"Everyone has a theory about the financial crisis. These theories range from the absurd — from claims that liberal Democrats somehow forced banks to lend to the undeserving poor (even though Republicans controlled Congress) [...]" (Paul Krugman, NYT, March 7, 2010)There that Krugman fool goes again. Wins a Nobel Prize ostensibly for economics (but probably because the left-leaning Nobel Prize committee wanted to give credibility to his paranoid leftist rants in the NYT editorial pages) and now he thinks he can veto truth, facts, and history.
Call it force or call it pressure, but the government placed LOTS of it on banks, mortgage lenders like Countrywide, and Freddie Mac and Frannie Mae in order to boost homeownership among minorities. And no one claims it was just coming from the liberal Dems. Bush Junior was just as responsible for pressuring banks to lend to underqualified minorities with low incomes and bad credit as the Dems. But don't take my word for it. Krugman's employer, the New York Times, does a great job in chronicling how leftists and politicians pressured banks and mortgage lenders to loan more to minorities.
Leftists don't want you to know that the subprime mortgage crisis was spawned by themselves and wooly-eyed politicians. Why? Because then they would have to cease and desist from their never-ending activism to "close the gap" in homeownership between whites and minorities.
In this blog, I will show how leftists and our government - with the best of intentions of course! – helped bring about the subprime mortgage crisis.
And to avoid accusations of bias, I will only use archived articles from the New York Times – Krugman's employer and our nation's premier leftist newspaper!
First some background. Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage commercial banks and savings associations (basically "depository" financial institutions) to lend more in minority communities. Banks launched outreach programs to encourage creditworthy minorities to apply for home mortgages and some progress was made in "closing the gap" in homeownership. Still, progress was limited by the simple fact that many minorities did not have the income or credit standing to own homes. But leftist activists were undeterred by these inconvenient facts. For them, homeownership was a "right" - not a privilege. "You're telling us that a limited pool of qualified minorities is slowing progress? Well then standards be damned! Qualifications and eligibility be damned! Give us results. Period! Just get the dollars flowing into minority communities now, or else!!" And so after winning de-facto quotas in university admissions, job recruitment, and government contracts, leftists began to push for defacto quotas in home mortgages.
However, these leftists would have to sit tight through three Republican administrations before Bill Clinton, elected to the White House in 1992, gave them a green light to push forward with their radical plans. Clinton was not in office one year before he put teeth into the Community Reinvestment Act (CRA) to more or less "force" banks to make loans to minorities. And Congress's approval was not needed to pass these radical changes because the White House, as the executive branch of government, portrayed the moves as simply "enforcement" of the Act.
But don’t take my word from it. The New York Times – our friendly leftist newspaper! – reported on the moves at the time.
"Clinton Proposes Tough New Rules On Bias By Banks" (NYT, December 9, 1993)
The Clinton Administration proposed tough new tests today that are intended to insure that banks end discrimination in their lending to members of minority groups and to people with low and moderate incomes.
The changes are the latest effort by the Administration to broaden access to credit, financial services and investments. Officials predicted that people and businesses in these groups would gain access that they might not otherwise get to billions of dollars in credit once the proposals take effect in 1995.
The regulations, which set higher standards for banks, for the first time apply objective measurements on three levels. [Race Realist: No more outreach. Give us quotas!] Banks would be tested in several ways to determine if their overall pattern of lending in specific neighborhoods was biased, when compared to their overall lending and those of competitors. They would also be judged on whether they were making investments in a community's growth, like grants for economic redevelopment, and whether they were providing a full array of customer services.
Although Federal examiners would still have a fair amount of leeway in determining whether an institution was complying with the law, banks could for the first time face sanctions like binding orders or fines to change their practices.
That would give regulators additional power. Now, a bank's poor record in this area can affect whether the Government will permit bank acquisitions or mergers, and institutions that fall short have been sued by community groups or regulators. Lately, Federal regulators have blocked bank acquisitions when they regarded a lending pattern unfavorably. [RR: Few loans in minority communities? Sorry, won't approve your merger. This explains why it was the biggest banks – the ones who needed to curry favor with the government for approval of their mergers and therefore ramped up lending in minority communities – who were the hardest hit by the subprime mortgage crisis and ultimately had to be bailed out by the government.]
