7 million to settle a civil lawsuit for manipulating the company's earnings thru an Enron-like accounting scandal.

Don't pity Mr. Raines too much though as he "earned" over $90 million in bonuses and stock options during his time at Fannie while cooking the books. Plus, he received a $19 million severance package or Golden Parachute when he "resigned" in December 2004 after this scandal first surfaced.

Why in each case since 2000 did Congress not listen to and act to reform Fannie and Freddie? They ignored Clinton's Treasury Secretary, President Bush's Administration, Alan Greenspan, OFHEO, the HUGE accounting scandals, and other Senators? Money!

It is mind boggling to me that Congress went after Enron and its executives hard for their fraud and rightfully so. In fact, Enron became their Poster Child for bad corporate behavior. But, very little happened with Fannie Mae and their cooking of the books even though their scandal was 9 times larger!

Barney Frank, Chris Dodd, and Harry Reid, three of the top four leaders of the Democrat Party in Congress have all been huge supporters of Fannie and Freddie and have always denied that there were any problems with them. Plus, they have been huge recipients of money from Fannie and Freddie. Thus, no bill was ever passed to reform Fannie and Freddie.

Here is a quote from each of the three Democrats named above-

Harry Reid in 2005 "accused the GOP of trying to ‘cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding homeownership.'" (Source: Terry Jones in the Investor's Business Daily 9/29/08)

In the summer of 2007 AFTER the subprime meltdown had begun Senator Chris Dodd "called on President Bush to ‘immediately reconsider his ill-advised reform proposals.'" (Source: Al Hubbard and Nom Neusner, Op-Ed, "Where Was Senator Dodd?" The Washington Post 9/12/08)

For Barney Frank it's hard to choose just one quote out of the dozens available about his undying support for Fannie and Freddie. So I will go with these two quotes from the Wall Street Journal Editorial titled, "Fannie Mae's Patron Saint" written 9/10/08-

A month after Freddie Mac's own multi-billion dollar accounting scandal erupted in 2003, Mr. Frank said, "I do not think we are facing any kind of a crisis at this time."

In April 2004 after Fannie went public with their own accounting scandal, Mr. Frank said, "Fannie and Freddie posed no risk to taxpayers. Adding that I think Wall Street will get over it if the two collapsed."

I will say this: Republicans had control of Congress from 1995 through 2006 and they were unable to pass anything because several of their own members were receiving "bribe" money from Fannie and Freddie as well. Plus, the Democratic leaders would often call any Republican, names like "racist" if they brought up the subject of reform of Fannie and Freddie. They remind me of my 4 year old daughter.

But, I could not find any Democratic support of reforming Fannie and Freddie in Congress using Google. If you Google "Democrat Reform Fannie" or "Democrat Reform Freddie" all you get in the first 50 results is how Democrats always blocked any efforts to reform Fannie and Freddie. I was surprised by this.

I will end this post with two final quotes. First, as reported by Dominic Lawson in The Independent, he quoted Alabama Congressman Artur Davis: "Like a lot of my Democrat colleagues I was too slow to appreciate the recklessness of Fannie and Freddie when in retrospect I should have heeded the concerns raised. I wish my Democrat colleagues would admit that we were wrong."

On 9/25/08 President Clinton appeared on ABC's "Good Morning America" and said this: "I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress, or by me when I was President, to put some standards and tighten up a little on Fannie Mae and Freddie Mac."

To learn more please watch the following YouTube video-

http://uk.youtube.com/watch?v=1RZVw3no2A4&feature=iv&annotation_id=event_597487

I believe the number one reason for my success this year and this year has been my best year ever financially, is the training I have received from Achievement Dynamics, which is part of Sandler Sales Training. Debbie Scott my coach will be my next speaker for my Business Success Lunch on November 6^th at 11:30 AM at the SMDRA (South Metro Denver Realtor Association) office.

Here is why you MUST attend this Business Success Lunch-

1. First she will discuss various hidden roadblocks and barriers that all sales people encounter regardless of their experience level, and especially during a "down economy":
   • • Tired of hearing "this isn't a good time"?
     • Frustrated and confused about how to deal with prospects that ask you to do unpaid consulting before they've committed to hire you?
     • Mad about a drop in your "bottom line" and not sure how to stop it?
2. Next she will explain why those roadblocks are happening.
3. And finally she will talk about a 7 step process and a unique philosophy called "Discovery Selling" that will describe how to overcome those roadblocks and barriers.

Because of the POWER of this seminar I am sure it will "sell out" quickly. Thus, RSVP right away by email to me. PLUS LUNCH IS FREE.

Each week I write a newsletter that I email to my referral partners and i have received hundreds of compliments in the last year for my newsletter from Realtors. Thus, I thought I want to share it with you the Active Rain Community which I just joined this year. Please let me know what you think.

