White House Press Secretary Dana Perino, asked by a reporter Wednesday if the Bush administration’s "deregulatory approach" helped create the housing and financial market meltdown, deflected blame to Congress.

Perino said Congressional lawmakers have thwarted HUD’s attempts to overhaul the Real Estate Settlement Procedures Act (RESPA), and only passed legislation to modernize FHA and strengthen oversight of Fannie Mae and Freddie Mac after years of haggling.

White House Press Secretary Dana Perino, asked by a reporter Wednesday if the Bush administration’s "deregulatory approach" helped create the housing and financial market meltdown, deflected blame to Congress.

Perino said congressional lawmakers have thwarted HUD’s attempts to overhaul the Real Estate Settlement Procedures Act (RESPA), and passed legislation to modernize FHA and strengthen oversight of Fannie Mae and Freddie Mac only after years of haggling.

"We’ve been calling for years for (government-sponsored enterprises’) reform, and Congress did not act until there was a crisis at hand," Perino said. "We asked for RESPA reform, which would help people clarify their closing costs, so that everybody understands exactly what they’re getting into. Congress failed to act. We are now in the middle of a rule-making process that the Democrats are trying to block. There’s FHA modernization that we asked for, so that we could improve that agency. We didn’t get that legislation until there was a crisis."

Housing Secretary Steve Preston took a similar tack Wednesday, telling members of the Exchequer Club in Washington, D.C., that it was "absolutely reprehensible" that Congress is fighting HUD’s latest attempt at overhauling RESPA, "especially when they know so many families are in trouble because they didn’t understand the terms of their mortgage" (see Inman News story).

HUD says a proposal unveiled in March to change the way mortgages and settlement services are marketed and sold could save consumers up to $8.35 billion a year by helping them do a better job of comparison-shopping and making lenders compete harder for their business. Congress has been sympathetic to the industry’s complaints that the changes would do more harm than good, and could block their implementation as it did in derailing an earlier RESPA reform plan the administration rolled out in 2002.

While RESPA reform is still in play, many of the important decisions about the role Fannie Mae, Freddie Mac and the Federal Housing Administration will play in the eventual recovery of housing markets have already been made.

The sweeping housing bill passed July 30 included legislation overhauling oversight of Fannie and Freddie and included many aspects of the FHA modernization legislation sought by the administration (although the battle over seller-funded down-payment assistance and risk-based pricing of FHA premiums continues).

The Sept. 7 decision to place Fannie and Freddie under government conservatorship and provide a backstop of up to $200 billion in funding means that borrowers — at least those who meet Fannie and Freddie’s underwriting standards — can still rely on secondary markets to provide hundreds of billions in funding. Interest rates have been falling since the bailout, and while the resulting surge in mortgage applications is largely driven by borrowers seeking to refinance, favorable rates could also kick-start housing sales.

But with the November election fast approaching and the economy likely to be a deciding factor in the minds of many undecided voters, Democrats and Republicans will undoubtedly continue to expend considerable energy in coming weeks directing the finger of blame at each other.

Rep. Barney Frank, D-Mass., who chairs the powerful House Financial Services Committee, this week lashed out at a Wall Street Journal editorial, "Fannie Mae’s Patron Saint," that portrayed him as "a stalwart opponent" of strengthened oversight of Fannie Mae and Freddie Mac "going back more than a decade."

Frank objected that his support for "GSE reform" (referring to the reform of Fannie and Freddie) dates back to 2005, when the House passed legislation tightening oversight of Fannie and Freddie that became bogged down in the Senate.

When Frank became chairman of the House Financial Services Committee at the end of January 2007, the committee quickly passed a GSE reform bill that included the increased oversight requested by the administration, he said. Although the committee approved the bill in March and the House followed suit in May, more than a year would pass before the Senate would get on board and put a bill on President Bush’s desk (the sweeping housing bill, HR 3221, passed July 30).

"I am not surprised to find myself in disagreement with the Wall Street Journal on what the government’s role should be in helping to build affordable housing, but I am very surprised and deeply disappointed that they would present my view in an intellectually dishonest way and then refuse to allow me the chance to correct their distortions in a timely manner," Frank said when the paper took its time publishing his response (the editorial was published Sept. 9, and Frank responded to the Journal the same day. He issued a press release on Sept. 16 complaining that the letter had not run, and the Journal published it the next day).

If assigning blame for the housing boom-bust and ensuing credit crunch is crucial to winning the White House in November, MarketWatch editor-in-chief David Callaway thinks Barack Obama has an edge.

The crisis, Callaway writes, is "the death knell for the idea that markets and Wall Street can police themselves," an idea "more closely connected to the current administration and John McCain’s party than Obama’s Democrats." By "pulling Wall Street from the burning house," Callaway says, Treasury Secretary Henry Paulson is helping usher Obama into the White House.

Regulation is "on the minds of the voters and the lips of the politicians as we witness the largest financial meltdown since the Great Depression," writes Boston University law professor Cornelius Hurley, who agrees in a guest column for Reuters that the crisis gives Obama an edge.

Callaway, Hurley and other observers are less likely to focus on RESPA, GSE reform and FHA modernization as the root cause of today’s mess than the deregulation of financial institutions in 1999, which revolutionized the way mortgages were financed.

The repeal of the Glass-Steagall Act, which separated commercial banking from investment banking, and the passage of the Gramm-Leach-Bliley Act, which left investment banks largely free of regulatory oversight, "sowed the seeds of destruction" and fueled the use of SIVs, CDOs, credit default swaps, CLOs and alt-A mortgages, Hurley writes.

Hurley, a former assistant general counsel of the Board of Governors of the Federal Reserve, also thinks Obama gains from the havoc the meltdown in housing and financial markets is wreaking on the economy. Even though the deregulation of the finance industry happened on the Clinton administration’s watch, McCain has a "record of railing against regulation in almost any form during his career in the Senate," he writes.

One of the authors of the Gramm-Leach-Bliley, former Texas Senator Phil Gramm, has been an economic adviser to McCain. But lately, McCain has been talking tough about the need for regulations that would prevent a repeat of the current financial crisis.

Some economists say that if Congress goes overboard in clamping down on the rules governing financial markets and mortgage lending, the flow of money into mortgage lending will remain constricted or tighten further, worsening the downturn.

Obama, for example, favors allowing bankruptcy judges to modify the terms of mortgages to keep troubled borrowers in their homes — a move the banking industry says would rattle investors who buy securities backed by mortgages.

Unfortunately, the debate over how we got into this mess and how we get out of it involve many complex, interacting issues that don’t lend themselves well to sound bites the candidates must employ.

Hurley sums it up this way: "One of the problems with this debate, in addition to its taking place in the context of a presidential campaign, is that the very word ‘regulation’ long ago was politicized, with one party branding itself as the party of deregulation (read: smaller government) and the other party being perceived as more comfortable with governmental regulation (read: bigger government). These banalities became the slings and arrows of politics and often stood in the way of meaningful reform."

Maybe the best we can hope for is that whoever wins in November will dispense with the banalities of campaign rhetoric and forge a path based on a nuanced understanding of financial markets and a healthy respect for the law of unintended consequences. Unfortunately, neither candidate has provided much evidence so far that they are capable of doing that.

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