Trent's Blog
The Obama Economy, In Pictures
Posted By: Trent Franks on January 18, 2012
Filed Under: Taxes and Economy Taxes Economy Obama Presidency Debt Federal Budget
$15 Trillion -- Our National Debt, In Pictures
Posted By: Trent Franks on November 16, 2011
Filed Under: Economy Budget Debt
Franks in the News -- Week of 9/18/11
Posted By: Congressman Trent Franks on September 23, 2011
Filed Under: Arizona Constitution Debt Department of the Interior Economy Human Rights Taxes Taxes and Economy Voting Senate
More Failed Policies Won't Lift Housing Market
Posted By: Rep. Trent Franks on June 1, 2009
Filed Under: Economy Financial Sector Local Issues
Arizona Republic
According to an April report, Phoenix is now leading the entire nation in the number of home foreclosures. Valley bankruptcies reached a 41 month high in March, and in the city of Maryvale, approximately one in two homes are in foreclosure.
The West Valley in particular has been hit especially hard, having experienced a severe spike in foreclosure rates in the cities of Surprise, El Mirage, Peoria, and Glendale over the past many months. Amidst such seemingly dire news for homeowners, it is crucial for us to reflect on the lessons we've learned over the past few years by considering the policies that helped contribute to the current mortgage crisis, and what we can do to address them.
Unfortunately, much of the turmoil in our financial markets is rooted in failed government policies affecting the mortgage industry, through government sponsored enterprises such as Fannie Mae and Freddie Mac, as well as in corrupt rating agencies who fueled false confidence in the stability of incredibly risky loans. And while many lenders proved to be unscrupulous, so did many borrowers.
In 2006, there was a 44% increase in mortgage loan fraud filings in 2006, often stemming from borrowers materially misrepresenting their income, assets, or debt, forging documents, or simply lying about whether the property would be occupied as a primary residence, when in fact it was purchased for investment purposes. The Boston Federal Reserve concluded that the main reason for foreclosures in the subprime market has been the decline in the value of their homes, supporting the conclusion that these homeowners never intended to pay their mortgages at the higher reset interest rate.
Instead, they bet that their home would continue to appreciate, allowing them to refinance before the expiration of the lower “teaser” rate.
One piece of legislation in particular that fueled the cascades of foreclosures was the Mortgage Forgiveness Debt Relief Act of 2007. I was one of only 27 Members in the U.S. House of Representatives and the only Member of the Arizona Congressional Delegation to vote against this legislation. While the bill did lower taxes for a small number of Americans and the motive behind it was admirable, the broader effect of the bill was largely overlooked by Members of both parties.
Previous to that legislation, the IRS considered forgiven debt as "income," and therefore collected taxes on it. The unintended consequence of the bill -- which modified tax laws for residential property to limit the amount of taxable forgiven debt -- was that it often made it more financially rational for homeowners to walk away from their home rather than to fulfill one's contract with the bank and struggle to keep it.
Due to the bursting of the government-fueled housing bubble, the majority of houses purchased between 2004 and 2007 are "under water," meaning the owner's mortgage is greater than the value of the home. Although the foreclosure process has traditionally been an involved, expensive and time-consuming process, policies such as the Mortgage Forgiveness Debt Relief Act made voluntarily foreclosing and going through the seven-year credit rehabilitation suddenly easier than paying even the most conservative and conventional of all home loans, the 30-year fixed rate mortgage.
Enacting more of the same failed policies -- that is, embracing extreme federal intervention and nationalization of the housing market -- will not restore our ailing housing market. When the government intervenes and decides when prices are too high and when they are too low—based on political and media-driven interests rather than objective economic calculations—the result is an artificially manipulation of the market, hampering the market’s natural corrective tendencies and extending the timeframe in which such corrections occur, thereby spreading the damage to a wider population than would otherwise be adversely affected. These are the exact causes that helped shape our current financial crisis in the first place.
Government should encourage the injection of private capital into the mortgage industry again to shore up home prices, stop the precipitous decline of housing values, and reverse the destructive flood of mortgage foreclosures.
Federal lawmakers can best help the marketplace normalize by sending a clear message of certainty that there will not be a mortgage bailout enacted and that the government will not engage in risk management with the private sector. Taxpayers at large should not be asked to absorb any of the risk; the risk should be shouldered by the private sector.
Lawmakers must also be wary of hastily passing legislation that creates a "cure" worse than the disease. For instance, despite its misleading title, last year's American Housing Rescue and Foreclosure Prevention Act provided enormously costly corporate bailouts, imposed additional tax increases, and created slush funds for politically motivated organizations. None of these are solutions to our mortgage crisis.
