Merv of PrairiePundit links to an excellent post by Hans Bader of Openmarket.org (h/t Larwyn) who in turn quotes Washington Examiner and Village Voice articles that attribute the subprime crisis to regulatory pressure on Fannie Mae and other government-created entities to make excessive loans to low-income borrowers. The video I just posted (h/t Larwyn) provides visual evidence of one facet of this saga. It is outrageous that, given the grounding of the sub-prime crisis in government intervention and Democratic Party politics, Barack Obama and the media that supports him is willing to claim that free markets and the Republicans are to blame. Have they no shame?
The Examiner writes:
"Barack Obama held the Bush administration responsible yesterday for what he calls “the most serious financial crisis since the Great Depression.” Obama is hopelessly wrong on the facts. One need look no further than The Washington Examiner and The Washington Post to see that the roots of this crisis sprouted during the Clinton administration’s politically motivated effort in the 1990s to use Fannie Mae and Freddie Mac to expand home ownership. Fannie and Freddie are Government-Sponsored Entities (GSEs) that dominate the U.S. mortgage market...In an oped article published on these pages last February, former Wall Streeter Robert Cox noted that “in response to political pressure at the time, the GSEs took steps to make homeownership more affordable for lower-income Americans and those with a poor credit history.”
Bader adds:
"The current mortgage crisis came about in large part because of Clinton-era government pressure on lenders to make risky loans in order to 'make home ownership more affordable for lower-income Americans and those with a poor credit history,' the DC Examiner notes today."
The Voice argues that Andrew Cuomo, HUD's director under Clinton, was directly responsible for today's meltdown:
"Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
"What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York's attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie."
Merv concludes:
"This election can be turned into a landslide for McCain if he focuses on Democrat corruption which caused this debacle. There is no need for Republicans to be defensive about this. The Bush administration, contrary to the statements of Pelosi and others, tried to do something about the corruption at Fannie Mae and Freddy Mac and was thwarted by Chris Dodd and the Democrats who were on the receiving end of contributions from those responsible for the problem. The second largest beneficiary was Barack Obama. The ad that needs to be out there almost writes itself and if McCain doesn't produce it some independent group should be doing it today."
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I thoroughly researched the causes of the subprime crisis and was surprised at the paper trail that I found. Although the crisis has its roots in 1999, it was really the policies that were put in place between 2001 and 2006 that caused this crisis. I reviewed White House, HUD, and Fannie Mae and Freddie Mac press releases and fact statements as well as many Acts that were passed during that time period. If you read down through this, I cite to and quote many of the important documents as well as include links to many of the documents at the end.
Republican Phil Gramm was the sponsor of the 1999 Gramm-Leach-Bliley Act which removed depression-era Glass-Steagall Act regulations requiring a separation between banking, investment, insurance, and brokerage activities. Gramm is currently co-chairing McCain’s campaign and was until recently his Chief Financial Advisor. Gramm no longer has that title after he was criticized for calling us a “nation of whiners” and said that we are just in a “mental depression.” Gramm’s current position as McCain’s campaign co-chair is thought to be a message to Wall Street that McCain will not institute government regulations on Wall Street.
Bush considered appointing Gramm as the Secretary of Treasury and now Gramm is considered as McCain’s frontrunner for the post. Gramm’s and the Republican Congress’ Act was the first key piece of de-regulation that put into place this economic crisis. Republican Phil Gramm also authored an Act that exempted Energy Commodities Trading from federal regulation which allowed the Enron scandal and collapse to occur.
How did the repeal of the depression-era Glass-Steagall Act have a role in the current crisis? The Act allowed, for the first time since the Great Depression, banks to deal in securities which allowed them to purchase mortgage-backed securities. If not for the Gramm-Leach-Bliley Act being passed by the Republican Congress, banks could not have dealt in mortgage-backed securities.
Did Clinton have a role in this deregulation? Clinton was President at the time. Clinton did initially threaten to veto this Act, but eventually signed it into law. At that time, the Republicans had the majority in Congress, it was a Republican-authored Bill, and the Republicans had enough votes to override a veto by Clinton.
Nonetheless, the Gramm-Leach-Bliley Act was only the first step that was taken to create this crisis. In addition to the Gramm-Leach-Bliley Act, the Republican Administration and Congress furthered this crisis between 2001 and 2006. In order to stimulate the economy, stave off a recession, and feed the market's huge demand for more mortgage-backed securities, Bush aggressively pushed the lending industry to make massive amounts of mortgage loans. To do so, he called for the most massive increase minority and low income homeownership in our history as part of his "Ownership Society" plan.
