There is a lot of talk about the mortgage crisis and the "bail outs" by the tax payers of several large Wall Street mortgage related institutes. Listening to the politicians you get the idea that a) This is the fault of a lack of regulation by the government over these federally insured institutions b) That if allowed to go on without governmemt intervention it would, or could, drag the entire economy down into recession or depression and c) That this is the most severe economic crisis since the great depression. Of course, as is usual with politicians, none of these claims is correct. So why do these politicians want us to believe these claims? They want us to believe them because that will hide the real cause and congress would not be given the authority over the billions of bail out dollars that will be thrown at the problem.

Let’s examine these claims in order. a) This is the fault of a lack of government regulation over these mortgage companies and their greedy CEOs.

Freddie Mac and Fannie Mae were two results of LBJ’s Housing and Urban Development Act of 1968, which stated that city’s downtown urban areas needed to be kept alive by continually pumping billions of dollars into them via Community Block Grants and other policies adopted by Housing and Urban Development, also a result of the act in 1968. Fannie Mae, the Federal Home Loan Mortgage Association, was to be a privately owned and operated corporation backed by the government that would buy mortgages from lenders and bundle them as mortgage securities and provide backing to the lenders. The bundled securities would be offered for sale or investment to large financial institutions to raise money for redevelopment, stockholders, and executives of Fannie Mae. The profits were to be used primarily for subsidies to urban developments projects in specified cities. Freddie Mac was the same type of private corporation but their proceeds were to be used for specified communities nationally and not limited to urban areas.

These two corporations were created in 1968 and 1970 respectively, by democrats in Congress and under a democrat president. They were created by passing a law that claimed urban areas and some parts of some communities needed to be supported by outside sources because, if left to nature, they would soon become ghost towns and they just couldn’t see that happening to all those living there. What you have then, essentially, is the federal government going into private practice by buying mortgages from mortgage lenders and reselling them as bundled securities to large financial houses.

So things went fairly well, or so it seemed, until 1998 when the federal reserve chairman and some members of the banking committees in congress found out that both Fannie Mae and Freddie Mac were buying mortgages that were over-leveraged by the lender. The lenders were lending up to $30.00 for every dollar they actually had. In 1993, Janet Reno, appointed attorney general by Clinton, ordered the two FMs and associated mortgage lenders to stop "red lining" federally backed loans or suffer severe federal repercussions. Red lining was the practice of denying loans to people living in certain areas of blight or economic failure. She subsequently widened her order to include the residents of those areas in her definition of red lining. As a result, the mortgage lenders were required to abandon the age old business rules that established ones ability to repay the loan being applied for or to sell loans they could not actually fund 100%. Predatory loans and lenders were allowed to flourish by selling interest only, adjustable rate, and non-ammortized home loans. Many people who bought homes with these loans ended up losing their home and any money they had invested in them. In 1998 republicans in congress called for reforming the FMs and their policies but Sen. Christopher Dodd and Rep. Barnie Frank, banking committee chairmen, stopped any bill proposed to reform the laws stating, "We can’t push these people out of their homes into the streets," when all the time the home buyers were defaulting on predatory loans anyway. Again in 2003, George W. Bush urged Congress to investigate and reform the policies of the two FMs and, again, Dodd and Frank led the opposition to victory and no reform.

When these bad loans were made, housing demand rose, availibility dropped, and new construction boomed. The prices of homes then soared with the increased demand. This is what constituted the "housing bubble". But when it became apparent that there were a lot of these suspect loans bundled in the two FM’s securities, and there being no way to estimate how many would be paid off, or what their actual value is, the two FMs stopped accepting them for backing and the bubble burst. The lenders almost completely stopped lending for new homes which killed demand, the newly constructed homes sat empty, and prices for homes fell drastically. In a nutshell, it was governmental restrictions and laws implemented to regulate the private mortgage industry that caused the current situation. The two most culpable people are Sen. Chris Dodd and Rep. Barnie Frank.

The second claim b) That this crisis, if left alone, would drag the entire economy down with it.

Essentially, the crisis at hand is not an economy wide problem, it is a mortgage credit problem. And really, the only problem is with the sub-prime loans that are held by the two FMs or by lenders who were counting on offloading their own loans to the FMs. The underwriters, those who actually provide the capital funds for loans, have stopped investing in the affected mortgage companies essentially putting them out of business. They are left with their assets of viable, valuable loans and those loans whose futures are suspect and whose values are inestimable. To remain in business they must somehow liquidate the suspect loans for as high a price as possible or convert them to loans whose value is set.

If left alone, ie no bail outs by the tax payers, the lenders whose liquid assets are not enough to carry their non-liquid government mandated loans would fail. The two FMs would then own these loans and would either back them and hope for the best or foreclose and write them off. Either way the underwriters would not recover their investments 100%.

If the bail out of the lenders is approved, the two government FMs wll buy those sub-prime, questionable loans at a set rate eliminating them from the assets of the lender and allowing them to stay in business. The bail outs of the two FMs will do the same thing for them that doing nothing would. The two FMs will own the non-liquid loans bought with taxpayer money. The two FMs can then foreclose and recover mere pennies on the dollar or honor the loans and gamble on the unqualified borrower paying them and write off the losses from those who default . But wait, those are the same options the FMs would have if they weren’t bailed out. What’s the reason for bailing out the two FMs? Congress gets involved in the bail out and will regulate and oversee the funds provided for the rescue. That is why congress is scurrying around trying to quickly pass a resolution to provide 700 billion for the bail out. They will then skim off millions for earmarks, pork barrel projects, and generally do what congress does with huge sums of cash. Spend it and line their pockets.

But, people who have traditional, fixed rate, fully amortized mortgages based on their income and ability to pay need not worry. And those with the capability to pay loan payments and qualify for a traditional mortgage will find this an excellent opportunity to buy a home as prices are down and they can buy a home of higher value than they could otherwise.

The mortgage crisis has arisen from government imposing itself into a privately owned and operated industry. Now, those who caused the crisis are screaming that government should have been more involved and more regulation should be implemented. The proverbial fox is in the henhouse and is now wanting written permission from the farmer to slaughter his hens at will and to provide the charcoal and BBQ sauce as well.

As for culpability, at the very least, Sen. Dodd and Rep Frank should be forced to resign and forfeit their pensions. Janet Reno should be prosecuted for malfeasance. There are a few others who deserve such action also. The two FMs should either be made totally private without undue government regulations or be dissolved and the loans they backed and owned should be foreclosed upon.

This crisis is not a threat to the overall economy, but democratic demands for more government involvement in rescuing failed communities and subsidizing inner city urban areas when people choose to move elsewhere, or imposing fly-by-night requirements and restrictions on privately owned, thriving industry, or taxing industry because of resounding successes and soaring profit are all severe and imminent threats to the economy.

Vote them ALL out of congress. Demand term limits for members of congress. Demand that congress recognize their duty to call for a convention for ammending the Constitution as required in Article Five. If they don’t respond to our demands, vote THEM out. Vote for McCain even if he isn’t the epitome of conservative values. A vote any other way will only hasten the fall of our great nation.