What Caused The Loan Crisis?
The answer is: President Clinton wanted it that way.
Fannie Mae and Freddie Mac, even into the early 1990s,
weren't the juggernauts they'd later be.
While President Carter in 1977 signed the Community
Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to
minority communities, it was Clinton who supercharged the process. After
entering office in 1993, he extensively rewrote Fannie's and Freddie's
rules.
In so doing, he turned the two quasi-private,
mortgage-funding firms into a semi-nationalized monopoly that dispensed
cash to markets, made loans to large Democratic voting blocs and handed
favors, jobs and money to political allies. This potent mix led
inevitably to corruption and the Fannie-Freddie collapse.
Despite warnings of trouble at Fannie and Freddie, in 1994 Clinton
unveiled his National Homeownership Strategy, which broadened the CRA in
ways Congress never intended.
Addressing the National Association of Realtors that year, Clinton
bluntly told the group that "more Americans
should own their own homes." He meant it.
Clinton saw homeownership as a way to open the door for blacks and other
minorities to enter the middle class.
Though well-intended, the problem was that Congress was about to change
hands, from the Democrats to the
Republicans. Rather than submit legislation that the GOP-led Congress was
almost sure to reject, Clinton ordered Robert Rubin's Treasury Department
to rewrite the rules in 1995.
The rewrite, as City Journal noted back in 2000, "made getting a
satisfactory CRA rating harder." Banks were given strict new numerical
quotas and measures for the level of "diversity" in their loan
portfolios. Getting a
good CRA rating was key for a bank that wanted to expand or merge with
another.
Loans started being made on the basis of race, and often little else.
"Bank examiners would use federal home-loan data,
broken down by neighborhood, income group and race, to rate banks on
performance," wrote Howard Husock, a scholar at the Manhattan Institute.
But those rules weren't enough.
Clinton got the Department of Housing and Urban Development to
double-team the issue. That would later prove disastrous. (This is Henry
Cisneros time to shine-
former San Antonio mayor who couldn't keep his zipper up.)
Clinton's HUD secretary, Andrew Cuomo, "made a
series of decisions between 1997 and 2001 that gave birth to the
country's current crisis," the liberal Village
Voice noted. Among those decisions were changes that let Fannie and
Freddie get into subprime loan markets in a big way.
Other rule changes gave Fannie and Freddie extraordinary leverage,
allowing them to hold just 2.5% of capital to back their investments, vs.
10% for banks.
Since they could borrow at lower rates than banks due to implicit
government guarantees for their debt, the
government-sponsored enterprises boomed.
With incentives in place, banks poured billions of dollars of loans into
poor communities, often "no doc" and
"no income" loans that required no money down and
no verification of income.
By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12
trillion U.S. mortgage market - a staggering exposure.
Worse still was the cronyism.
Fannie and Freddie became home to out-of-work politicians, mostly Clinton
Democrats. An informal survey of their top officials shows a roughly
2-to-1 dominance of Democrats over Republicans.
Then there were the campaign donations. From 1989 to 2008, some 384
politicians got their tip jars filled by Fannie and Freddie.
Over that time, the two GSEs spent $200 million on lobbying and political
activities. Their charitable foundations dropped millions more on think
tanks and radical community groups.
Did it work? Well, if measured by the goal of putting more poor people
into homes, the answer would have to be yes.
From 1995 to 2005, a Harvard study shows, minorities made up 49% of the
12.5 million new homeowners.
The problem is that many of those loans have now gone bad, and minority
homeownership rates are shrinking fast.
Fannie and Freddie, with their massive loan portfolios
stuffed with securitized mortgage-backed paper created from subprime
loans, are a failed legacy of the Clinton era.
By TERRY JONES
INVESTOR'S BUSINESS DAILY Posted Wednesday, September
24, 2008 4:30 PM PT
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3 comments:
http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:
The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) the crisis is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.
Thats not what this meant. What i meant to get across. I all I wanted to prove was that the Clinton Administration did have a major role in this, yet many deny it. For the most part we actually agree on the causes.
Agreed
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