Last month, The Atlantic published an interview with Rep. Barney Frank that set off a debate about the role Washington played (or didn't play) in the mortgage bust that triggered the Great Recession. In this, our latest installment, Rep. Frank defends his record on Fannie Mae and Freddie Mac. Read Peter Wallison's opposing argument here.
Peter Wallison's recent article in The Atlantic, "Hey, Barney Frank: The Government Did Cause the Housing Crisis," is part of his ongoing attempt to show that the private financial industry was the victim, not the cause, of the financial crisis.
Mr. Wallison protests my characterization of him in a recent interview in The Atlantic as "a real extremist." Yet his article again proves his extremism which is marked by his denial that a failure of regulation of reckless or imprudent practices in the private financial services industry played any significant role in the crisis, and his complete rejection of the regulatory reforms in the 2010 Wall Street Reform and Consumer Protection Act.
It is important to remember that Wallison's unique interpretation of the financial crisis has been rejected by every other member of the Financial Services Inquiry Commission, including the three Republican commissioners on the panel. Wallison's disagreement with the other members was so strong that he refused to sign their dissent and instead wrote his own dissent to the majority opinion. In subsequent Congressional testimony Wallison referred to them disparagingly as the "The Group" because he found them woefully inadequate because in his mind they did not place sufficient blame on the government for the housing crisis. A report on the FCIC by Democratic members of the House Oversight Committee revealed the degree to which other commissioners struggled to deal with Wallison's extreme position.
Mr. Wallison is also far out of the mainstream in his recommendations for dealing with Fannie Mae and Freddie Mac. In 2009 and 2010, while Democrats were working to pass the financial reform law that Mr. Wallison believes to be wholly unnecessary, the Republican Members of the Financial Services Committee offered a bill drafted by Mr. Wallison which would abolish Fannie and Freddie without putting anything in their place to support the mortgage market. Senator Dodd, I and many other Democrats believed that a new system was needed, but we did not think that abolishing Fannie and Freddie without creating some kind of arrangement for the guarantee of securitizations of 30-year mortgages would adequately serve our nation's housing needs. The Republican members of the House-Senate Conference Committee were contemptuous of our position, and they pushed hard to get us to adopt the bill which Wallison had drafted.
This year, House Republicans abandoned Wallison's position. As the majority party in the House, Republicans have the power to advance Wallison's legislation to abolish Fannie and Freddie. But they are fully aware that groups concerned with housing - realtors, homebuilders, lenders, low-income housing advocates, etc. - believe that Mr. Wallison's approach would be a disaster. For this reason, Republicans did not even introduce the bill the until after we embarrassed them by noting its absence. The current posture of the Republican committee leadership, articulated by Congressman Scott Garrett, Chairman of the relevant subcommittee, is that they cannot move on the bill because they need guidance from Secretary Geithner; they cannot act on their own principles and views until the Obama administration tells them how to do it. The fact is that they cannot advance the bill because they know it is too extreme.
Wallison's positions are formulated on the basis of his extremely selective account of the financial crisis and steps taken to address its causes. For example, he omits mention of the passage in 1994 of the Homeowners Equity Protection Act (HOEPA), which directed the Federal Reserve to establish rules to prevent mortgages from being given to people who could not afford them. A decade later, as the housing bubble inflated, Federal Reserve Chairman Alan Greenspan refused to use the power given to him under this law to restrict predatory lending, arguing that free markets would naturally lead to the best results. In 2008, after the peak of the financial crisis, Greenspan appeared before the House Committee on Government Oversight and admitted that his assumptions had been wrong. "I found a flaw," he told Chairman Henry Waxman. "I don't know how significant or permanent it is, but I've been very distressed by that fact." Wallison has apparently not yet discovered this flaw.
Wallison criticizes me for having said in 2003 that I was for "rolling the dice" on Fannie and Freddie. But his memory for the period between 2004 and 2008 becomes extremely selective to the point of being dishonest. In 2004, the administration of President George W. Bush began a conscious plan of trying to increase levels of homeownership as part of its "Ownership Society," raising affordable housing targets for Fannie and Freddie. I opposed this policy because I thought people could end up with mortgages they could not afford. Wallison also omits Democratic efforts to pass legislation to reduce predatory lending -- this was blocked on direct orders by House Majority Leader Tom DeLay. He also conveniently ignores the fact that my Democratic colleagues and I worked with moderate House Republicans to try to pass legislation to increase regulation of Fannie Mae and Freddie Mac -- this was killed by the Bush administration, which according to Republican Chairman Mike Oxley, "gave us the one-finger salute." Finally, he omits the fact that in 2007 House Democrats passed an even stronger Fannie and Freddie bill which later became law. The legislation allowed Bush Treasury Secretary Henry Paulson to put Fannie Mae and Freddie Mac into conservatorship, arresting behavior that could cause further losses. The law has won widespread praise.