In 2001/2002, Bush created "America's Home Ownership Challenge" in which he challenged the private lending sector as well as Fannie Mae and Freddie Mac to make more than 5.5 million new minority and low income mortgage loans. To meet his challenge to the private lending industry, 24 of our largest banking and lending companies pledged to make 1.1 trillion dollars in low income and minority loans. You can find all of the official documents in the White House Press Releases if you use "America's Home Ownership Challenge" as your search term in the White House archives.
The following are excerpts from his plan:
Fact Sheet: President Bush Calls for Expanding Opportunities to Homeownership
Today's Presidential Action
• Today, President Bush announced a new goal to help increase the number of minority homeowners by at least 5.5 million before the end of the decade. The President's aggressive housing agenda will help dismantle the barriers to homeownership by providing down payment assistance, increasing the supply of affordable homes, increasing support for self-help homeownership programs, and simplifying the home buying process & increasing education. The President also issued "America's Homeownership Challenge" to the real estate and mortgage finance industries to join in his effort to increase the number of minority homeowners by taking concrete steps to tear down the barriers to homeownership that face minority families.
Background on the President's Homeownership Agenda
Buying a home is the biggest single investment most people will make in their lives. Homeownership is a cornerstone of America's healthy, vibrant communities, and benefits individual families by helping them build stability and long term financial security. But sadly, homeownership is out of reach for many Americans -- especially for minority families. For millions of these families, homeownership is a distant, unreachable dream.
President Bush has a comprehensive agenda to help increase the number of minority homeowners by at least 5.5 million before the end of the decade.
(Excerpt from White House Press Release: Fact Sheet President Bush Calls for Expanding Opportunities to Homeownership).
Increasing Affordable Housing and Expanding Homeownership
We live in a time of change, and our dynamic economy can create great opportunities for America's families to realize their dreams. During this time of change, President Bush believes that government should help families to have the security, dignity, and independence that comes with owning their piece of the American dream.
President Bush has a bold agenda for promoting an ownership society: giving young people the option of voluntary personal accounts under Social Security to give them more control over their retirement savings; Health Savings Accounts to give individuals expanded access and choice in health care; lower taxes and less burdensome regulations on entrepreneurs; and policies to eliminate barriers to homeownership.
* * *
The President's Homeownership Accomplishments
Congress and the President have worked together to accomplish important elements of his strategy - providing downpayment support for low-income families and good financing options for rural buyers. Under President Bush's leadership, overall U.S. homeownership in the second quarter of 2004 reached an all-time high of 69.2 percent. Single-family housing affordability is at its highest level in 30 years, and minority homeownership set a new record-high of 51 percent in the second quarter.
The President has called on Congress to work with him on additional steps to promote homeownership in America. He has set bold goals for homeownership, including his challenge to the Nation to create 5.5 million new minority homeowners by the end of the decade - and he has now set an additional goal of 7 million new affordable homes.
(Excerpt from White House Press Release: “Increasing Affordable Housing and Expanding Homeownership”).
Bush aggressively pushed the private lending industry to make over 1.1 trillion in low income and minority lows and to "create more creative" loan products to do it. He pushed them to "loosen credit standards" and pushed them to make the most risky loan products available to the riskiest buyers. Then, he turned to Fannie Mae and Freddie Mac and threatened to rewrite their regulatory charters if they did not make more low income and minority loans.
The government-sponsored corporations created to increase the liquidity of mortgage markets, so more capital would be available for mortgage loans, are supposed to lead the market in reaching underserved populations. While these corporations have increased their commitments to these efforts, they lag behind private lenders in this regard, according to government studies. The Administration will revisit the regulatory goals for these corporations’ purchases of affordable housing loans, which are set to expire in 2003. The federal government should demand more and should hold such publicly-chartered corporations accountable for better performance.
(From Bush’s Press Release entitled “A Home of Your Own EXPANDING OPPORTUNITIES FOR ALL AMERICANS, PRESIDENT GEORGE W. BUSH JUNE 2002” regarding his “America’s Homeownership Challenge).
The Bush Administration issued the following press release hailing its successes in pushing the private lending industry and Fannie Mae and Freddie Mac into making more low income and minority loans:
Under President Bush's leadership, overall U.S. homeownership in the second quarter of 2004 reached an all-time high of 69.2 percent. Single-family housing affordability is at its highest level in 30 years, and minority homeownership set a new record-high of 51 percent in the second quarter.
