EVERYONE THINKS REPUBLICANS CAUSED THE
MORTGAGE CRISIS…
Americans wondering who was responsible for the mortgage
crisis should ask
themselves a question: is owning a home a privilege or a
right?
Despite the meltdown in 2008, the seeds for the mortgage
crisis were sown much
earlier by a Democrat Party long convinced homeownership was
an entitlement.
As this chapter shows, once that basic premise became
conventional wisdom, it
was all downhill from there.
I
f one listens to the mainstream media and many Democrats,
the blame for
the mortgage crisis rests with the Republicans and the Bush
administration.
They’ve convinced the public that Democrats had nothing
whatsoever to do
with our current financial woes.
Precisely the opposite is true: Democrats created the
lax mortgage policies
that precipitated the crisis while simultaneously stifling
Republican efforts to
prevent it.
The history of the crisis started with the Community
Reinvestment Act (CRA),
signed into law by Democrat President Jimmy Carter in
1977. The law was
designed to foster homeownership in low-income communities
by pushing
banks to aggressively lend to low and moderate income
people. At first, it was
easy to comply with the CRA. Banks merely had to
demonstrate that they
did not discriminate in making loans in poor and black
neighborhoods.
When Democrat Bill Clinton became President in 1992, he
broadened the
Community Reinvestment Act in ways Congress had never
intended. In
1995, rather than submit legislation that the Republican-led
Congress was
certain to reject, Clinton bypassed Congress entirely,
ordering the Treasury
Department to rewrite the CRA rules.
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CLEARING UP THE PAST: ECONOMIC INSECURITY
As a result, banks were forced to fulfill loan “quotas” in
low income
neighborhoods.
That wasn’t the only problem. CRA also allowed
community activist groups
such as ACORN (Association of Community Organizations for
Reform
Now), for whom Barack Obama once worked in Chicago, and NACA
(Neighborhood Assistance Corporation of America) to file
complaints that
could affect a bank’s CRA rating. Failure to comply
with CRA or a bad rating
meant a bank might not be allowed to expand lending, add new
branches or
merge with other companies. Banks with poor CRA
ratings were also hit
with stiff fines.
This rewrite of CRA gave activist groups like ACORN and NACA
unprecedented power. Protests often held in bank
lobbies or in front
of the homes of bank officials, coupled with threats of
litigation, allowed
these groups to extort huge sums of money from financial
institutions.
In
response, financial institutions began allocating more funds
to low-income,
high risk borrowers.
Loans started being funded on the basis of race and often
little else.
CRA
became an excuse for lowering credit standards. Many
Democrats have
claimed that banks subject to the CRA represented few of the
mortgages
that led to our current problems. Not true.
Nearly 4 in 10 subprime loans
made between 2004 and 2007 were funded by CRA-covered banks
such
as Washington Mutual and Indy Mac.
Many other subprime lenders not
covered by the Act were, in effect, beholden to CRA mandates
because they
were owned by banks that were subject to it.
Since CRA only covered banks, the Clinton administration
created a separate
department at Housing and Urban Development to police “fair
lending”
policies at other institutions such as Countrywide and
lending behemoths,
Fannie Mae and Freddie Mac.
The result? Countrywide made more loans to minorities than
any other
lender, and not surprisingly, was one of the first lenders
overwhelmed by loan
defaults.
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As groups like ACORN ran their intimidation campaigns
against local
banks, they eventually hit a roadblock. Banks told
them they could afford to
reduce their credit standards by only a little – since
Fannie Mae and Freddie
Mac refused to buy up these risky loans for resale on the
secondary market.
ACORN realized that unless Fannie and Freddie were willing
to relax their
credit standards as well, local banks wouldn’t make enough
loans to individuals
with bad credit histories or with very little money for a
down payment.
Democrats such as Barney Frank (D-MA), Ted Kennedy (D-MA)
and
Maxine Waters (D-CA) allied with the Clinton administration
to broaden
the acceptability of these risky mortgage loans. When
the Republicans
attempted to restore fiscal sanity by paring back the CRA,
they were stymied
by Democrats — and by ACORN.
