Our guest blogger is Ed Paisley, Vice President of Editorial at the Center for American Progress Action Fund.
The Bush administration this weekend had to rescue home mortgage giants Fannie Mae and Freddie Mac after eight years of regulatory mismanagement of our home mortgage financial marketplace by administration appointees. Putting Fannie and Freddie into federal conservatorship is clearly the right step to take, yet Sen. John McCain (R-AZ) and his economic advisors embrace long-term changes to these two government-sponsored entities that are bad for the long-term interests of American homeowners and prospective homeowners.
For decades now, these two GSEs played an important stabilizing role in the home mortgage market, maintaining access to mortgage credit during periods of private market contraction and establishing good lending standards through “conforming” loans.” Under the Bush administration, however, financial regulators willfully took their eyes off unscrupulous mortgage originators, allowing the marketplace for home mortgages to grow in size and complexity without ever trying to match this growth with prudent regulation to protect the safety and soundness of the financial system, let alone consumers.
Now, Sen. McCain and his economic advisors are calling for more deregulation, not better regulation, in the wake of the takeover of Fannie and Freddie.
Imagine if the policy answer to the savings-and-loan crisis of the 1980s had been a $160 billion taxpayer rescue of the industry accompanied by further deregulation of the very financial institutions that got us into the problem in the first place. That, in essence, is what McCain economic policy advisor Douglas Holtz-Eakin is calling for when he demands that Fannie and Freddie be phased out of existence as GSEs so that the financial market players who brought us the subprime mortgage crisis can takeover the entire industry.
So, too, is Sen. McCain, who early on in the housing crisis incongruously said: “our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.”
We don’t yet know the cost to taxpayers of the rescue of Fannie and Freddie, but the International Monetary Fund estimates nearly $1 trillion in losses by financial institutions around the globe due to the U.S. subprime mortgage crisis and its cascading effect on other mortgages. This is directly attributable to the lack of proper regulation of home mortgage lending and securitization by the Bush administration. And this is exactly the kind of marketplace Sen. McCain and his economic advisors want to preserve and expand.
This would be great for Wall Street, but a disaster for Main Street.