The proposal is the most important modification of equal-lending enforcement since 1977, when Congress passed the Community Reinvestment Act. That law was intended to force [RR: Hmm. NYT uses the word "force," Mr. Krugman? Is this idea really so "absurd"? And if Wall Street was so anxious to write dangerous subprime mortgages, then why did the govt have to "force" them? ] banks to make loans to individuals, businesses and groups in neighborhoods that many large financial institutions had shunned.
While the law has been effective in some ways, there were growing complaints from consumer groups that the method for evaluating a bank's lending activity was too lenient. [RR: Show us the money!] While it has been hard to measure how much discrimination has gone on, numerous studies, including one from bank regulators, reported that minority-group applicants for home mortgages, for instance, were denied loans at a higher rate than whites were offered even when other social factors were considered.
Banks did not like the law and its regulations because compliance required excessive paper work.
Under the newly proposed standards, regulators would evaluate banks based on specific lending and market-share data that would measure actual lending. But they would not set fixed credit quotas. [RR: Again, just like in university admissions, they avoid calling it quotas, but if loans don't reflect the "diversity of the community," then the heavy hand of the law will come crashing down.] The proposal is subject to further review and debate for two months, but faces no major opposition and requires no Congressional action.
Today, consumer groups and banking organizations, which have not seen eye to eye on lending regulations, praised the central elements of the Administration's plan, although each side found something to criticize in the details.
The Administration, which promised the changes months ago, has been pressing on several fronts to increase lending in poor and ethnic-minority communities. The issue of fair credit has been increasingly prominent in recent years, as several studies have shown that banks have persistently failed to provide equal credit opportunities, despite laws and regulations.
Eugene A. Ludwig, the Comptroller of the Currency and the Administration's leading advocate of fairer lending practices, said the new approach emphasized "performance over paper work."
All four Federal banking agencies are expected to issue similar rules. But some members of the Federal Reserve Board, which plays a crucial role in enforcing the law, are less enthusiastic than some of the other agencies about the new approach, something that is likely to emerge at the board's meeting on its proposed regulations on Friday.
In particular, the Fed has opposed the collection of racial data on small-business loans, as is done already with mortgage loans. Advocates of more aggressive enforcement of the fair lending law called this an important gap in the proposed new rules.
"The Fed appears to have won many of the key battles in the fights among agencies over these rules," said Deepak Bhargava of Acorn [RR: Yes, that upstanding organization we're all familiar with! The one Obama represented as an attorney and taught its activists Alinksy's "Rules for Radicals"!], a national group that lobbies for lending and housing reform. "I would almost characterize their efforts here as obstruction of the President's efforts. I would call them the George Wallace of C.R.A. reform, blocking the door to getting something done." [RR: Leftists using the old good vs. evil argument. We're moral. The opposition are racists.]
Lawrence B. Lindsey, a governor of the Federal Reserve, who appeared with other officials at the White House to discuss the proposal, said in a telephone interview that he and his colleagues had some concerns about the proposals, but were not at odds with the other banking agencies.
"This is a very radical proposal; there is no question about it," said Mr. Lindsey, who heads the board's committee on the Community Reinvestment Act. "It will benefit at this stage from public comment. We are going where no man has gone before, and if you do that, I think you want to do it right."
Among bankers, Leo F. Mullin, president of the First Chicago Corporation, said, "The proposal represents a positive and promising step toward improving the effectiveness and efficiency of the Community Reinvestment Act."
Michelle Meier, counsel for government affairs at Consumers Union, said, "The Clinton Administration is on the right track."
(snip)
For the first time, banks would have to publish data detailing where in their marketing areas they provided services like checking accounts and automated teller machines, and what types of community investments they had made.
In the past, they had to document their efforts to expand operations throughout their local markets, but these might not be good indications of actual lending.
(snip)
In the end, regulators based assessments on 12 factors, a time-consuming process that often resulted in subjective judgments..Anyone surprised to see ACORN and the usual cornucopia of leftist organizations involved in all of this?! They frequently lodged complaints under the CRA whenever banks sought regulatory approval for mergers. They also tried to "shake down" the banks to commit a certain level of dollars to minorities, and "shame" them for not "investing" enough in minority communities.