In 1995, an unrestrained Clinton administration announced a
comprehensive
strategy to push homeownership in America to new heights –
regardless of the
compromise in credit standards that this would
require. Fannie and Freddie
were given massive subprime lending quotas, which would
increase to about
half of their total business by the end of the decade.
Then came the single most catastrophic decision leading to
the housing
crisis: Clinton legalized the securitization of these
mortgages, which allowed
Fannie and Freddie to finance everything by buying loans
from banks, then
repackaging and securitizing them for resale on the open
market.
Thus began the meltdown. In 1997, Bear Stearns handled
the first
securitization of CRA loans — $385 million worth — all
guaranteed by
Freddie Mac.
Subsequently, a subprime market that had been a
relatively
modest part of the mortgage business with $35 billion in
loans in 1994 soared
to $1 trillion by 2008.
Regrettably, this massive bundling of subprime mortgages
wound up
poisoning the entire mortgage industry.
Fannie and Freddie used their “affordable housing mission”
to avoid
restrictions on their accumulation of mortgage
portfolios. They argued
that if they were constrained, they wouldn’t be able to
adequately subsidize
affordable housing. As a result, by 1997, Fannie was
offering mortgages with
a down payment of only 3 percent. By 2001, it was
purchasing mortgages
with “no down payment at all.”
CLEARING UP THE PAST: ECONOMIC INSECURITY
By 2007, Fannie and Freddie were required by Housing
and Urban
Development to show that 55 percent of their mortgage
purchases were to
low and moderate income borrowers, and, within that goal, 38
percent of
all purchases were to come from underserved areas (usually
inner cities).
Meeting these goals almost certainly required them to
purchase loans with
low down payments and other deficiencies that would
characterize them as
subprime or Alt-A.
The decline in lending standards was also facilitated by
competition. Fannie
and Freddie were now competing with private-label mortgage
lenders
such as investment and commercial banks to fulfill the
affordable housing
requirements imposed by Congress.
The inevitable result? Everyone was scraping the
bottom of the mortgage
barrel in search of new borrowers.
Once the looser lending standards were offered to low and
middle income
buyers, it was naïve to believe that they wouldn’t lead to
more relaxed standards
for higher-income and prime borrowers as well.
This spreading of looser
standards to the prime market greatly increased the
availability of credit for
mortgages, and ultimately led to the bubble in housing
prices.
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Unsurprisingly, Fannie Mae and Freddie Mac were huge
campaign
contributors to Congress, spending millions to ensure no
reform would be
implemented to restrict them. In all, 354
members of Congress received
funds. The bulk of the money went to Democrats.
Between 1989 and 2008,
the leading recipient of Fannie/Freddie campaign money was
Connecticut
Democrat Chris Dodd, the Senate Banking Committee Chairman,
who
collected more than $165,000. Dodd opposed
restrictions on Fannie and
Freddie and pushed hard for the continuance of subprime
loans. In second
place was then-Senator Barack Obama, who, in just three
years in the U.S.
Senate, took in $126,000. Third, was Massachusetts Democrat
John Kerry,
who received $110,000.
Since the 1990s, Fannie Mae and Freddie Mac have been run by
Democrats.
From 1991 to 1998, Fannie Mae was led by James Johnson, a
long-time aide to
former Democrat Vice President Walter Mondale. Johnson
made headlines in
2008 when Barack Obama picked him to chair his vice
presidential selection
committee. He had to resign in disgrace when it was
revealed he had taken
out at least five below-market real estate loans totaling
more than $7 million
from Countrywide Financial Corporation.
Johnson’s successor as head of Fannie Mae, Franklin Raines,
had previously
served as a budget director to President Bill Clinton.
From 1995 to 2005,
Raines pocketed nearly $100 million in compensation before
leaving because
of a scandal involving profit and loss reports manipulated
to increase his
annual bonuses.