Financial News

•· Pimco, the world's largest bond investment firm announced earlier this week that at the end of September 79% of their portfolio was in mortgage bonds! They are smart as mortgage bonds are paying an extra 2% in yield above a Treasury Bond with NO MORE RISK! When will the rest of the market catch on?

•· The FHFA, formerly OFHEO, reiterated again that Fannie and Freddie's debts and mortgage bonds are backed explicitly by the government.

•· The Fed is expected to cut short-term rates, the Fed Funds Rate, next Wednesday by ½% to 1.00%. Thus, the Prime Rate would drop to 4%. There is even talk that the Fed may lower rates even further in the future. Now remember, a large majority of the time when the Fed lowers short-term rates, mortgage rates RISE due to the lower rates causing long-term inflation and a weaker Dollar.

•· Britain's economy shrank for the first time in the 3^rd quarter in 16 years! Since the Bank of England and the ECB are so far behind the curve as the world sinks into a recession I expect quick and massive rate cuts in Europe. This action will affect 2 things here in the States; first, the Dollar will strengthen further. Second, with lower interest rates in Europe the rates on our debts like mortgage bonds will start to look more attractive, hopefully causing mortgage rates to drop as more buyers step in.

•· Speaking of the Dollar, the Dollar has gained 9 cents against the Euro this week. Now, it only takes $1.26 to buy a $1.00 Euro. This summer it hit as high as $1.55 needed to buy $1 Euro.

•· And a stronger Dollar means lower oil prices as oil is sold in Dollars. Proof in point: oil prices are down over $3 today to under $65 a barrel in spite of OPEC's announcement of less production.

Loan Update

•· I am hearing rumors that FHA will very soon limit cash out refinances back to 85% LTV from the current 95% LTV.

•· PMI is no longer available on investment properties anywhere. You must put 20% down and your buyers may want to put 25% down as the discount fee drops from 3.00% to 1.75% with 25% down.

•· Great News-You can now refinance a non-VA loan into a VA loan up to 100% LTV; previously the max LTV was only 90% on these loans.

•· VA loans can once again feature 3/1 and 5/1 ARMs through September 30^th 2012.

•· Don't forget FHA's $100 down payment program is back for home buyers buying HUD owned homes in CO. FHA will no longer pay the closing costs for the buyer; instead they are allowing the buyer to finance their closing costs and pre-paids up to 110% of the home's value. Not really smart by FHA; but what do you expect from the government?

•· One of our FHA lenders is no longer offering FHA loans on manufactured homes and I expect more lenders to follow suit due to investors' lack of demand for this property type.

Mortgage Mess Part 9

Who was in charge of being the watchdog for Fannie Mae and Freddie Mac. Who was protecting our interests and money as taxpayers? Until the Treasury's takeover of Fannie and Freddie this September it was OFHEO or the Office of Federal Housing Enterprise Oversight, which was an arm of the Department of Housing and Urban Development or HUD.

According to Terry Jones writing for the Investor's Business Daily on September 25^th, "OFHEO was unique among federal regulators in that it had to go back each year to Congress for its budget. This assured total dependence on Congress-a less than ideal situation for a regulator."

As a former accountant you never want an auditor to receive their budget from the company being audited. That's a recipe for "book cooking" like never seen before. That makes for a very weak and impotent regulator. You could say that OFHEO was asleep at the wheel, but they did not have a wheel in front of them or even a car to drive, because of Congress who kept them on a short lease budget-wise.

Terry Jones goes on to say in this article, "Over the next decade or so, Fannie and Freddie made sure that OFHEO stayed off their backs, funneling $200 million to various political causes and community activists while donating to 354 political candidates of both parties."

How did that help you ask? Since OFHEO had to ask for money each year from Congress to regulate Fannie and Freddie who were donating millions to Congressmen and women and to their special interests, it was very difficult for OFHEO to get the needed money to regulate Fannie and Freddie. Money talks!

So, let's follow the money. Who were the top recipients of money from Fannie and Freddie? Which party received the most money?

According to OpenSecrets.com from 1989 thru 2008 Fannie and Freddie gave a total of $4.8 million to 354 political candidates. These contributions include money from their PAC's and their employees. 57% of the $4.8 million was given to Democratic candidates.

The top 3 recipients are Senator Chris Dodd who heads the Senate Banking Committee with over $165k received, Senator Obama with $126k collected in just 3 years, and Senator John Kerry who has collected $111k. Two Republicans, Senator Robert Bennett and Congressman Spencer Bachus have each received over $100k.

I wonder how much of the $200 million from above ended up in the hands of politicians after the initial funding by Fannie or Freddie to another group?

It's amazing what money can do to people.