The President has called on Congress to work with him on additional steps to promote homeownership in America. He has set bold goals for homeownership, including his challenge to the Nation to create 5.5 million new minority homeowners by the end of the decade - and he has now set an additional goal of 7 million new affordable homes.
(White House Press Release – “Increasing Affordable Housing & Expanding Homeownership).
Through the Republican Congress in 2003 and the Bush Administration's work through HUD and the FHA, the Bush Administration forced Fannie Mae and Freddie Mac to, for the first time, make available riskier loan products to minority and low income buyers.
The Federal Housing Administration Mortgage Program. In 2002, the President issued America’s Homeownership Challenge to increase first-time minority homeowners by 5.5 million through 2010. The Federal Housing Administration (FHA) mortgage program is an important tool for reaching that goal. In 2006, 31 percent of those using FHA mortgages were minorities purchasing their first home. The 2008 Budget continues Administration efforts to modernize FHA by improving its ability to reach traditionally underserved homebuyers (aka those who do not normally qualify for loans), such as low- and moderate-income families, individuals with blemished credit, and families who have little savings for a down payment.
(From Bush Administration’s White House Press Release entitled, “Focusing on the Nation’s Priorities – Meeting America’s Housing Needs”).
The Bush Administration through HUD, also required Fannie and Freddie to give a higher percentage of their loans to loan-income and minorities that otherwise would not qualify for the loans.
That's why I've challenged the industry leaders all across the country to get after it for this goal, to stay focused, to make sure that we achieve a more secure America, by achieving the goal of 5.5 million new minority home owners. I call it America's home ownership challenge.
And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system -- I introduced two of the leaders here today -- they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It's a commitment that conforms to their charters, as well, and also conforms to their hearts.
(From White House Speech archives – “President calls for Expanding Opportunities to Homeowners” at St. Paul AME Church in Atlanta, Georgia).
Franklin Raines, the head of Fannie Mae at the time, also responded to Bush’s “challenge” in a letter, stating:
June 13, 2002
President George W. Bush
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President:
As America’s largest source of private capital for affordable housing, Fannie Mae applauds your call for “broader homeownership, especially for minorities.” We accept your challenge to the private sector to join in partnership to address America’s housing needs. And we are proud to step up to your challenge by launching an even greater commitment of private capital and creative strategies to expand minority homeownership. * * * (the full letter can be found online).
Then, the following press release was sent out:
Fannie Mae Chairman and CEO, Franklin D. Raines today joined President Bush and U.S. Department of Housing and Urban Development (HUD) Secretary Mel Martinez, and other industry leaders and non-profit organizations, for a housing summit to promote the Administration's proposal to expand minority homeownership.
* * *
Fannie Mae's ten-point plan to help advance the Bush Administration's homeownership proposals was included in the Blueprint for the American Dream document released by HUD today.
The Blueprint for the American Dream that we unveiled today is the response to the `homeownership challenge' President Bush issued in June to increase minority homeownership," said HUD Secretary Mel Martinez. "Our partners, representing every segment of the affordable housing industry, are committed to working together to achieve the President's goal of adding 5.5 million new minority homeowners by the end of the decade."
In his February State of the Union address President Bush called for "broader homeownership, especially among minorities." In June, President Bush challenged both the public and private sector to be a partner in his crusade to create 5.5 million new minority homeowners by the end of the decade.
Fannie Mae responded by committing $700 billion in home financing to 4.6 million minority households through 2009. This increases by 66 percent the specific pledge Fannie Mae made in 2000 to minority families through it's American Dream Commitment plan to provide $420 billion for three million minority families.
(quotes from Fannie Mae and Freddie Mac in Business Wire “President Bush’s Nationwide Effort to Increase Minority Homeownership” – October 15, 2002).
Fannie Mae responding to Bush’s aggressive push by committing $700 billion for low income and minority loans, a 66 percent increase in its previous pledge made in 2000.
In 2003, the following article was on Washington Business Wire:
WASHINGTON--(BUSINESS WIRE)--March 18, 2003--On the third anniversary of its "American Dream Commitment(R)," Fannie Mae and its lender partners already have fulfilled over half of its ten-year pledge to provide $2 trillion in home financing for 18 million historically underserved families, Fannie Mae Chairman and CEO Franklin D. Raines announced today.