Another well-known Democrat, Jamie Gorelick, served as vice
chair of Fannie
from 1998 to 2003. Prior to that, she was Janet Reno’s
Deputy Attorney
General during the Clinton years, when the Clinton Justice
Department
was aggressively compelling banks to make subprime loans to
unworthy
borrowers.
And Rahm Emanuel, current White House Chief of Staff,
also
served as a director at Freddie Mac.
Most Americans are not aware that Fannie and Freddie, while
lining the
pockets of politicians, also funnels hundreds of millions of
dollars to a host
of leftist groups and causes promoting the Democrat agenda.
The grantmaking arms of Fannie and Freddie – specifically
the Fannie Mae Foundation
and the Freddie Mac Foundation – gives tens of millions of
dollars each year
to predominantly left-wing organizations such as the
American Civil Liberties
Union; the NAACP and National Urban League; the
left-wing financier the
Tides Foundation; pro-illegal immigration groups like the
Mexican American
Legal Defense and Education Fund, and the National Council
of La Raza;
pro-Democrat community activist groups like ACORN; and
former president
Jimmy Carter’s Carter Center.
The Republicans were not oblivious to Fannie and Freddie’s
problems.
Bush’s 2001 budget called runaway subprime lending a
“potential problem”
and warned of “strong repercussions in financial markets.”
In July 2003,
Senators Chuck Hagel (R-NE), Elizabeth Dole (R-NC) and John Sununu
(R-NH) introduced legislation to address regulation of
them. The bill was
blocked by the Democrats.
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In September 2003 Bush’s Treasury Secretary,
John Snow, proposed what The New York Times called “the most
significant
regulatory overhaul (of Fannie and Freddie) in the housing
finance industry
since the savings and loan crisis a decade ago.”
Did the Democrats in Congress welcome reform? Here’s
how Barney Frank 48 CLEARING UP THE PAST: ECONOMIC INSECURITY
(D-MA), the ranking Democrat on the Financial Services
Committee,
responded:
“I do not think we are facing any kind of a crisis.
That is, in my view, the
two government sponsored entities we are talking about here,
Fannie Mae
and Freddie Mac, are not in crisis…. I do not think at this
point there is a
problem with a threat to the Treasury…. I believe that
we, as the Federal
Government, have probably done too little rather than too
much to push
them to meet the goals of affordable housing and to set
reasonable goals.”
In 2005, Republican Senators Hagel, Sununu, Dole, and later
John McCain
reintroduced legislation to once again address regulation of
Fannie and
Freddie. In essence, the bill would have required
Fannie and Freddie to
eliminate their investments in risky subprime loans.
According to Kevin Hassett, writing in Bloomberg.com,
“if that bill had become law, then the
world today would be different.”
But the legislation didn’t become law for a single
reason: Democrats opposed
it on a party-line vote in the Senate Banking Committee,
signaling that this
would be a partisan issue. Republicans, tied in knots
by the tight Democrat
opposition, couldn’t even get the Senate to vote on the
bill.
Had the bill passed in 2005, the mortgage meltdown would
have been far less
intense. In 2005, 2006 and 2007, approximately $1
trillion of these terrible
mortgage loans were funded by Fannie and Freddie at a time
when housing
prices were at their highest. When housing prices fell
dramatically, losses
from those mortgages turned out to be tremendous.
Bottom line: if Fannie Mae and Freddie Mac weren’t buying
these subprime
loans, the market for them would likely not have
existed.
Rep. Artur Davis (D-AL) now admits Democrats were in
error:
“Like a lot of my Democratic colleagues, I was too slow to
appreciate the
recklessness of Fannie and Freddie. I defended their
efforts to encourage
affordable home ownership when in retrospect I should have
heeded the
concerns raised by the regulator in 2004. Frankly, I
wish my Democratic
colleagues would admit when it comes to Fannie and Freddie,
we were
wrong.”
This is from a book by a (supposedly) life-long Democrat,
Richard Bernstein: Duped America.
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