The new rules set three evaluation standards for banks to meet. If a banks was given relatively low ratings on the tests, it would have time to improve before facing sanctions.
The lending test would evaluate direct lending as well as indirect lending through participation in loan pools or credit subsidiaries. [RR: Eventually, even subprime mortgaged-backed securities would be A.O.K! Hence banks bought up the subprime MBS to meet their unstated loan "quota."]
The service test would evaluate the bank's branch network in low- and moderate-income areas, and the availability of credit services like counseling.
An investment test would take into account investments in groups that foster community development, minority ownership of businesses, and affordable housing. It would also look at, for example, whether the bank is buying community bonds for housing or hospital financing.
Under the lending test, a bank would be evaluated in two ways.
First, its loans would be assessed to see how its lending patterns compared with other banks operating in the same local markets.
In a second and separate test, its loans would be analyzed without regard to how other institutions were performing, but on whether its loans were concentrated in one part of its market. Agencies would examine the ratio of the bank's loans made in neighborhoods of low and moderate income in comparison to loans throughout its service area.
The regulations would not require a bank to offer specific types of loans, to make any particular loan or investment,[RR: Yeah right. And affirmative action does not require universities or government departments to make quotas or set-asides for minorities - but we all know the hysteria that breaks out if the numbers don't match the "diversity of the community"] or to make loans or investments that were expected to lose money or otherwise undermine the bank's safety or soundness [RR: Sure. And affirmative action doesn't lead to the hiring or admission of under-qualified minorities. Please! The banks lost so much money from giving subprime mortgages to unqualified borrowers that a trillion-dollar taxpayer-funded bailout was required!]
But leftists and politicians knew that persuasion and pressure would only get them so far because – as leftists are quick to point out - the CRA only covers "depository" institutions [i.e. banks] but not mortgage-only lenders like Countrywide. This meant that incentives would also be needed to encourage both banks and mortgage lenders to lend more to minorities.
And this is where Fannie Mae and Freddie Mac came to play a central role in the Minority Mortgage Meltdown. Banks obviously did not want to make dangerous loans. But if politicians could pressure Fannie Mae and Freddie Mac – both semi-governmental agencies with a federal mandate to expand "affordable" homeownership - to buy subprime mortgages and subprime mortgage-backed securities (MBS) junk from private banks and mortgage lenders, then private banks and mortgage lenders, freed of the junk, would be willing to make even more of these junk loans!
The plan was a marvelous one and worked brilliantly, if by brilliantly you mean causing the subprime mortgage market to expand exponentially. And it all started during the Clinton administration. The Department of Housing and Urban Development (HUD, formerly headed by Henry Cisneros) pressured Fannie Mae (headed by the African-American Franklin D. Raines) to buy more subprime junk. But again, don't take my word for it. Read this old article from our friendly leftist newspaper the New York Times:
"Fannie Mae Eases Credit To Aid Mortgage Lending" (NYT, Sep 30, 1999)
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.Interruption. Don't you think the NYT was quite honest about what was going on while all this was considered "good work"? I, for one, am impressed :) But then again, they didn't know that the seeds were being planted for the Great Recession...
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers [RR: The government wants us to make these junk loans to minorities – ok, we will do that, but only if you take the junk off our back!] These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."
(snip)
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 1980's. [RR: These words, in 1999, were prophetic!!!]
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' [RR: Again, prophetic! Conservative think tanks were already forecasting that we would face trouble down the road.]
(snip)
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's [RR: Yeah, with help from the Clinton administration which put teeth into CRA enforcement.] The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants. [RR: For heaven's sake! The underwriting systems are automated precisely to prevent human bias and 'discrimination' in the loan granting process! Race cannot possibly be a factor! So – let me get this straight – they're claiming that somehow mathematical algorithms discriminated against blacks? Geesh.]So Clinton and the Dems were already pressuring Fannie Mae and Freddie Mac in the 1990s to buy up subprime mortgages and subprime mortgage-backed securities from banks since this would relieve banks of the risk and encourage them to make MORE subprime loans. Banks were happy with this arrangement because they could profit initially from originating and selling the subprime loans, and could pass to Fannie and Freddie the ticking time bombs that eventually exploded in everyone's faces causing trillions of dollars of taxpayer losses.