To date, Fannie Mae has provided more than $1.3 trillion for nearly 12 million targeted families, completing two-thirds of the American Dream Commitment in about 30 percent of the time, and leading the market in serving minorities and the nation's affordable housing needs.
Joining with representatives from 11 leading mortgage lenders and Fannie Mae partners, Raines applauded the mortgage finance industry for its extraordinary efforts to reach and serve "emerging markets" of historically underserved families and communities, deliver Fannie Mae's $2 trillion in targeted capital, and extend the benefits of the nation's housing boom.
Lender partners participating in today's announcement include: Bank of America; Bank One Corporation; Charter One Bank; Countrywide Financial Corporation; Doral Financial Corporation; First Horizon Home Loan Corporation; Fleet Boston Bank; Huntington Mortgage Company; Irwin Mortgage; J.P. Morgan Chase & Co.; and Standard Mortgage Corporation.
"Together, America's top lenders and Fannie Mae have made terrific progress in bringing the nation's housing boom to overlooked Americans and addressing the gaps in housing opportunity," Raines said. "Fannie Mae applauds our lender partners for helping us surpass the halfway mark in our $2 trillion commitment to underserved families so quickly. Together, we lead the market in serving Americans of color and modest means."
The Administration and Republican Congress also passed the “American Dream Downpayment Act of 2003” to allow low income and minorities with blemished credit and no ability to come up with a downpayment to have the government cover their downpayment and closing costs. The Act gave 161.5 million dollars in taxpayer money to cover the downpayment and closing costs of minorities and low income individuals that would not be able to afford a downpayment and/or had “blemished credit.”
On December 16, 2003, President Bush signed into law the American Dream Downpayment Act of 2003, which will help approximately 40,000 families a year with their down payment and closing costs, and further strengthen America’s housing market. This legislation complements the President’s aggressive housing agenda announced in 2002 to dismantle the barriers to homeownership.
(From White House Press Release “American Dream Downpayment Act of 2003 – Expanding Homeownership Opportunities for All).
Bush also pushed and passed a "Zero-down Payment" initiative.
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE Initiative Aimed at Removing Major Barrier to Homeownership
LAS VEGAS - As part of President Bush's ongoing effort to help American families achieve the dream of homeownership, Federal Housing Commissioner John C. Weicher today announced that HUD is proposing to offer a "zero down payment" mortgage, the most significant initiative by the Federal Housing Administration in over a decade. This action would help remove the greatest barrier facing first-time homebuyers - the lack of funds for a down payment on a mortgage.
Speaking at the National Association of Home Builders' annual convention, Commissioner Weicher indicated that the proposal, part of HUD's Fiscal Year 2005 budget request, would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.
"Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities," said HUD's Acting Secretary Alphonso Jackson. "President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal."
Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.
"This initiative would not only address a major hurdle to homeownership and allow many renters to afford their own home, it would help these families build wealth and become true stakeholders in their communities," said Commissioner Weicher. "In addition, it would help spur the production of new housing in this country.”
The following is a summary of the initiatives from a White House Press release:
• Downpayment Assistance and Homebuying Education:
o American Dream Downpayment Initiative. To help low-income families overcome the hurdle of a downpayment, the President proposed the American Dream Downpayment Initiative in June 2002 and signed the American Dream Downpayment Act into law on December 16, 2003. In June 2004, HUD announced $160 million in funding for this initiative to 400 local and state governments across the country to assist low-income families with down payment funds. The President requested $200 million for the American Dream Downpayment Initiative in his FY 2005 budget, which will assist an estimated 40,000 families.
o Zero-Downpayment Initiative. In his FY 2005 budget, the President proposed the Zero-Downpayment Initiative. Preliminary projections indicate this Initiative would help about 150,000 homebuyers in the first year alone. This proposal would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.
(Excerpt from White House Press Release: “Increasing Affordable Housing and Expanding Homeownership”).
The Administration, through HUD, further forced Fannie Mae and Freddie Mac to offer riskier 3, 5, and 7 year adjustable arm loan products to low income and minorities.
BUSH ADMINISTRATION ANNOUNCES NEW ADJUSTABLE-RATE MORTGAGE PRODUCTS TO ENHANCE HOMEBUYING OPPORTUNITIES
40,000 More Families Expected To Benefit From New Offerings
WASHINGTON – The Department of Housing and Urban Development is proposing to enhance homebuying opportunities by expanding its offerings of adjustable-rate mortgage (ARM) products on FHA-insured mortgages. Potential homebuyers would be able to choose mortgages with periods of three, five, seven or ten years, depending on their needs, during which time the interest rate would be fixed. “By offering additional types of FHA-insured ARMs tailored to the financial conditions and desires of the borrowers, we are creating more homeownership opportunities,” said HUD Secretary Mel Martinez today in a speech to America’s Community Bankers. “We estimate that as many as 40,000 families a year will choose these new adjustable-rate mortgages as their way of financing their home purchase.”
