It seems that then-president George W. Bush warned Congress seventeen (that’s right – 17) times in 2008 about the roles of Fannie Mae and Freddie Mac in the mortgage crisis. But Congress did nothing until the situation was out of hand. So, we (U.S. taxpayers) are stuck with the situation.
A little history of the crisis is in order. The Community Reinvestment Act (CRA), first enacted in 1977, started the ball rolling in 1995 (while Bubba Clinton was president). The CRA and major regulatory changes (emphasized by the White House in the late 1990s) created an increase in subprime lending, a sharp increase in highly risky mortgage-backed securities, and the housing boom. In 2001, Bush’s first budget called subprime lending by Fannie Mae and Freddie Mac “a potential problem” and warned of “strong repercussions in financial markets.” “In 2003, John Snow, Bush’s Treasury secretary, proposed what the New York Times called ‘the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.’” Did Democrats listen to Snow? NO! “I do not think we are facing any kind of a crisis,” declared Rep. Barney Frank, D-Mass., in a response typical of those who viewed Fannie and Freddie as a party patronage machine that the GOP was trying to dismantle.
What “proof” do we have that Democrats caused the mortgage meltdown? Directly, none. But look at what happened, as uncovered by a recent National Bureau of Economic Research (NBER) study, and see if what the study highlights rises to the level of proof.
The NBER found:
- “… adherence to that act led to riskier lending by banks.”
- “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam.”
- “To satisfy CRA examiners, ‘flexible’ lending by large banks rose an average 5% and those loans defaulted about 15% more often.”
- “The strongest link between CRA lending and defaults took place in the runup to the crisis – 2004 to 2006 – when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.”
“We want your CRA loans because they help us meet our housing goals,” Fannie Vice Chair Jamie Gorelick [yes, you know that name] beseeched lenders gathered at a banking conference in 2000 [while Bubba was still president], just after HUD hiked the mortgage giant’s [Fannie Mae] affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. “We will buy them from your portfolios or package them into securities.”
And, as the graph that accompanies this article illustrates, “tightening” CRA rules (forcing banks to follow the CRA, or else) in 1995 clearly led to an increase in loan commitments to ACORN and other non-profit organizations. (An enlarged graph can be found here)
Want more “proof?” Then read this article by John Carney (not White House hack Jay Carney). Carney lays out the entire CRA fiasco. Carney closes with, “… an enormous amount of subprime loans were made to lower-income borrowers target by the CRA. Forty-five percent of subprime loan originations went to lower-income borrowers or borrowers in lower-income neighborhoods in 2005 and 2006, where the foreclosures are almost twice as likely. This suggests [but does not prove] that the kind of low income borrowers targeted by the CRA are likely to be responsible for the majority of subprime foreclosures.” [emphasis mine]
What’s happening right now? As Paul Sperry at Investor’s Business Daily wrote, “… the Obama administration is broadening the anti-redlining regulation’s [of the CRA] authority and scope, spooking bankers.” Ex-BB&T CEO John Allison said, “The CRA overhaul ‘has been a disaster.’ [It] forced ‘banks to participate in making high-risk housing loans to low-income buyers who would not meet traditional bank lending standards. The default rates on these low-income loans are extraordinarily high.’” Sperry continued, “Still, the Obama administration wants banks to step up approval of such low-income mortgages.”
It sure seems as if Dear Leader Barack Hussein Obama cannot, or will not, learn from history, and still wants to throw good taxpayer money after bad.
But that’s just my opinion.
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