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October 1, 2008

Senator David L. Thomas
410 Gressette Building
Columbia, SC 29202
864-630-9389 or 803-212-6240

October 1, 2008
The American public has not been told why the $700 billion bailout is necessary and, worst, what caused the breakdown in the financial institutions that has brought us to this critical place.  The public deserves to know the reasons for this fiasco.

As Chairman of the Banking and Insurance Committee in the South Carolina State Senate, in 2002 we passed legislation to curb predatory lending practices in our state, which was cited as “business unfriendly.”  Can you imagine a bill being business unfriendly that prohibited lenders from making mortgage loans to people who could not afford to repay those loans?   The legislation was passed in 2003 and, according to consumer advocate groups, passage of this law has helped curb foreclosures in our State.

This past session, we introduced legislation to further tighten regulations on the lending industry, which was again cited as “business unfriendly” by some business lobbying groups.  A lobbyist from one of these failed institutions spoke in Committee and told us how solid their lending practices were and that further regulations would impede the market!  The very institution he represented was bailed out last week by the United States government to prevent its total collapse.  The bill passed in the Senate but died in the House.

Having dealt with this issue, I will not just give you my opinion, but would like to share the following vital information on history that will explain why we are here and an analysis from a banker who is NOT in trouble.  This is not the entire explanation, but, I believe, it gives a fundamental understanding of what has happened.

First below are excerpts from an article written by Steven A. Holmes, ‘Fannie Mae Eased Credit To Aid Mortgage Lending,’ that ran in the New York Times in 1999.  This unprecedented move was the “set up” for the current crisis in the financial industry.

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements, ” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”

This failed system was not only put in place but pressed into effect by our United States Congress–this “slackness” in standards for subprime borrowers to obtain risky loans that was enthusiastically embraced by some “greedy” lenders who took big risks in building their portfolios to pad their pockets.

Following is a portion of a letter from a banking institution that was sent within the past two weeks to the United States Congress.  This Bank did not take advantage of this “set up” for failure and thinks a bailout will further exacerbate our current problem:

“Dear Senator/Congressman/Representative:

BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and southeast states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.

We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.

Attached are the issues that we believe are relevant from the perspective of healthy banks. Your consideration of these issues is greatly appreciated.
Key Points on “Rescue” Plan From a Healthy Bank’s Perspective.

1.    Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
2.    There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
3.    While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
4.    Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
5.    A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
6.    This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
7.    The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
8.    Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bail out insurance companies, investment banks, hedge funds and foreign companies.
9.    It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
10.    The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.

The public deserves a full explanation of why the proposed $700 billion bailout is necessary.  The public is now being told by Congressmen and Senators that they know what is best for them, and they are being asked to support a solution without an adequate explanation.  The public deserves to know why this breakdown occurred and, more importantly, what is being done to make sure this “created” fiasco will never happen again.  The public is not being told the answers to either of these two questions, which is why they are not supporting the bailout.

David L. Thomas (R)
SC State Senate, District 8

3 Comments leave one →
  1. batguano101 permalink
    October 1, 2008 3:17 pm

    The bailout is a scam.

    It is the wrong thing to do, rapes the nation to give a tip to the crooks, but more important than the immoral aspect is it will hurt the nation.

    No to the bailout.
    No to the candidates promoting it.
    No to the congress selling out the USA for it.
    No to the media acting as a propaganda arm selling it.

  2. Jason permalink
    October 1, 2008 8:22 pm

    To keep up with Wall Street expectations, Fannie Mae held onto more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s. Once again it was spared in 2008.

  3. batguano101 permalink
    October 7, 2008 3:01 pm

    The Constitution was thrown out the window to rush through the bailout/sellout.

    That is more important than the depression.

    You can recover from a depression.
    You cannot recover from a change in form of government.

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