Subtitle H, Dodd-Frank FinReg

Most people have very little knowledge of exactly how we ended up in such a terrible mess in the real estate and mortgage markets. Much of what we think we understand comes from special interests on all sides of the debate. What most people do not know is that Congress has published a surprisingly unvarnished account of how the stage was set for disaster, and it appears in the last section of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, signed into law in July, 2010, by President Obama.

Subtitle H of the Act was how Congress addressed the elephant in the room, the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac. There is no shortage of blame to go around, for the tweaking of the GSE mission was the product of Democratic and Republican administrations and congresses weighted disproportionately toward both parties over the period these tweaks were made. It appears ironic that Subtitle H is near the very end of what arguably qualifies as a bafflingly overcomplicated and huge maze of new rules, regulations and expansive bureaucracy.

Essentially, Congress was admitting that the GSEs were a central --if not the central-- cause of the mortgage meltdown and ensuing Great Recession, yet Congress did not one thing to amend the GSEs' position in the market, other than to make this statement in Section 1491 (b): "It is the sense of the Congress that efforts to enhance by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac." A fair conclusion one is invited to draw is that in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it took Congress over 300,000 words (that is about one-half the size of the combined Old Testament and New Testament of the Bible) to fix Wall Street and protect consumers, but only 554 words to define the fundamental and persisting problem (GSEs) and decide that other people should really do something about it later.

SEC. 1491. SENSE OF CONGRESS REGARDING THE IMPORTANCE OF GOVERNMENT-SPONSORED ENTERPRISES REFORM TO ENHANCE THE PROTECTION, LIMITATION, AND REGULATION OF THE TERMS OF RESIDENTIAL MORTGAGE CREDIT.

(a) FINDINGS.—The Congress finds as follows:
(1) The Government-sponsored enterprises, Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), were chartered by Congress to ensure a reliable and affordable supply of mortgage funding, but enjoy a dual legal status as privately owned corporations with Government mandated affordable housing goals.
(2) In 1996, the Department of Housing and Urban Development required that 42 percent ofFannie Mae’s and Freddie Mac’s mortgage financing should go to borrowers with income levels below the median for a given area.
(3) In 2004, the Department of Housing and Urban Development revised those goals, increasing them to 56 percent of their overall mortgage purchases by 2008, and additionally mandated that 18 percent of all mortgage purchases by Fannie Mae and Freddie Mac be ‘‘special affordable’’ loans made to borrowers with incomes less than 60 percent of an area’s median income, a target that ultimately increased to 28 percent for 2008.
(4) To help fulfill those mandated affordable housing goals, in 1995 the Department of Housing and Urban Development authorized Fannie Mae and Freddie Mac to purchase subprime securities that included loans made to low-income borrowers.
(5) After this authorization to purchase subprime securities, subprime and near-prime loans increased from 9 percent of securitized mortgages in 2001 to 40 percent in 2006, while the market share of conventional mortgages dropped from 78.8 percent in 2003 to 50.1 percent by 2007 with a corresponding increase in subprime and Alt-A loans from 10.1 percent to 32.7 percent over the same period.
(6) In 2004 alone, Fannie Mae and Freddie Mac purchased $175,000,000,000 in subprime mortgage securities, which accounted for 44 percent of the market that year, and from 2005 through 2007, Fannie Mae and Freddie Mac purchased approximately $1,000,000,000,000 in subprime and Alt-A loans, while Fannie Mae’s acquisitions of mortgages with less than 10 percent down payments almost tripled.
(7) According to data from the Federal Housing Finance Agency (FHFA) for the fourth quarter of 2008, Fannie Mae and Freddie Mac own or guarantee 75 percent of all newly originated mortgages, and Fannie Mae and Freddie Mac currently own 13.3 percent of outstanding mortgage debt in the United States and have issued mortgage-backed securities for 31.0 percent of the residential debt market, a combined total of 44.3 percent of outstanding mortgage debt in the United States.
(8) On September 7, 2008, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, with the Treasury Department subsequently agreeing to purchase at least $200,000,000,000 of preferred stock from each enterprise in exchange for warrants for the purchase of 79.9 percent of each enterprise’s common stock.
(9) The conservatorship for Fannie Mae and Freddie Mac has potentially exposed taxpayers to upwards of $5,300,000,000,000 worth of risk.
(10) The hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive.
(b) SENSE OF THE CONGRESS.—It is the sense of the Congress that efforts to enhance by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac.