Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee Chairman Scott Garrett (R-NJ) delivered the following opening statement at today's hearing:
"Today's hearing seeks to examine in greater detail the role that Fannie Mae and Freddie Mac played in facilitating the 2008 financial crisis.
"Over the last four years, there has been a great deal of discussion as to what the main causes of the financial crisis were. However, I believe there is one similar fundamental trait that connects every analysis -- Bad Mortgages. No matter what part of the financial crisis is discussed it always comes back to Bad Mortgages.
"My friends on the other side of the aisle love to discuss a wide variety of other reasons that they believe led to the financial crisis. However, for each instance, the underlying similarity is Bad Mortgages.
"Their favorite things to highlight are opaque and complicated derivatives, incompetent and over-relied upon credit rating agencies, off-balance sheet and synthetic securitizations, pro-cyclical accounting standards, and greedy Wall Street banks. However, all of those things are symptoms and not the actual disease. The disease was Bad Mortgages.
"The derivatives were written on Bad Mortgages.
"The Ratings Agencies were rating Bad Mortgages.
"The Securitizations had collateral of Bad Mortgages.
"The Accounting standards marked to market Bad Mortgages.
"Failing Wall Street banks were holding Bad Mortgages.
"All of these symptoms lead to the same disease -- Bad Mortgages. So we have to ask ourselves: How did this disease infect the country?
"The evidence indicates the disease began in the 90's with adoption of Affordable Housing Goals for the GSEs and the Clinton Administration's push to rapidly expand homeownership opportunities by systematically reducing underwriting standards.
"In May of 2011, Michael Cembalest, global head of investment strategy for J.P. Morgan′s Asset Management business, who had originally believed that the private sector had unwritten a majority of the Bad Mortgages wrote to his clients:
'In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector. Why? US Agencies appeared to be responsible for only 20% of all subprime, Alt A and other mortgage exotica. However, over the last 2 years, analysts have dissected the housing crisis in greater detail. What emerges from new research is something quite different: government agencies now look to have guaranteed, originated or underwritten 60% of all "non-traditional" mortgages, which totaled $4.6 trillion in June 2008. What's more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make much riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards. To be sure, private sector banks and investors are responsible for taking the bait, and made terrible mistakes. Overall, what emerges is an object lesson in well-meaning public policy gone spectacularly wrong.'
"Unfortunately, my democratic colleagues didn't take the time and do the same due diligence that Mr. Cembalest and others did to accurately diagnose the appropriate causes of the financial crisis. They rushed forward with the 3,000 page Dodd-Frank Act which includes a liberal wish list of the policy changes they had pent up over the previous 12 years that had absolutely nothing to do with the crisis and that are not strangling the economy and negatively impacting job creation.
"Unfortunately, most of Dodd-Frank only dealt with symptoms and not the actual disease.
"Many of the interest groups that directly benefit from large subsidizations in the housing market continue to state that Fannie and Freddie fell victim to the bad private market participants. This suggestion is completely false. It was government housing policy, coupled with loose money from the Federal Reserve, that caused the housing bubble and those are the areas where we must focus reform.
"As one of our esteemed panelists, Mr. Rosner, points out so precisely and with many specific examples in his book, Reckless Endangerment, Fannie Mae and Freddie Mac systematically reduced underwriting standards to meet government regulatory requirements and to curry favor with the political class.
"Fannie Mae and Freddie Mac are the essence of Crony-Capitalism and if we recreate them in some form or fashion as so many in the industry and across the aisle are recommending, we are doomed to repeat the same terrible outcomes that our nation has experienced over the last four years.
"Mr. Cembalast's analysis ended; 'As regulators and politicians consider actions designed to stabilize the financial system and the housing/mortgage markets, reflection on the role that policy played in the collapse would seem like a critical part of the process.' I can only hope we do."