Barney Frank's Bankrupt Ideas

Financial Rescue: Democrats created the mortgage crisis by forcing banks to give loans to people who couldn't afford them. Now Obama and Biden want bankruptcy judges to bail out the same deadbeat homeowners. And once again, Barney Frank is helping.

It's been said that history is a lie agreed upon. Democrats are trying to rewrite history by blaming the Bush administration for the current crisis and claiming that the rescue bill is necessary to save the economy from Republican mismanagement.

Last Thursday on Fox News, when Bill O'Reilly tried to suggest that both parties might share the blame, House Finance Committee Chairman Frank, in a not atypical meltdown, disowned any responsibility for his lack of oversight over the last two years and his complicity before that. Frank also claimed: "The fact is, it was 1994 that we passed a bill to tell the Fed to stop the subprime lending. We tried to get them to do it." In other words, those rascally Republicans did it all when they took control of Congress that November. The legislation he spoke of was the Homeowners Equity Protection Act. It was supposed to empower the Federal Reserve to set the rules on mortgages. Problem was, the Clinton administration had its own ideas of what the rules should be.

The Community Reinvestment Act, first passed in 1977 under Jimmy Carter, was intended to increase minority homeownership. It grew out of charges that banks were "redlining" entire inner-city neighborhoods as bad credit risks. Banks now were forced to perform outreach to these areas.

In the '70s and '80s, banks could show that they were trying to do that by advertising in minority newspapers and having representatives sit on the boards of local groups. In other words, they were rated on the effort made and not on the results achieved. Creditworthiness still mattered.

In 1995, as Howard Husock pointed out eight years ago in City Journal, "the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance."

Creditworthiness and due diligence no longer mattered. As a 1999 New York Times editorial observed: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Bill Clinton administration to expand mortgage loans among low- and moderate-income people and felt pressure to maintain its phenomenal growth in profits."

On Frank's and Clinton's watch, the Community Reinvestment Act was changed to force the issuance of bad loans. Banks would be rated on the number of loans, not on their soundness. Fannie Mae and Freddie Mac were then encouraged to buy them up. It was all about affordable housing, even if the housing was unaffordable. "From the perspective of many people, including me, this is another thrift industry growing up around us," Peter Wallison, a resident fellow at the American Enterprise Institute, said back in 1999. "If they fail, the government will have to step in and bail them out the way it stepped up and bailed out the thrift industry." That prediction came true, but it didn't have to.

On Sept. 11, 2003, the Bush administration proposed to Congress a new agency under the Treasury Department to assume supervision of Fannie and Freddie. The new agency would have had the authority to set capital-reserve requirements, veto new lines of business and determine whether the two quasi-government lenders were adequately managing the risk of their ballooning portfolios. When former Treasury Secretary John Snow pleaded for Frank to support Fannie and Freddie reform, Frank responded: "These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Democrats believe in affordable housing even if it's at the expense of the vast majority who watch their credit, work hard and pay their mortgages on time. But for the deadbeats, particularly Democratic constituencies, they have ways to make affordable the housing you couldn't afford. S o first, they forced them into housing they couldn't afford, and now they give them a financial mulligan.

In the vice presidential debate, Sen. Joe Biden said that "what we should be doing now — and Barack Obama and I support it — we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you're paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal you owe." To get this bill passed, Obama made a lot of phone calls — particularly to members of the Congressional Black Caucus, including caucus chief Rep. James Clyburn — assuring this would happen.

Those paying their mortgages on time don't get that break. Rep. Elijah Cummings said Obama told him that, if elected president, he would direct a Treasury Department official to work with homeowners in foreclosure to restructure their loans. Cummings said Obama also told him he'd seek changes in bankruptcy laws allowing judges to reduce what borrowers owe on their home loans. Section 110 of the rescue legislation has the Orwellian title of "Assistance to Homeowners" — but only for the deadbeats. It describes somebody called a "Federal property manager" who "holds, owns or controls mortgages, mortgage-backed securities, and other assets secured by residential real estate." Section 110 speaks of "modifications" that this manager can make to these mortgages including not only the reduction of interest rates but the reduction of loan principal. Not only is Uncle Sam now the world's largest landlord. He can also arbitrarily set the value of property and the amount owed on it at will, thus distorting the free market.

The vast majority of homeowners who pay their mortgages on time get the shaft. They're the ones who'll take up the others' slack. Why? And why is the Community Reinvestment Act still law?