The Government Is Suing The Wrong People

On Friday, Market Watch reported that the Federal Housing Finance Agency, overseers of Fannie Mae and Freddie Mac, is ready to sue a dozen major banks, claiming they misrepresented mortgage securities they bundled together and sold during the run-up to the burst of the housing bubble. ran a similar story on Saturday reporting:

Edward J. DeMarco, head of the U.S. watchdog overseeing Fannie Mae and Freddie Mac, says his job is protecting taxpayers. His critics think he’s undermining the government’s efforts to shore up the economy. 

I firmly believe that the government is suing the wrong people. There is a video at YouTube I have linked to in the past called Burning Down The House which does a very good job of detailing the history of the housing bubble. It shows Congressional testimony relating to decisions that caused the bubble. It is well worth watching.

In 2010 Republicans on the House Oversight & Government Reform Committee issued a report entitled, Follow the Money: ACORN, SEIU and their Political Allies.” The executive summary of the report states:

“ACORN drafted language to loosen underwriting standards and decrease down payments in the housing industry, paving the way for the high rate of subprime loans millions of Americans eventually defaulted on.

“ACORN used provisions in the Community Reinvestment Act of 1977 that allowed community groups to challenge bank mergers and acquisitions if a bank did not adequately invest in its own community. These challenges, which featured ACORN’s standard intimidation tactics, successfully forced banks to make lending agreements with ACORN Housing. If banks refused ACORN’s demands, they jeopardized approval of mergers in a timely manner. ACORN Housing moved to become a conventional service provider for the loans. ACORN reaped profits from over a billion dollars in loans to low-income neighborhoods. Because of the policies and financial instruments developed, in part through ACORN’s lobbying activities, borrowers eventually defaulted on the loans. The end result was the bursting of the housing bubble.

“ACORN Housing received a total of $39,925,620.13 from Bank of America, JPMorgan Chase & Co., CitiBank, HSBC, CapitalOne, and SunTrust. These lenders and banks also provided ACORN with grants, address and bank account information of at-risk homeowners so ACORN could provide free counseling services. Instead, ACORN used the address and bank account information to target struggling Americans who would be signed up as dues-paying members of ACORN. ACORN’s membership recruiting brought in $48 million a year for ACORN — a boon for their Muscle for Money program.”

The banks were not totally innocent in the financial collapse of the housing market, but they were not entirely guilty either. When the government and ACORN required the banks to make risky loans, the banks dealt with the situation by bundling sub-prime loans with good loans and selling them as a package–thus selling off any mortgages that might not be repaid. That was an understandable business decision. What we need is a local banker who knows his customers and can make decisions regarding mortgages based on that knowledge. Unfortunately, when ACORN began protesting banks that were not making enough risky loans, the game changed. It’s time to let banks be banks and the government be the government. There is some need for regulation, but the overregulation and rules of the 1990’s helped cause the problems. The government is suing the wrong people–but I don’t think they can sue themselves.