But Bush Junior was also anxious to get in on the action and prove his bona fides as a "compassionate conservative." The Clinton administration may have set the minority mortgage train wreck in motion, but the Bush administration revved up the engine.
Again, let's revisit an old article from our friendly leftist newspaper the New York Times early in the Bush administration.
"HUD Candidate Would Seek More Homes for Minorities" (NYT, January 18, 2001)
President-elect George W. Bush's choice for secretary of housing and urban development, Melquiades R. Martinez, told a Senate committee today that he would work to ensure that more minority families owned homes and would fight any effort to reduce the department's budget.
''Despite record-high levels of homeownership, African-American and Hispanic-American homeownership rates remain below 50 percent,'' Mr. Martinez said. ''That is not acceptable.'' [RR: Since when does the government decide what homeownership rates are acceptable?! What's wrong with renting when that's all you can afford?]
(snip)
''Unless we make sure that everyone is participating in this great economic expansion and until we ensure that barriers to home ownership are torn down for everyone,'' he said, ''until then, our job is not done.''
(snip)And how about Bush's State of the Union Address on January 30, 2002: "Members, you and I will work together in the months ahead on other issues: productive farm policy, a cleaner environment, broader home ownership, especially among minorities, and ways to encourage the good work of charities and faith-based groups."
Advocacy groups that had been wary of Mr. Martinez and his thin record on housing said today that they were not opposed to his confirmation and looked forward to working with him. [RR: Lefitsts supported Bush's nomination?! Bad sign! Who needs leftist enemies when you have conservative friends like Bush...]
''We were encouraged that he understands the country is facing a serious problem that there is not enough affordable housing for low-income families,'' said Sheila Crowley, president of the National Low Income Housing Coalition.
Senator Paul S. Sarbanes, the Maryland Democrat who is the chairman of the Committee on Banking, Housing and Urban Affairs until Saturday, when the Republicans take over, opened the hearing by announcing that the long-troubled housing agency had been removed from the government's ''high-risk'' category because of management changes under Andrew M. Cuomo, the departing secretary. [RR: Delusional Democrats! They had removed HUD from the high-risk category?!]
(snip)
Echoing Mr. Bush's campaign theme of compassionate conservatism, Mr. Martinez said he hoped to create partnerships with religious organizations and nonprofit groups to help solve housing problems. And once again, he pointed to his work in Florida as a model. [RR: Florida – also known as ground zero of the subprime mortgage crisis!]
True to his promise, this was a major initiative of his. See the following NYT article at the time.
"Bush Calls Transformed Area A Model Program for Housing" (NYT, June 18, 2002)
Mr. Bush visited largely hostile political territory to make the case that his administration was working to close a gap between the percentage of whites who own houses compared with that for blacks and Hispanics.
(snip)
''There is a homeownership gap in America,'' [RR: Gap this, gap that! The real question is whether the gap reflects real differences between the races. If it does, then all the effort in the world will not close the gap. We hear today that homeownership among blacks and Hispanics fell back to pre-crisis levels following the subprime meltdown.] Mr. Bush told 450 people like politicians, architects and residents who have moved into the tidy single-family houses that have been built here. ''The difference between Anglo-American and African-American homeownership is too big.''
About 74 percent of whites own their houses, compared with 48 percent of blacks and Hispanic residents, according to government statistics that the White House cited.
(snip)
It was unclear how Mr. Bush would reach his goal of 5.5 million new homeowners from minorities by 2010. The administration seems to be relying heavily on programs developed by two federally chartered corporations, Fannie Mae and Freddie Mac, the major players in the secondary mortgage market [RR: The "secondary mortgage market" basically refers to the buying and selling of mortgages that have already been originated, or securities backed by mortgages. In other words, Bush would have Fannie and Freddia buy up the subprime mortgages and subprime mortgage-backed securities (SMBs) from banks and mortgage lenders.]The NYT reports Clinton boasting, upon his leaving the White House on Jan 20, 2001 about "record levels of home ownership."
