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Text of Pat Toomey’s Speech on the Housing Crisis and Joe Sestak’s Role in it

Text of Pat Toomey’s Speech on the Housing Crisis and Joe Sestak’s Role in it
Pat Toomey
Philadelphia, PA, October 13, 2010

Allentown – Today, Pat Toomey delivered a major policy speech in Philadelphia on the Housing Crisis, his own efforts to rein in Fannie Mae and Freddie Mac, and Congressman Joe Sestak’s efforts to loosen regulation on the two mortgage giants.  The text of the speech is below.  It can also be found there:

The Housing Bubble Grows
Thank you all for coming today.  I’d like to discuss the root cause of the financial crisis that triggered this terrible recession, my role in trying to prevent it, and Joe Sestak’s active role in enabling it.
The fundamental problem that led to the collapse of the residential mortgage market and subsequent financial and economic disaster was a classic bubble.  It was a bubble in the housing market.  We all know how bubbles work.  They grow and grow as more and more folks want to get in on the deal.  Eventually, all bubbles pop, sometimes, as in this case, with disastrous consequences.
Over the past decade, we experienced unusually low interest rates and extremely loose lending standards that led to an explosion in mortgage lending.  By 2003, 35-year fixed-rate mortgages were less than 6%—their lowest cost in 40 years.  By 2006, 20% of all new home mortgages were given to subprime borrowers – those with relatively weak credit histories, and another 20% were Alt-A loans – those made without the ordinary underwriting standards.  It was an unprecedented period of irresponsible lending.
As easy credit flowed, prices rose dramatically.  Between 2001 and 2006 some U.S. housing markets increased by 80%, while the average yearly inflation was about 3%.Everyone wanted to get in on the housing bubble, but incomes were not rising at the same pace as home prices – so many people bought homes they could not afford.
Fannie and Freddie Contribute to the Housing Bubble
Unfortunately, Congress was at the forefront of this housing bubble, encouraging subprime loans to people who were not yet financially situated for home ownership.  Like so many things in Washington, as soon as Congress got its hands on the housing market, it became about politics, not about what makes sense economically.
The greatest drivers of this explosive growth and subsequent collapse of the residential mortgage markets were the giant, government-sponsored enterprises – better known as Fannie Mae and Freddie Mac.  According to Peter Wallison, between 2005 and 2007, “Fannie and Freddie bought approximately $1 trillion in sub-prime and Alt-A loans. This amounted to about 40 percent of their mortgage purchases during that period.”
Although Fannie and Freddie were sold to private shareholders in 1968 and 1989 respectively, they had a unique privilege of a special relationship with the federal government.  Fannie and Freddie were both exempt from state and local taxes, and, unlike any other financial institution, they had an important line of credit from the U.S. Treasury.  Most importantly, as special-case, government–sponsored businesses, they were widely perceived to have the implicit guarantee of the federal government.  As we have seen, that guarantee became explicit when the giants collapsed—at great cost to the American taxpayer.
Congress Pushes Fannie and Freddie Deep into Dubious Mortgages
Fannie and Freddie quickly became the darlings of Congress and a tool for politicians in Washington to push their particular ideological agenda.
When Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, they added an affordable housing mission to the GSEs’ charter.  In order to comply with congressional mandates, by 1997, Fannie and Freddie had lowered their underwriting standards so much that Fannie Mae was offering a 97% loan-to-value mortgage.  By 2001, it was offering mortgages with no down payment at all. 
According to Edward Pinto, a former executive vice-president and chief credit officer at Fannie Mae: “In 1990, 1 in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%.  By 2006 an estimated 30% of all home buyers put no money down.” 
By 2007, Fannie and Freddie were required to show that 55% of their mortgage purchases were low- to moderate-income loans.  Within that, 25% of these loans were supposed to go to low-income and very-low-income borrowers.  Affordable housing is a worthwhile goal, but we had reached a point where the pursuit of that goal was threatening to destabilize our entire economy. 
For many years, even as some people warned of the looming threats, members of Congress were so enthralled with the growth of Fannie and Freddie that they could not, or would not, see the impending crisis on the horizon.
Pat Toomey Warns About the Risk of Fannie and Freddie Collapse
Back when I was a freshman Congressman, ten years ago, I began to raise questions about Fannie Mae and Freddie Mac’s troubling structure, in which the shareholders enjoyed all the profits and the taxpayers bore all the risk.  In a2000 hearing with Federal Reserve Chairman Alan Greenspan, I raised the following question:
TOOMEY: If I could ask one other question on a different topic, getting back to the housing GSEs for a moment. Clearly, there’s been considerable growth in their – their debt issuance lately has attracted a lot of attention.  One of the things that I was wondering if you could comment on. It seems possible that one could make the argument that the benefits that are conferred upon these entities by government increase as these institutions grow, naturally. Perhaps that creates an even greater incentive to grow than a dissimilar company might have.  At the same time, perhaps, given the implied government guarantee of the debt issued by these enterprises, there is some diminution of the market’s ability to put a control – a brake on the costs, at least in the form of higher costs of funds, although admittedly the market can still lower the stock price.  Is there any danger that we create a dynamic where we create a greater incentive to  grow and a lesser ability for the market to discipline that growth, and that in the event of hard times, the taxpayer is put at greater risk than might otherwise be, given this dynamic? (House Banking and Financial Services Committee Hearing, 07/25/00)
Pat Toomey Sponsors Legislation to Properly Regulate Fannie and Freddie
In addition to raising the issue of the risks posed by Fannie Mae and Freddie Mac, in 2000, I cosponsored legislation that would have drastically mitigated – if not prevented – the housing crisis by dramatically strengthening the regulation of Fannie Mae and Freddie Mac. 
The Housing Finance Regulatory Improvement Act (HR 3703): Among other things, it would have:
Repealed the GSE’s conditional line of credit with the Treasury – long before the bailouts ever started!
Directed the FDIC to study potential effects of GSE failure on depository institutions and the economy.
In 2003, I cosponsored the Secondary Mortgage Market Enterprises Regulatory Improvement Act (HR 2575).  This bill sought to do a number of things: 
It required a new, much stronger regulator to ensure the GSEs operated in a financially safe manner and remain adequately capitalized.  Adequate capital would have allowed them to survive credit losses.
It would have limited the maximum size of single-family mortgages that Fannie and Freddie could purchase.
It would have established minimum and critical capital levels and would perform risk-based capital tests on the GSEs, dramatically reducing taxpayer liability down the line.
Finally, it would require the transfer of regulatory authority over Fannie and Freddie from the Department of Housing and Urban Development to the Treasury, where there would be a much stronger, more competent authority.
Let me be clear about this: The  bills I sponsored in 2003 called for much more stringent regulation over Fannie Mae and Freddie Mac because I saw the dangers they posed to our financial system and taxpayers.  Had they been enacted, first, the mortgage bubble could never have gotten close to the size it reached, and second, any losses that might have resulted from failed mortgages could have been absorbed by the larger capital base that would have been in place.  Thus, taxpayers, our financial system, and the economy would have been spared the disaster that subsequently unfolded.
Unfortunately, virtually all Democrats, and too many Republicans in Congress, were perfectly content to whistle past the graveyard and ignore the warnings that I and others were making.  The legislation languished.
Congressman Joe Sestak’s Contribution to the Housing Crisis
And what was Joe Sestak’s role in this?  Well, four years later, he opposed efforts to impose commonsense regulations and limits on the taxpayer-backed GSEs and let Fannie and Freddie roll the dice on the backs of taxpayers.
By the time Congressman Sestak got to Washington in the winter of 2007, it was pretty clear to everyone that the government had allowed Fannie and Freddie to grow to unsustainable and irresponsible levels, and the housing market had become a bubble.
But many in Congress still refused to rein in Fannie and Freddie, clinging instead to a extremely liberal ideology that put taxpayer-subsidized housing ahead of our economy’s security.
Leading this charge was Rep. Barney Frank, the first Congressman to endorse Joe Sestak, who famously declared: “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under.”

