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After mortgage meltdown, Barney Frank gets another chance to remake housing finance

The chairman of the House Financial Services Committee played a key role in shepherding the regulatory overhaul bill through Congress. Now he turns his attention to reworking federal housing policy.

The companies had been growing ever larger. Yet compared with their rivals in the banking industry, they were putting aside relatively little capital to cover potential losses. Leach proposed a tough new regulator that would restrain Fannie and Freddie.

The appeal was mostly ignored. President George H.W. Bush signed the Gonzalez bill in 1992, assigning Fannie and Freddie new goals for fostering affordable housing and setting up a new regulator - but one with little real power to curtail their riskiest investment activities.

Still, the warnings kept coming. By late 2003, the firms had taken on more than $4 trillion in debt, rivaling that of the entire federal government. Yet Frank, who had by then become the top Democrat on the influential House Financial Services Committee, still wasn't focused on the risks. He had his sights set on what else they could do to promote for affordable housing, particularly low-cost rental housing.

At a hearing called by Republicans, who controlled the committee, Frank made clear that he was reluctant to tighten oversight because it could limit the ability of Fannie and Freddie to help people get a roof over their heads.

The companies, he urged colleagues, "are two of the very important tools that we have" and had to do what "the market in and of itself will not do. "They were "not endangering the fiscal health of this country," he continued.

But he recognized that it was a gamble.

"I want to roll the dice a little bit more in this situation towards subsidized housing," Frank said.

The market crashes

It didn't take long for Fannie and Freddie to let him down. Both companies had gotten caught up in accounting scandals, accused of doctoring their books to make their earnings look good and goose bonuses for top executives.

As Frank grew more willing to strengthen oversight, he worked with the Republican chairman of the committee, Rep. Michael Oxley of Ohio, to write a bill creating a stricter regulator. But the Bush White House didn't think it was tough enough and opposed Frank's efforts to include new affordable housing initiatives, including a proposed housing trust fund to be financed by the companies. The bill never passed.

Fannie and Freddie proceeded to load up on securities backed by risky mortgages, such as subprime loans and no-document loans. The firms asserted that they were aggressively fulfilling their affordable housing mission, and some risky mortgages were indeed going to borrowers who couldn't otherwise afford a home.

But many of the loans were going to people who could have afforded traditional mortgages, and the companies were bulking up on the risky loans purely in pursuit of even larger profits.

When the housing market crashed, the unprecedented surge in mortgage defaults blew a hole in the firms' finances.

A year and a half after Democrats captured Congress and Frank became chairman of the committee, Congress passed a bill creating a tougher regulator for Fannie and Freddie. It was too late. In September 2008, facing imminent collapse, they were taken over by the federal government.

Longtime critics of the companies said Frank, more than anyone else in Congress, enabled Fannie and Freddie to operate without a tough regulator for far too long.

"Of all the people in Congress, Barney Frank was the most important in supporting affordable housing and the independence and fairly free operations that were left to Fannie and Freddie," said Peter J. Wallison, a member of the congressional panel studying the origins of the financial crisis.

Now Frank has abandoned hope for Fannie and Freddie, saying they should be abolished. His new goals are to devise a housing finance system to replace Fannie and Freddie, preserve existing affordable housing and set up a trust fund to help pay for more.

For all his efforts, Frank readily acknowledges that there are more people needing decent housing than there were when he started in Congress. And with millions of others losing their homes to foreclosure, Frank asks to be judged by how much worse things would have been without him.

"In the political world, you get measured on the ultimate results," he said. "I think we've prevented things from getting as bad as they otherwise might have been."

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