(HUD Press Release).
Bush and the Republican Congress forced Fannie Mae and Freddie Mac to make zero-down loans and adjustable rate 3, 5, and 7 year arms available to the riskiest buyers. Fannie Mae and Freddie Mac were forced to effectively finance 103 percent of the mortgage (including closing costs).
The Bush Administration often pointed to the huge increase in housing as one of its greatest successes.
[The Administration has] Helped Americans buy homes, expanding the homeownership rate to nearly 70 percent and the minority homeownership rate to over 51 percent nationwide. With approximately three million minorities owning a home for the first time, the Nation now has the highest minority homeownership rate in its history. Furthermore, the Administration is ahead of schedule in achieving the Presidential goal of adding 5.5 million new minority homeowners by 2010.
(From Bush Administration’s press release entitled “Expanding Home Ownership” under section entitled “Accomplishments”).
It was between 2001-2005 that most of these loans that have gone bad were made. You can find all of the official documents at the White House, HUD, and Fannie Mae and Freddie Mac press release websites. You can also find the head of Fannie Mae's letter (Raines) back to Bush (after Bush threatened to not renew their charter) saying that he would meet his aggressive challenge online.
So why did Bush and the Republican Congress push minority and low income loans? They pushed it for two main reasons. First, the economy was facing a recession and they looked to stimulate economy by stimulating the housing market. In fact, the Administration pointed to the huge increase in housing numbers under his “leadership” to show that he stimulated the economy to keep us out of a recession. Second, there was a huge demand in the securities market for mortgage-backed securities and there were not enough of them to keep up with demand.
Mortgage-backed securities were in such demand because it allowed banks and lenders to turn an illiquid asset - mortgages-- into a liquid asset by bundling the mortgages and selling them as securities. Also, many thought that they were great securities to buy because they were further secured by collateral -- the homes -- and if they debt went bad, the collateral could be sold. They also thought that the mortgage-backed securities bundled from loans made through Fannie and Freddie were government guaranteed because they are quasi-government agencies.
In any event, there was a huge demand for these in the investment market and not enough supply. To increase supply for mortgage-backed securities, more loans had to be made. The only way to get more loans made was to come up with more creative loan products to get people into homes that otherwise would not qualify. So the Bush Administration and Republican Congress aggressively came up with ways to allow individuals who normally could not get loans to get loans.
The problem was the housing “bubble” started to burst and home values started to fall. At the same time, many of the 3 and 5 year arm loans were set to adjust to higher interest rates. Homeowners went to re-finance, but some could not afford the several thousand dollars of closing costs to refinance and others were unable to re-finance because their homes were now worth less than what they owed on their mortgages. Those who could not refinance saw their interest rates shoot up to incredibly high rates, such as, 15.9%. Homeowners saw their mortgage payments triple and could no longer afford their homes. The cause of the foreclosures in most cases were “creative loan products” with low introductory rates that were scheduled to shoot up or adjustable rates that shot up to unconscionable rates that left individuals unable to pay their very high mortgages as well as the loss in home values that left individuals unable to refinance their mortgages to reasonable fixed rates.
Did the Democrats block McCain and the Republican party’s attempt to regulate Fannie and Freddie as McCain claims? No. The Bill made it out of committee in the Senate, but was never brought up for consideration by the Republican Congress. At that time, Republicans had a majority in the Senate and controlled the agenda. So the Republicans could have brought it up for consideration if they had wanted to. The Bill sat on Republican Rick Santorum’s desk and was never actually offered for consideration. Hence, the Democrats never got the chance to vote against it or to mount a filibuster to block it. Facts are from Factcheck.org.
Furthermore, by the time McCain signed on to the legislation, over a year after it was drafted, it was too late to prevent the crisis anyway. McCain added his name to the Bill on May 25, 2006, when the housing bubble had already nearly peaked. Standard & Poor's Case-Schiller Home Price Index, which measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States, shows that housing prices began falling in 2006 and the loans that are now going bad were already made. Facts are from Factcheck.org.
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