In 2003, the New York Times ran this article on proposed reforms to Fannie Mae and Freddy Mac:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ...

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session. ...

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies. ...

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

I believe these were known as the Shelby (R AL) hearings if you care to Google it.

McCain’s attempt to fix Fannie Mae, Freddie Mac in 2005

[From http://hotair.com/archives/2008/09/17/mccains-attempt-to-fix-fannie-mae-freddie-mac-in-2005/  I excerpt the following]

Politically, the pertinent question is this: Which candidate foresaw the credit crisis and tried to do something about it? As it turns out, John McCain did — and partnered with three other Senate Republicans to reform the government’s involvement in lending three years ago, after an attempt by the Bush administration died in Congress two years earlier. McCain spoke forcefully on May 25, 2006, on behalf of the Federal Housing Enterprise Regulatory Reform Act of 2005 addressed the President of the Senate:

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation.

In this speech, McCain managed to predict the collapse that has forced the government to eat Fannie Mae and Freddie Mac, along with Bear Stearns and AIG. He hammers the falsification of financial records to benefit executives, including Franklin Raines and Jim Johnson, both of whom have worked as advisers to Barack Obama this year. McCain also noted the power of their lobbying efforts to forestall oversight over their business practices. He finishes with the warning that proved all too prescient over the past few days and weeks.

Republicans and the Regulator repeatedly cried danger and called for reform.

Gateway Pundit published a list of warnings and attempts for reform by President Bush Fannie Mae and Freddie Mac. They counted 17 such attempts since 2001.

But Congress would not act on the president's warnings: The list of top 5 recipients of campaign donations from Freddie and Fannie may explain the blockage.

In 2005-- Senator John McCain partnered with three other Senate Republicans to reform the government’s involvement in lending.
Democrats blocked this reform, too.

Blame

Some have claimed seen the mortgage mess is a failure of Republicans and/or the free market system. The popular German magazine Der Spiegel declared we have seen the end of American capitalism

Responsibility is widespread. The bulk would seem to fall on the greedy home buyers who bought higher than they could afford and the Democratic Party who conceived, expanded an untenable project protected it from reform attempts by Republicans. Some salient points;

1. Government Sponsored Enterprises are not are not free market private entities. It was Government Sponsored Enterprises (spawned under the Carter administration, I believe) that are the root of the problem.
2. Andrew Cuomo, son of Gov Mario and Secretary of HUD under Clinton saw that 41% of GSE loans were for “affordable” housing, i.e. risky loans. i.e. sub prime loans. Rather than advocating reduction to reduce the risk level he urged the level be increased to 50%. Atty General Janet Reno supported Cuomo’s position effectively making it a mandate.
3. Nationally chartered banks are required to keep 12% reserves which means they can lend up to 8 times the money they have on hand (the reciprocal of 12). That’s the maximum for banks. The GSEs however are allowed to lend 30 times the money they have on hand. Another example of a reasonable rule applied to private enterprise but not to government.
4. Wall Street is complicit, but in my opinion amoral. That’s amoral, not immoral. For better or worse Wall St is about money not politics, ideology or morality. Sometimes that’s better, sometimes that’s worse. Congress sets the rules. Wall St looks for opportunities within the rules.
5. Securitization of debt, derivative instruments thereof and the power of computerization enabled the creation of real assets whereof no one could assuredly determine the value. There is real value but no one knows what it is. Everyone knows it is less than face value. How much less is a mystery.
6. Sarbanes Oxley, the government’s response to the Enron fraud, requires corporations to value all assets at current market value. It’s called marking to the market. It’s a mild headache for manufacturing companies, an administrative killer for midsize companies and has become the fly in the ointment for financial companies. When no one knows the value of an asset, but everyone knows it is distressed there are no buyers. Any asset, and particularly a derivative security is only worth what someone will pay for it. No buyers, no market value, the government says you must report it as worthless, more or less.
7. Lenders are complicit. Lenders exploited the government largess that flowed thru the GSEs. Encouraged by Congress to expand lending to all Americans, financially able or otherwise, lenders offered ARMs with introductory teaser rates, SILs (Stated Income Loans, no income verification required, dubbed NINJA loans for No Income No Job no Assets). The government provided the money via the two GSEs.
8. Buyers are complicit. Given a virtually unlimited supply of money available for real estate, no questions asked, no money down required, government sponsorship, a lot of people are going to commit beyond their means. Also all the elements were there to fuel a boom. Booms invite speculation. Booms always bust. Unlike the dot com spike this was a government sponsored boom.
9. Summary, opinion and conclusion. Today’s problem was incubated by the government with the probably well intentioned idea of extending home ownership to lower income echelons. It’s almost a mathematical law, government + real estate = corruption. Corruption occurred (Raines). But there was more than corruption. It became a font of funds for everyone from welfare recipients to fat cat speculators. Alan Greenspan saw the reality and warned Congress. The regulator Lockhart alerted President Bush of the house of cards and begged for more regulatory authority. The President and some Republicans urged Congress to tighten regulation. McCain and two other Republicans introduced a reform bill but were unable to prevail against Democratic opposition.
10. After thought. When it was all private enterprise lenders required meaningful down payments and assurance that buyers could afford to honor their commitments. Initial home ownership was more difficult, but foreclosures were rare. Then the government decided they could improve on it. If the government had not come in to help we would not be facing the financial crisis we are working through today.