Special Report falsely suggested Fannie and Freddie chief perpetrators of "financial mess," Rep. Frank opposed stricter oversight

During the September 24 edition of Fox News' Special Report, host Brit Hume said, "Many financial analysts are saying that if mortgage giants Fannie Mae and Freddie Mac had been effectively regulated years ago, the supercharged subprime mortgage meltdown that led to the current financial mess would either never have happened or would have been nowhere near as severe." Purporting to, "examine the timeline. What were those warning signs? Who raised them? And who disputed them?" chief White House correspondent Bret Baier then falsely suggested that Rep. Barney Frank opposed stricter oversight of Fannie Mae and Freddie Mac. Baier aired two comments Frank made in 2003 expressing confidence in Fannie Mae and Freddie Mac and asserted that oversight legislation "was blocked," while omitting entirely any mention of Frank's support for a bill in 2005 and, as chair of the committee, his spearheading legislation in 2007 to strengthen oversight of Fannie Mae and Freddie Mac.

Contrary to Hume's suggestion that Fannie Mae and Freddie Mac are largely responsible for the "current financial mess," economist Dean Baker recently reported that the accusation that "the financial crisis is attributable to the close government relationship with Fannie Mae and Freddie Mac" is "obviously not true." He wrote: "Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded."

Indeed, in a 2006 Securities and Exchange Commission filing covering its activities in 2004, Fannie Mae stated (report available here): "We did not participate in large amounts of these non-traditional mortgages in 2004 and 2005." In the report, Fannie Mae also noted the growth of subprime lending and reported, "These trends and our decision not to participate in large amounts of these non-traditional mortgages contributed to a significant loss in our share of new single-family mortgage-related securities issuances to private-label issuers during this period." In a 2006 Federal Reserve analysis, Souphala Chomsisengphet, a financial economist at the Office of the Comptroller of the Currency, and Anthony Pennington-Cross, a senior economist at the Federal Reserve Bank of St. Louis, reported that the value of the subprime market had increased from $65 billion in 1995 originations to $332 billion in 2003.

Moreover, Baier and Hume completely omitted any mention of Frank's efforts in passing legislation providing greater oversight of Fannie and Freddie. In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to oversee the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed certain restrictions on the kinds of nonprofit organizations that could receive funding under the bill.

Frank also said during the House's debate on the bill:

The committee voted on this bill. It is contentious as anything I would write, as anybody would write. It is a good bill which sets up a world-class regulator. Much of what has been said on that side I agree with. Then the Republican Study Committee, the most conservative Members of the House who appear to be able to run the House by using their influence with the majority leadership, an influence which does not seem to have changed since the majority leadership changed, they were able to take this bill hostage.

They tried to kill this whole thing. Members on their side now say, we are for doing this affordable housing. Well, then why did they try to kill it? There was an amendment to kill the whole affordable housing fund, not restricted. It lost 53 to 17, and so then they went to the majority leader and said we cannot win a fair fight. Hijack the bill.

In early 2007, as Media Matters for America previously documented, as chairman of the House Financial Services Committee, Frank sponsored H.R. 1427, a bill to create the Federal Housing Finance Agency (FHFA), granting that agency "general supervisory and regulatory authority over" Fannie Mae and Freddie Mac, and directing it to reform the two companies' business practices and regulate their exposure to credit and market risk. Among other things, Frank's legislation, titled the "Federal Housing Finance Reform Act of 2007," directed the FHFA director to "ensure" that Fannie Mae and Freddie Mac "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls" and to establish standards at those two entities for "management of credit and counterparty risk" and "management of market risk."

The legislation also required the FHFA director to "establish standards by which the portfolio holdings, or rate of growth of the portfolio holdings, of the enterprises will be deemed to be consistent with the mission and the safe and sound operations of the enterprises." In addition, it authorized the director to "require" a regulated entity "to dispose of or acquire any asset, if the Director determines that such action is consistent with the purposes of this Act or any of the authorizing statutes." In May 2007, the House passed H.R. 1427. The Senate did not act on the legislation.

The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were "similar" to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.

From the September 24 edition of Fox News' Special Report with Brit Hume:

BRIT HUME (host): Many financial analysts are saying that if mortgage giants Fannie Mae and Freddie Mac had been effectively regulated years ago, the supercharged subprime mortgage meltdown that led to the current financial mess would either never have happened or would have been nowhere near as severe.

Chief White House correspondent Bret Baier rejoins us now to examine the timeline. What were those warning signs? Who raised them? And who disputed them?

[begin video clip]

BAIER: The Bush administration raised red flags starting in April 2001. The '02 budget request declares that the size of mortgage giants Fannie Mae and Freddie Mac is, quote, "a potential problem" because financial trouble and either one of them could, quote, "cause strong repercussions in financial markets."

In 2003, the White House warning about Fannie and Freddie was upgraded to a systemic risk that could spread beyond just the housing sector. In fall of '03, the Bush administration was pushing Congress hard to create a new federal agency to regulate and supervise Fannie and Freddie, both government-sponsored enterprises, or GSEs.

JOHN SNOW (former Treasury secretary): We need a strong, world-class regulatory agency to oversee the prudential operations of the GSEs and the safety and the soundness of their financial activities.

BAIER: But then-Treasury Secretary Snow was getting a lot of pushback from then-ranking member, now chairman of the House Financial Services Committee, Democratic Congressman Barney Frank.

FRANK: Fannie Mae and Freddie Mac are not in a crisis.

BAIER: In fact, Frank said the federal government should be encouraging Fannie and Freddie to do more to get low-income families into homes, and he believed too many people had a "sky is falling" mentality.

FRANK: The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. And even if there were a problem, the federal government doesn't bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.

BAIER: The legislation was blocked. In 2005, Fed Chairman Alan Greenspan added his voice on Fannie and Freddie, after Fannie leaders admitted major accounting screwups. Quote, "Enabling these institutions to increase in size -- and they will once the crisis in their judgment passes -- we are placing the total financial system of the future at a substantial risk."

Adding later at another hearing on the topic --

GREENSPAN: If we fail to strengthen GSE regulation, we increase the possibility of insolvency in crisis.

BAIER: But the two mortgage giants had staunch defenders. Democratic Senator Charles Schumer said, quote, "I think Fannie and Freddie over the years have done an incredibly good job and are an intrinsic part of making America the best-housed people in the world. If you look over the last 20 or whatever years, they've done a very, very good job."

Senator John McCain co-sponsored legislation pushing for regulation, delivering a speech on the Senate floor in 2006. Quote, "For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac. And the sheer magnitude of these companies and the role they play in the housing market, the GSEs need to be reformed without delay."

[end video clip]

BAIER: That bill made it out of the Senate Banking committee with a party-line vote. All of the Democrats voted against it. But fearing that they didn't have the votes to pass it, Republicans didn't even bring it up on the Senate floor. Senator Obama did not weigh in on that bill. Brit.

HUME: All right, Bret. Thank you very much.