The head of Fannie Mae, Franklin Raines, said he had re-oriented many Fannie Mae programs ''to deal with people who have less than perfect credit'' and to lower down payment requirements ''to make it more easily possible'' for lower-income families to afford houses.
''Minorities are likely to be the beneficiaries,'' Mr. Raines said.
He added that Fannie Mae would increase loans to minorities, to $700 billion through 2009, a $280 billion increase over $420 billion promised in 1999, when he took over the corporation.
Bush made a similar boast in his 2005 State of the Union Address – two years before the subprime meltdown began - saying "We've raised homeownership to its highest level in history."
So in summary, it was leftists and wooly-eyed politicians who, through a carrot and stick approach, pressured banks and mortgage lenders to churn out subprime mortgages. The "stick" was the CRA. Politicians and leftists used the CRA to force banks to give minorities loans or risk penalties. The "carrot" was Fannie/Freddie. Politicians pressured Fannie and Freddie to buy up the subprime junk from banks and mortgage lenders like Countrywide because this would incentivize these banks and mortgage lenders to originate even more subprime loans! The CRA and Fannie/Freddie were both essential to forming the "perfect storm" that was the subprime mortgage crisis. Any leftist explanation that leaves out one or the other is biased.
With Fannie/Freddie taking the subprime junk off their books, banks and mortgage lenders went into a frenzy originating subprime loans. They invented paperless mortgage applications where you no longer needed evidence of income, savings, or even legal residency! They invented no-down-payment mortgages! Without down payments - the whole purpose of which is to keep borrowers responsible by making them put some of their own money on the line - borrower responsibility went out the window. Why not take out the biggest loan possible even if your income can't justify it? After all, you have nothing to lose if you've put nothing down!
Krugman is blinded to the truth by his partisanship and paranoid hatred for any views that might be interpreted as even slightly right of center.
It's funny. Krugman, after dismissing as "absurd" the possibility that political pressure on banks helped caused the subprime mortgage crisis, tries to buttress his argument with a research paper, but this paper also partly attributes the crisis to ideology, "stressing the way US politicians celebrated the ideal of homeownership." But Krugman cherrypicks. He generally likes the paper's conclusions, but not this one: "the authors of this paper get this wrong" he says.
Leftists like to claim that banks made subprime mortgages of their own free will on the expectation that these loans would be "profitable," and that political pressure played no role.
But if the loans were so profitable, then why was legislation needed - specifically, the Community Reinvestment Act (CRA) - to halt the practice of "redlining" and force banks to lend in minority communities? And why did Clinton have to bolster enforcement by effectively establishing quotas? The answer is clearly that the banks knew subprime mortgages were dangerous and weren't going to make these loans unless they were forced to. Sure banks could charge higher interest rates with subprime mortgages – offering the potential for higher profits – but any initial profits would be wiped out and replaced with enormous losses if the borrowers defaulted. And that's exactly how things played out. Subprime borrowers defaulted in droves and banks posted trillions of dollars in combined losses. We taxpayers are still footing the bill for this pie-in-the-sky scheme.
Leftists, however, have pulled a big one over the gullible US public, though. They have managed to reassign blame for the subprime mortgage crisis to a target everyone loves to hate – Wall Street – thereby absolving themselves of responsibility and allowing them to continue bullying banks into lending to under-qualified minorities. The public falls for this re-write of history because it is human nature to want to attribute bad outcomes (in this case a financial crisis, a nose-diving economy, record joblessness, and record indebtedness) to bad motives. Why? Because it gives us a target for venting moral outrage. It feels good to say "Those greedy Wall Street bastards cheated us!" But what if the public understood our disastrous circumstances were the result of the best of intentions? "Those caring bastards tried to expand homeownership for low-income minorities!" Hmm. See what I mean? It's hard to get riled up…
And yet we are all familiar with the phrase "The road to hell is paved with good intentions." Communism was an ideology founded on the best of intentions ("to each according to his need, from each according to his ability"), but it still created enormous misery for large swaths of humankind.
Americans need to wake up to the fact that leftists are busy at work paving a road to hell for our nation with the best of intentions. In their obsession with expanding homeownership for minorities, they destroyed the economy, driving unemployment to record highs. And never ones to learn from their mistakes, after inviting millions upon millions of illegal and legal mostly Hispanic immigrants to our country – against the will of the majority of Americans – they are obsessed with giving them free or subsidized healthcare that will most certainly bankrupt our nation by the end of this decade and diminish the quality of care (and increase the cost!) for older and middle-class Americans.
