How Could This Happen Part II

nosferatu (1) The Predators’ Ball

Fannie Mae and Freddie Mac have helped defang laws that might have prevented the subprime mess.

Michael Hirsh


Aug. 18-25, 2008 issue

Roy Barnes is a self-described “small-town” lawyer with a mane of silver hair and an Andy Griffith drawl. But like Griffith’s Ben Matlock, the TV character he resembles, Barnes is the furthest thing from a rube. He comes from a family of bankers, and back in the ’90s Barnes saw, far before many in Washington, what was happening as deregulation took lending further away from the local banks and gave it to mortgage brokers and Wall Street. So when Barnes was elected governor of Georgia in 1998, he decided to push through the toughest antipredatory lending law in the country. The 2002 law made everyone up the line, including investment banks on distant Wall Street and rating agencies like Standard & Poor’s, legally liable if the loans they sold, securitized or rated were deemed unfair. “There has to be accountability,” Barnes told NEWSWEEK. “In the end you have to be able to say, do I really want to make this loan? Because I may have to eat it.” “A victory for Georgia consumers,” the Atlanta Journal-Constitution called the new law, which was also hailed by AARP and the NAACP.

It was when Roy Barnes started talking about accountability that the Feds began marching into Georgia. Barnes found himself besieged by lobbyists from major banks and national regulators—as well as Fannie Mae and Freddie Mac, the government-sponsored mortgage issuers whose mandate is to help people obtain affordable homes at fair prices; today, Fannie and Freddie are so financially fragile that the government has agreed to bail them out if necessary.

The major mortgage issuers hinted that they would turn Georgia into a financial pariah if the state made them liable. They let Barnes know in no uncertain terms that he was something of a “country bumpkin” when it came to banking, says his legislative aide, Chris Carpenter. As Barnes recalls, “They would say—and Fannie Mae and Freddie Mac were part of it—’This is a complex global market. If you start interfering with the free flow of money, then Georgia will become an island that has no credit’. I kept telling them, ‘You’re in for a crash here’.”

Ultimately, the Georgia Legislature, under Barnes’s successor, gutted his law in early 2003 after a dramatic eleventh-hour vote in which a Republican senator warned that Freddie Mac was about to cut off most of its business with the state. “It broke my heart,” Barnes says. (Fannie and Freddie declined to comment specifically on any efforts against Georgia’s liability law, but in general they say they have “always supported efforts to fight predatory lending,” says Fannie spokesman Brian Faith.)

The saga of Roy Barnes’s failed effort to protect Georgia from the subprime disaster is a reminder that states’ rights can still be a good idea. It was state and local officials who saw the oncoming flood of failed loans first—not least because defaults and foreclosures were destroying their neighborhoods years before Wall Street or Washington noticed. But what happened in Georgia is also a warning about what lies ahead—because the kind of federal lobbying Barnes faced six years ago is still being directed against state legislation today. Critics say new federal legislation and rules fall short, and that Washington’s regulators continue to try to pre-empt states from regulating national banks and thrifts. “In the face of this horrible mess, we still don’t have firm, clear regulations to protect consumers, like prohibiting loans the borrower can’t repay, or gouging on price,” says Margot Saunders of the National Consumer Law Center in Washington.

Nowhere is the sense of state impotence greater than California, which became ground zero for subprime defaults. Last May, David Jones, chair of the California Assembly’s Judiciary Committee, tried to resurrect Barnes’s idea of liability in California. The result “was major jihad by the lending industry,” which killed the bill, says Kevin Baker, the committee’s chief counsel. New York state was somewhat more successful—it signed a bill into law this month—but “Freddie Mac was up in Albany working hard to gut the bill’s language this past spring,” says New York consumer advocate Sarah Ludwig.

Spokesmen for Fannie and Freddie say they’ve sought to work with states, not override them, and they have often backed consumer-friendly new rules, such as one banning unnecessary credit insurance. Late last month President George W. Bush signed a law that created a new regulator for Fannie and Freddie called the Federal Housing Finance Agency. But that law also offered Fannie and Freddie multibillion-dollar bailouts at taxpayer expense, with no demand for internal reform, critics say. Former Treasury secretary Larry Summers argues that we’re missing a “once in a generation opportunity” to reform Fannie and Freddie, which wield enormous lobbying power in Washington and on Wall Street. Summers, a Harvard economist, says the subprime crisis could end up costing taxpayers much more than the 1980s savings and loan bailouts, which left Americans with a $300 billion bill.

Spokesmen and lobbyists for Fannie, Freddie and the banks say many of the problems that caused the current mess are being addressed. “The new law empowers our regulator to crack down on us in many ways,” says Freddie spokesman Doug Duvall. At the Federal Reserve, chairman Ben Bernanke announced a new “Regulation Z,” which created some common-sense rules, such as forbidding loans without sufficient documentation to show if a person has the ability to repay. As for now former governor Barnes, he may have turned out to be mostly right in his analysis of the subprime problem, but he says he’s staying out of politics. Instead, as a real-life Ben Matlock, he will fight for consumers in the courts. “My law’s a toothless tiger now,” Barnes says. “We have one of the highest rates of foreclosure in the country.” And the states still seem to be fighting a losing battle.

The original article can be found at:



NACA Fights Fannie Mae’s Attempt to Derail Anti-Predatory Lending Bill


Randy Wilburn, Media Coordinator w: 617-250-6222 c: 404-579-0770

For Immediate Release

April 7, 2002

The Neighborhood Assistance Corporation of America (NACA) and Georgia governor Roy Barnes are outraged concerning Fannie Mae’s last minute attempt to scuttle Georgia’s anti-predatory lending legislation (HB 1361). While Fannie Mae behind the scenes been undermining anti-predatory lending legislation nationwide, this marks their first direct attack on such legislation.

NACA along with Governor Roy Barnes has been leading the fight to pass comprehensive anti-predatory lending legislation in Georgia. Thanks to strong public support, the legislation was headed for passage until Fannie Mae threatened that it would use its political clout to block it. In a letter to Governor Barnes (see attached), Fannie Mae stated they would oppose the bill, which regulates predatory practices with respect to the most high priced loans, unless the loans they purchase are excluded from its provisions. Fannie Mae offered no justification for the exclusion of their loans from the bill. This exclusion highlights the refusal of Fannie Mae to disclose the terms of billions of dollars of subprime loans they purchase. Fannie Mae already engages in predatory lending for if they do not purchase these types of loans, why does it need to be excluded from regulations concerning them?

Recent media reports document Fannie Mae’s fight against attempts by congress for fuller disclosure including being subjected to SEC regulations as a public corporation and its giving its own board members high priced consulting contracts. Said Bruce Marks, NACA CEO “Fannie Mae’s behavior in Georgia is part of a pattern. Fannie Mae thinks that the rules that apply to them should be different from the rules that apply to everyone else. Fannie Mae is to the mortgage industry what Enron was to the energy industry. Like Enron, they want to control every aspect of the market from pricing to supply, but they want to avoid scrutiny. Like Enron they distribute billions of dollars to politicians and non-profits because they believe that if they pay the piper they can call the tune. However, unlike Enron, they are a government entity and should be responsible to the American taxpayer.”

NACA will be working closely with Governor Barnes and politicians nationwide to stop Fannie Mae. As a national organization with over one hundred thousand members, NACA will bring its confrontational tactics to bear against Fannie Mae.


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