A viable alternative to massive government-interventionist "solutions" to the housing market must first and foremost protect law-abiding taxpayers by refusing to burden them with subsidizing market failure, fraud, and poor investment decisions. We must also reject slush funds for political activist organizations; encourage personal accountability and responsible borrowing, lending, and investing; stimulate the creation of wealth; and address the fact that Fannie Mae and Freddie Mac remain at the core of the housing problem. Only by remaining committed to these tried-and-proven principles will we restore stability and profitability to the mortgage industry.
Lesson from AIG: Time to Stop the Bailout Stampede
Posted By: Rep. Trent Franks on March 18, 2009
Filed Under: Financial Sector Economy Federal Budget
TownHall.com
The doublespeak coming from leading Congressional Democrats and the Obama Administration has reached new heights this week. Taxpayers are rightfully outraged at reports that after financing hundreds of billions in federal bailouts, they are now also footing the bill for AIG executives receiving $165 million in retention pay and "performance-based" bonuses-- when many of these same executives are responsible for putting AIG in its untenable position in the first place.
The Administration is likewise expressing outrage over the AIG bonus payments, but this of course comes after White House Press Secretary Robert Gibbs assured the American people that the Administration knew how every dime AIG had received thus far had been spent. The White House continues to offer no explanation for the fact that these bonus contracts were on the books well before the most recent plan to award the struggling financial conglomerate with another $30 billion was announced.
To be clear, American taxpayers have financed AIG's bad investment and management decisions not once, but three times: first a $60 billion loan, then $50 billion to buy toxic assets, and then $40 billion to buy preferred shares of stock. And now, another $30 billion installment from the second half of TARP (Troubled Asset Relief Funds) approved earlier this year.
Then, Monday night, after most of the AIG bonuses had already been disbursed, Democrats began calling for a tax on the AIG executives who had received these hefty bonuses. Yet only a month ago, when the Senate considered the $787 billion stimulus bill, Senate Democrats passed an amendment by Senator Chris Dodd providing an exception for "contractually obligated bonuses agreed on before Feb. 11, 2009." That is, Senator Dodd and other Democrat leaders who are decrying the outrageousness of exorbitant executive bonuses were the very ones to guarantee that the bonus checks would be written.
Senator Dodd arguably wields more influence over the banking industry than any other Member of the U.S. Senate, as Chairman of the Senate Committee on Banking, Housing, and Urban Affairs. According to opensecrets.com, Senator Dodd was AIG's largest single recipient of campaign donations during the 2008 election cycle; and one of AIG's largest offices is based in Connecticut. The connection is stark: the Senator from Connecticut ensured executives were allowed to receive their exorbitant bonuses even at the expense of American people struggling to pay their bills and keep their homes.
It's becoming increasingly clear that both the elected and appointed Democratic leaders at the helm of the world's largest financial ship of state, responsible for navigating us out of a spiraling economic crisis, have forfeited the common sense and commitment to the principles of a free market -- the most basic of which is the freedom of business to succeed and the freedom to fail -- which have formed America's economic compass for over two hundred years.
Confidence in the ability of our national leaders to restore stability to our financial markets is the most crucial factor to encouraging the investment of private capital and incentivizing growth in our financial markets again. But with government leaders performing like this, one can't blame the markets for continuing to lose faith.
As for the executive bonuses, unfortunately these contractual obligations are binding and it remains unclear as to whether there is any clear and constitutional method for the government to recoup the $165 million it allegedly never intended to give to the AIG executives. Over two hundred years of common law precludes the imposition of retroactive taxation or a politically-motivated tax aimed at specific individuals, let alone the dangerous precedent that would be set by such action.
But hardworking taxpayers should not lose sight of the bigger picture. The unfortunate reality is that $165 million is a mere drop in the bucket when one considers that they are actually being left on the hook for nearly $200 billion in bailout funds AIG has been allocated at taxpayer expense.
The AIG bonus fiasco only signifies the much larger problem of government intervention in the private sector, whether in the mortgage industry, credit markets, or any other aspect of our free market economy. Those of us who have voted against each of the consecutive government bailouts starting in September 2008 cannot help but believe that our commitment to preserving the principles of our free market has now been vindicated.
If we're to effectively "plug the holes" in the deflating balloon of consumer confidence, the Democratic leaders in government must commit to returning to the simple principles of personal responsibility, transparency, and integrity which they're demanding of everyone else, whether individuals or financial giants like AIG. Looking forward, the only viable response to incentivizing real economic growth and bringing true stability to our ailing financial markets absolutely must include an exit strategy for the growing government monopolies of private financial assets.