“Greed” is the popular answer if you ask the politicos, but it’s actually a lot more complicated than that. World Net Daily has a fascinating, revealing piece that quotes named analysts talking about the policies that led up to the crisis we’re seeing today:
“Home mortgages have been a political piÃ±ata for many decades,” writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.
Liebowitz puts forward an explanation that he admits is “not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown.”
In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country’s financial foundation to achieve its goal.
“In an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s,” Liebowitz writes. “The decline in mortgage underwriting standards was universally praised as ‘innovation’ in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists.”
He continues, “Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise.”
“As homeownership rates increased there was self-congratulation all around,” Liebowitz writes. “The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership.”
An article in the Los Angeles Times from the late ’90s praised the sudden surge in homeownership among minorities, calling it “one of the hidden success stories of the Clinton era.”
John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.
According to Lott, the Federal Reserve Bank of Boston produced a manual in the early ’90s that warned mortgage lenders to no longer deny urban and lower-income minority applicants on such “outdated” criteria as credit history, down payment or employment income.
Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and praised lenders â€“ like Countrywide and Bear Stearns â€“ for adopting the slackened policies toward minority applicants.
“Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac,” writes Lott, “the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising.”
A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
An ominous paragraph of the article reads, “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 1980s.”
What happened when Republicans in Congress tried to do something about this problem? Read on:
A few years later, when Greg Mankiw, chairman of President Bush’s Council of Economic Advisers, voiced a warning about weakened underwriting standards, Congress rebuffed him as well.
The Wall Street Journal quoted Congressman Barney Frank, D-Mass., in 2003 as criticizing Greg Mankiw “because he is worried about the tiny little matter of safety and soundness rather than ‘concern about housing.'”
Frank, chairman of the House Financial Services Committee, rejected a Bush administration and Congressional Republican plan for regulating the mortgage industry in 2003, saying, “These two entities â€“ Fannie Mae and Freddie Mac â€“ are not facing any kind of financial crisis.” According to a New York Times article, Frank added, “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’ve excerpted some key parts of the article, but please do make sure to read the whole thing. It’s eyeopening.
There are some who would suggest that this is no time to “be partisan” and that we should all come together to try and resolve the problem. For anyone reading this blog who believes that, you’re going to be sorely disappointed, because I believe it’s important to see how we got to where we are now – and it was thanks in no small part to politically correct Democrats in Congress who for years threw sensible financial policy out the window under the guise of “helping minorities.” No, Wall Street’s not been perfect and I’m sure there’s no small amount of greed amongst the movers and shakers there, but let’s not kid ourselves and put all this on their backs: While we’re passing around blame, a significant chunk of it should rest on the shoulders of the Democrats (and some Republicans) who helped create the mega-billion dollar mess that we’re in now, and who now want to act like only they are the only ones who know how to responsibly clean it up (are you listening, Chris Dodd?).
Read this piece to see what efforts the Bush adminstration made to try and stop the meltdown before it happened:
President Bush was receptive to reform. He withheld nominees for Fannie and Freddie’s boards — a presidential privilege. While it would have been valuable politically to use such positions to reward supporters, the president put good policy above good politics.
The administration did not accept half-measures. In 2005, Republican Mike Oxley, then chairman of the House Financial Services Committee, brought up a reform bill, and Fannie and Freddie’s lobbyists set out to weaken it. The bill was rendered so toothless that Card called Oxley the night before markup and promised to oppose it. Oxley pulled the bill instead.
During this period, Sen. Richard Shelby led a small group of legislators favoring reform, including fellow Republican Sens. John Sununu, Chuck Hagel and Elizabeth Dole. Meanwhile, Dodd — who along with Democratic Sens. John Kerry, Barack Obama and Hillary Clinton were the top four recipients of Fannie and Freddie campaign contributions from 1988 to 2008 — actively opposed such measures and further weakened existing regulation.
The president’s budget proposals reflected the nature of the challenge. Note the following passage from the 2005 budget: Fannie, Freddie and other GSEs “are highly leveraged, holding much less capital in relation to their assets than similarly sized financial institutions. … A misjudgment or unexpected economic event could quickly deplete this capital, potentially making it difficult for a GSE to meet its debt obligations. Given the very large size of each enterprise, even a small mistake by a GSE could have consequences throughout the economy.”
That passage was published in February 2004. Dodd can find it on Page 82 of the budget’s Analytical Perspectives.
Bush got involved in the effort personally, speaking out for the cause of reform in December. He even mentioned GSE reform in this year’s State of the Union address.
How did Fannie and Freddie counter such efforts? They flooded Washington with lobbying dollars, doled out tens of thousands in political contributions and put offices in key congressional districts. Not surprisingly, these efforts worked. Leaders in Congress did not just balk at proposals to rein in Fannie and Freddie. They mocked the proposals as unserious and unnecessary.
As recently as last summer, when housing prices had clearly peaked and the mortgage market had started to seize up, Dodd called on Bush to “immediately reconsider his ill-advised” reform proposals. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said that the president’s suggestion for a strong, independent regulator of Fannie and Freddie was “inane.”
Also I noted in a prior post, McCain’s on record as being on board (and was in fact a co-sponsor on a bill) with the proposed regulatory overhall back in 2005. Where was Barack Obama? Where was Joe Biden? How about Chris Dodd, who is laughably trying to take charge of the issue today after initially being against any efforts at real reform and regulation?
The record is clear. Though Republicans on this issue are hardly perfect, when it came to trying to head this problem off at the pass, key Republicans – starting straight at the top with the President – tried to get meaningful reform and regulation of the financial lending industry passed year after year, and Democrats led the pack in opposing it every step of the way. And now they want us to trust them to fix it? I don’t think so.
Related 2: Fox News investigates: Who’s responsible for the Fannie and Freddie mess?
… and the Ace of Spades unloads.