To be fair, there is one aspect of Wallison's piece in the Atlantic which reveals a partial retreat from his extremist positions. Mr. Wallison has long contended that the 1977 Community Reinvestment Act was a significant cause of the financial crisis. In page 85 of his dissent to the Financial Crisis Inquiry Commission report, Wallison writes that "the most controversial element in the vast increase in NTMs (non-traditional mortgages) between 1993 and 2008 was the role of the CRA." But in his response to my characterization of him as an extremist, he now repudiates his earlier position, writing that "As far as I can tell, CRA was a relatively small contributor to the crisis, when compared to the GSEs and the affordable housing requirements."
This is small but significant retreat from Wallison's very extreme position on the financial crisis. But overall his views remain clearly on the furthest margin of opinion, rejected even by his three Republican colleagues on the Financial Crisis Inquiry Commission and by conservative members of the House Financial Services Committee.
Update: Peter Wallison responded to The Atlantic via email. Here is his response in full:
There's no point in trying to respond to every one of Congressman Frank's statements and allegations. Almost every one of them is false. Instead, to show the quality of his recollections and respect for the truth I will simply address one point in his posting.
He writes: "Wallison criticizes me for having said in 2003 that I was for "rolling the dice" on Fannie and Freddie. But his memory for the period between 2004 and 2008 becomes extremely selective to the point of being dishonest. In 2004, the administration of President George W. Bush began a conscious plan of trying to increase levels of homeownership as part of its "Ownership Society," raising affordable housing targets for Fannie and Freddie. I opposed this policy because I thought people could end up with mortgages they could not afford."
In response, I will only quote an excerpt from a congressional letter to President George W. Bush, dated June 28, 2004, on which Congressmembers Frank and Nancy Pelosi were the principal signatories:
We write as members of the House of Representatives who continually press the GSEs to do more in affordable housing. Until recently, we have been disappointed that the Administration has not been more supportive of our efforts to press the GSEs to do more. We have been concerned that the Administration's legislative proposal regarding the GSEs would weaken affordable housing performance by the GSEs, by emphasizing only safety and soundness. While the GSEs' affordable housing mission is not in any way incompatible with their safety and soundness, an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing.
We have been led to conclude that the Administration does not appreciate the importance of the GSE's affordable housing mission, as evidenced by its refusal to work with the House and Senate on this important legislation. It now appears that, because Congress has not been willing to jeopardize the GSE's mission, the Administration has turned to attacking the GSEs publicly. We are very concerned that the Administration would work to foster negative opinions in the financial markets regarding the GSEs, raising their cost of financing. If the intent is to get prohousing members of Congress to weaken their support of the GSEs' mission, it is a mistaken strategy.
Our position is not based on institutional loyalty, but on concern for the GSE's affordable housing function. We appeal to you to agree to work on legislative proposals that foster sound oversight and vigorous affordable housing efforts instead of mounting assaults in the press. We also ask you to support our efforts to push the GSEs to do more affordable housing.
Here, in writing, is evidence of the credibility that should be attached to anything Congressman Frank says--not only about me, but about anyone who disagrees with him. He can call me dishonest, but he cannot run away from the words he has written.
Update II: ... and Barney Frank responded to Peter Wallison's response, with an email pasted below, in full:
In his latest response to a recent article I had written as part of our debate about the causes of the housing crisis, Peter Wallison made a valid criticism about one point.
After I had drafted the piece and realized that it was too long, it was edited in my office to cut it to proper length. In the course of editing, we made a critical mistake -- my description of the 2004 Bush administration policy ordering Fannie Mae and Freddie Mac to raise the percentage of loans they bought for mortgages to people below the medium income from 50% ultimately to 57% was compressed to read "affordable housing targets for Fannie and Freddie." Unfortunately, this re-wording drastically changes the meaning of my sentence, obliterating the distinction between affordable housing in general and programs to increase the level of homeownership in particular. I was careless and in not catching this mistake.
As the article appeared in print Peter Wallison was right to quote my 2004 letter in support of affordable housing goals as a contradiction of what I had written in my previous article. That's why the distinction lost in the editing of my article is a critical one.
In the GSE context the term "affordable housing" includes a number of activities, and to me the most important of these is support for multi-family rental housing. As I have consistently made clear in a number of places, I and other housing advocates use the phrase "affordable housing" to refer to low-income rental housing, rather than to "low-income homeownership" which we describe using exactly that phrase.
Thus, there is no contradiction between what I had originally written and meant to convey in my recent article in the Atlantic, and the 2004 letter which Mr. Wallison cites.
I continue to be supportive of strong federal efforts to facilitate multi-unit rental housing for low-income people. It is important to note that the multi-family rental housing business of Fannie Mae and Freddie Mac did not contribute to their financial problems.
I have tried through these debates to clearly differentiate between homeownership and affordable rental housing. I apologize for my sloppiness in not catching the error in my edited piece which gave Mr. Wallison an opening of which he understandably took advantage.