In lock step with them was the like-minded, liberal Congressman Joe Sestak.

Joe Sestak opposed measures that would have placed desperately needed safeguards on the out-of-control mortgage giants.  Congressman Sestak sold taxpayers out in order to pursue his far-left liberal agenda.  He chose Fannie and Freddie and Barney Frank over millions of taxpayers that are now footing Fannie and Freddie’s bill.  For example:

Joe Sestak voted against a measure that would have imposed limits on the size of  Fannie and Freddie’s loan portfolios (RC #383, 05/17/07).

Joe Sestak voted against a measure that would have allowed Fannie and Freddie to pour money into the affordable housing fund only if the director of the Federal Housing Finance Agency determined that it would not contribute to the enterprise’s financial instability (RC #390, 05/22/07).

Joe Sestak voted for an amendment that limited the authority of Fannie and Freddie’s new regulator—the Federal Housing Finance Agency—so that it would not have oversight of the enterprises’ portfolio risk to the overall U.S. economy (RC #394, 03/22/07).

Joe Sestak even voted against a commonsense amendment that would increase the minimum down payment requirement for an FHA loan from 3.5 percent to 5 percent.

Congressman Sestak Chooses his Liberal Ideology over Taxpayers

So let’s get this straight: Congressman Sestak had an opportunity to impose new, reasonable regulations on Fannie and Freddie, to make sensible reforms to curb their obvious excesses so that taxpayers would not be on the hook for hundreds of billions of dollars (as they are today)—and he repeatedly refused.

Not only does Congressman Sestak refuse to take responsibility for the disaster he helped enable, he now wants taxpayers to pay for his mistakes.  In 2008, he voted to force taxpayers to bail out Fannie and Freddie, in addition to the bailouts of Wall Street and the auto companies.  All of these failures were ultimately caused by the collapse in the residential mortgage market. Today, the bailouts of Fannie Mae and Freddie Mac continue with no limits.  They have directly cost taxpayers $148 billion already, they continue to lose money, and are expected to need further bailouts regularly as Congress does nothing to stop them.  There is no real prospect of taxpayers ever getting that money back.
It gets worse. 

Sestak even introduced his own mortgage bailout bill – The Home Ownership Vesting Plan of 2009.This bill that would force hardworking family homeowners to bail out other people’s mortgagees.The government (FHA) would bail out underwater mortgages by paying the difference between the current value of a home and the value of the mortgage on the home.

This is another $93 billion taxpayer-funded bailout, courtesy of  Congressman Sestak.
This is a fundamental question of fairness.  On every one of these bail outs, Joe Sestak has sided against hardworking taxpayers.  It is unfair to make hardworking folks, who struggle to pay their own mortgages, subsidize someone else’s.434 members of Congress agree because since March of 2009 when Sestak introduced the bill, not one member of Congress has cosponsored it.

Congressman Sestak likes to say that there are two different ideologies in this race, and he is right about that.  His liberal ideology is one that has put taxpayers on the hook for over a trillion dollars in government bailouts.  He forced taxpayers to bail out Fannie and Freddie after he voted against rules that could have prevented the need for a bailout.  He blames everyone but himself for his own failed philosophy.

I take a different approach.  I believe that Pennsylvania taxpayers who work hard every day should not be held responsible for the mistakes of Washington politicians and big Wall Street banks.  I believe our politicians in Washington need to put taxpayers first – ahead of their political careers and their political agendas.

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