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

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, October 12, 2010; 12:25 AM

Rep. Barney Frank, the disheveled, fast-talking Democrat from Massachusetts, had long been known more for his acerbic tongue than for the cause that has captivated him since he was a young aide in the Boston mayor's office.

Frank had championed housing for America's poor for four decades, but he gained the chance to leave his biggest mark in 2007 when he became chairman of the House Financial Services Committee. He dreamed of tapping into the riches of Fannie Mae and Freddie Mac - at the time, both fabulously successful mortgage finance companies - to help pay for the construction of thousands of affordable apartments.

It was too good to be true. Fannie and Freddie would soon melt down, requiring a federal bailout so far costing more than $160 billion. Frank's critics have alleged that his aspirations blinded him to the danger.

Now Frank is poised to play a pivotal role on Capitol Hill as the Obama administration prepares to tackle the future of Fannie and Freddie and to overhaul how millions of Americans are housed. In taking on their next major economic challenge, senior Obama officials are scheduled to release a proposal in January that would replace the two mortgage giants and rethink federal programs that help make housing affordable.

The coming debate could be the culmination of a career that Frank, 70, has spent trying to ensure that government can provide lower- and middle-class people with access to decent housing.

"A lack of decent housing is central to social problems," Frank said. "FDR said, 'I see one-third of a nation ill-fed, ill-housed, and ill-clad.' Nobody should put me in charge of dressing people, so I had to choose one or the other. I chose housing."

But the deliberations over how to reshape national housing polices after the mortgage meltdown, which triggered the financial crisis and the worst economic downturn since the Depression, could also be a chance to make amends for the lax oversight of Fannie and Freddie.

"I was too late to see they were a problem," Frank said. "I did see them as an important source of rental housing. I did not foresee the extent to which bad decisions . . . were causing problems."

A sense of injustice

Frank was a graduate student in political science at Harvard when he went to work for then-Boston Mayor Kevin White and first confronted the realities of America's public housing. At the time, public housing tended to mean the projects: cinder-block high-rises or low-rise, barracks-style apartments, often dilapidated and dangerous.

As White's chief assistant, Frank was asked to carry out the mayor's plan to give summer jobs, such as cutting lawns at public housing, to kids who lived in the buildings. The Boston Housing Authority, which oversaw the projects, traditionally steered the jobs to political supporters, and the agency's director was not receptive when Frank called.

"I'm not giving my jobs up," the director told Frank. "Are you crazy? "

"The mayor feels," Frank said, "and I agree, that if we give the jobs to people who live there, they'll do a better job because they'll care more about the place."

"Barney, Barney, are you out of your [expletive] mind?" asked the director. "If those people were any good, they wouldn't live in public housing."

In recently retelling the story, Frank said, "That's when I began to realize that these were people that were being pretty well victimized."

That sense of injustice continued to motivate Frank as a newly minted congressman, when he tried unsuccessfully to defend subsidized housing against efforts by the Reagan administration to roll back support.

Early in his second term, in a bid to highlight the importance of preserving housing for low-income people, Frank called a hearing of a key House subcommittee on housing that he chaired. When a senior official from the Housing and Urban Development Department testified that there was more subsidized housing than was needed in much of the country, Frank demanded proof.

HUD provided Frank with a list of 64 places where housing projects went underused. Frank's staff discovered that almost all were fully occupied. Frank was furious and took his outrage to the press.

"HUD has found an innovative way to deal with the housing shortage, which is to define it out of existence," he told reporters. "It's a triumph over reality."

Yet in those years, Frank's triumphs on behalf of affordable housing remained few, his mission largely quixotic.

A new opportunity

The country's stock of low-income homes had remained flat for more than a decade when Frank and his allies in the House spotted an opportunity in the early 1990s. They concluded that Fannie Mae and Freddie Mac, created by lawmakers to promote housing and based in Congress's back yard, were not doing enough for the poor - even less, in fact, than some Wall Street banks.

Fannie and Freddie were in the business of buying and guaranteeing mortgage loans from private lenders, which in turn could take the money and make even more loans to prospective homebuyers or developers looking to build apartment buildings.

Democrats, led by one of Frank's closest allies, Rep. Henry B. Gonzalez (D-Tex.), wanted to require the two companies to spend a specific percentage of their funds on affordable housing. Under the proposed legislation, the companies were to buy home loans made to lower- and middle-class people and loans going to fund development of affordable rental housing.

This represented a rich new vein of money.

But even as Democrats were looking to expand Fannie and Freddie's mission, a small group of Republicans, led by Rep. Jim Leach of Iowa, urged the government to pay more attention to the dangers posed by the firms.

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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