But even if leftists refuse to learn from their mistakes. We must not. We must oppose their scatterbrained ideas and policies – however well intentioned! – because nothing less than the country we leave our children and grandchildren rests upon it.
Lastly, Obama likes to pretend that he "inherited" the financial mess from the Bush administration, but Obama is not exactly clean himself. McCain tried to bring attention to Senator Obama's role in the crisis during the presidential debates. The NYT reports: "Mr. McCain has a political interest in tying Fannie and Freddie to the current crisis because the companies have long had close ties to Democrats in Congress, including Senator Barack Obama. James Johnson, a former chairman of Fannie Mae, was a former outside adviser to Mr. Obama, and Mr. Obama in recent years has received more contributions from Fannie and Freddie employees than any member of Congress other than the chairman of the Senate banking committee, Senator Christopher J. Dodd, Democrat of Connecticut." (NYT Oct 16, 2008)
Why Obama? Basically Fannie and Freddie knew they would need the help of their traditional support base in Congress – the Democrats and in particular Obama, a former ACORN attorney - since Republicans were beginning to move to rein in the excesses of these two government-chartered companies. Unfortunately McCain was and still is so bad at presenting ideas to the public that this truth never got through to the average American. They continue to buy Obama's lie that he "inherited" the crisis.
In light of all this, what is the lesson we should take home from the subprime mortgage crisis?
1) Keep the government out of the housing market! No more pie-in-the-sky schemes of promoting an "ownership society."
2) Abolish Fannie Mae and Freddie Mac. Now!!
For more on Fannie's role in the crisis, see the following NYT article:
"Pressured to Take More Risk, Fannie Reached Tipping Point" (NYT, Oct 4, 2008)
Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.
But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.
Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.
(snip)
Mr. Mudd said in an interview that he responded as best he could given the company’s challenges, and worked to balance risks prudently.
“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”
When Mr. Mudd arrived at Fannie eight years ago, it was beginning a dramatic expansion that, at its peak, had it buying 40 percent of all domestic mortgages.
(snip)
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.
(snip)
The company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.
All this helped supercharge Fannie’s stock price and rewarded top executives with tens of millions of dollars. Mr. Raines received about $90 million between 1998 and 2004, while Mr. Howard was paid about $30.8 million, according to regulators. Mr. Mudd collected more than $10 million in his first four years at Fannie.
Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”
The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks. [RR: In other words, "If Fannie will buy this junk from us, we can take more risk and originate more subprime loans!"]
Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from subprime companies offering to help almost anyone buy a home.
(snip)
Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.
But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.
(snip)
Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.
“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”
(snip)
In one meeting, according to two people present, Mr. Mudd told employees to “get aggressive on risk-taking, or get out of the company.”
(snip)
“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior Fannie executive. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”
Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.
(snip)
In the middle of last year it became clear that millions of borrowers would stop paying their mortgages. For Fannie, this raised the terrifying prospect of paying billions of dollars to honor its guarantees.
(snip)
Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.
The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.
“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,” the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. “That’s why I’ve supported them all these years — so that they can help at a time like this.”
(snip)
As the housing crisis worsened, Fannie and Freddie announced larger losses, and shares continued falling.
(snip)
Freddie was given the same message. Less than 48 hours later, Mr. Lockhart and Mr. Paulson ended Fannie and Freddie’s independence, with up to $200 billion in taxpayer money to replenish the companies’ coffers.
The move failed to stanch a spreading panic in the financial world. In fact, some analysts say, the takeover accelerated the hysteria by signaling that no company, no matter how large, was strong enough to withstand the losses stemming from troubled loans.
Within weeks, Lehman Brothers was forced to declare bankruptcy, Merrill Lynch was pushed into the arms of Bank of America, and the government stepped in to bail out the insurance giant the American International Group.
Today, Mr. Paulson is scrambling to carry out a $700 billion plan to bail out the financial sector, while Mr. Lockhart effectively runs Fannie and Freddie.
