Mandatory Reading on the Origins of our Current Economic Crisis

As we swiftly approach the upcoming congressional and presidential elections, I think it behooves America that Her citizens understand exactly why we are in the financial mess we are in and the further mess which will come of trying to repair it. Americans need to know why centuries-old American companies are being bought up by overseas interests or folding altogether, why the value of the dollar is circling the drain, why we are facing perhaps the greatest financial crisis since the Great Depression.

Almost since the beginning of the Bush presidency, the current administration has warned about the probable dire consequences of financial difficulties at government-sponsored enterprises Fannie Mae and Freddie Mac. In fact, since the beginning of the Clinton presidency in 1992, congressional Republicans have by and large resisted the democrats’ urge to relax lending standards at Fannie and Freddie, knowing what could result. In 2005, Arizona Sen, John McCain warned that unless Congress acts to tighten lending practices at the two organizations, “American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

So there’s John McCain, who the democrats–and, back in March of this year, conservatives like myself–claim knows nothing about the economy, and he was absolutely right.

Now, McCain needs to finish what he started three years ago. He knows that the democrats are largely responsible for the mess we’re currently in, having forced banks to relax lending standards in the name of “social justice,” and he needs to take off the gloves and call them on it. Forget this whole movement toward taking “bi-partisan blame” and putting forth “bi-partisan solutions.” I don’t see anything bi-partisan about the fraud and sweetheart deals among leading democrats, and the last time we were handed a “bi-partisan solution” was in McCain and Ted Kennedy’s Comprehensive Immigration Reform Bill — and we all know just how potentially damaging the fine print in that piece of legislation was.

Above all else, as every American man, woman and child prepares to fork over more than $2000 of their own money, they MUST understand why we’re in the predicament we’re in, how the democrats’ idealistic, politically-correct views were put ahead of fiscal common sense despite repeated warnings from all sides. Take a look at the following two pieces. The first one appeared in the Los Angeles Times in May 1999, the second one today in Investor’s Business Daily.

– Jeff

–MAY 31, 1999–

Minorities’ Home Ownership Booms Under Clinton but Still Lags Whites’
by Ronald Brownstein, Los Angeles Times

It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.

These numbers are dramatic enough to deserve more detail. When President Clinton took office in 1993, 42% of African Americans and 39% of Latinos owned their own home. By this spring, those figures had jumped to 46.9% of blacks and 46.2% of Latinos.

That’s a lot of new picket fences. Since 1994, when the numbers really took off, the number of black and Latino homeowners has increased by 2 million. In all, the minority homeownership rate is on track to increase more in the 1990s than in any decade this century except the 1940s, when minorities joined in the wartime surge out of the Depression.

This trend is good news on many fronts. Homeownership stabilizes neighborhoods and even families. Housing scholar William C. Apgar, now an assistant secretary of Housing and Urban Development, says that research shows homeowners are more likely than renters to participate in their community. The children of homeowners even tend to perform better in school. Most significantly, increased homeownership allows minority families, who have accumulated far less wealth than whites, to amass assets and transmit them to future generations.

What explains the surge? The answer starts with the economy. Historically low rates of minority unemployment have created a larger pool of qualified buyers. And the lowest interest rates in years have made homes more affordable for white and minority buyers alike.

But the economy isn’t the whole story. As HUD Secretary Andrew Cuomo says: “There have been points in the past when the economy has done well but minority homeownership has not increased proportionally.” Case in point: Despite generally good times in the 1980s, homeownership among blacks and Latinos actually declined slightly, while rising slightly among whites.

All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

But for all that progress, the black and Latino homeownership rates, at about 46%, still significantly trail the white rate, which is nearing 73%. Much of that difference represents structural social disparities–in education levels, wealth and the percentage of single-parent families–that will only change slowly. Still, Apgar says, HUD’s analysis suggests there are enough qualified buyers to move the minority homeownership rate into the mid-50% range.

The market itself will probably produce some of that progress. For many builders and lenders, serving minority buyers is now less a social obligation than a business opportunity. Because blacks and Latinos, as groups, are younger than whites, many experts believe they will continue to lead the housing market for years.

But with discrimination in the banking system not yet eradicated, maintaining the momentum of the 1990s will also require a continuing nudge from Washington. One key is to defend the Community Reinvestment Act, which the Senate shortsightedly voted to retrench recently. Clinton has threatened a veto if the House concurs.

The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers. HUD says Fannie Mae is resisting more low-income loans because they are less profitable.

Barry Zigas, who heads Fannie Mae’s low-income efforts, is undoubtedly correct when he argues, “There is obviously a limit beyond which [we] can’t push [the banks] to produce.” But with the housing market still sizzling, minority unemployment down and Fannie Mae enjoying record profits (over $3.4 billion last year), it doesn’t appear that the limit has been reached.

All signs point toward a high-velocity collision this summer between two strong-willed protagonists: HUD’s Cuomo and Fannie Mae CEO Franklin D. Raines, the first African American to hold the post. Better they reach a reasonable agreement that provides more fuel for the extraordinary boom transforming millions of minority families from renters into owners.

–PRESENT DAY–

How a Clinton-era Rewrite Made Subprime Crisis Inevitable
by Terry Jones, Investor’s Business Daily

One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?

The answer is: President Clinton wanted it that way.

Fannie Mae (FNM) and Freddie Mac, (FRE) 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.

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.

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Comments

  1. T.Nelson says:

    Very informative article. To make real sense of this it would help to know what percentage of current forclosures are on low income and minority first homes and how many are to middle income second home owners who leveraged everything they could to ‘turn and burn’ a house for quick profit and now have two homes being forclosed upon. Either way credit should not have been extended to either group.

  2. John Galt says:

    The MSM had a big hand in this being largely responsible for the real estate hype that led to to the PC liberalization of real estate lending standings and artificially inflated home prices.

  3. Jenna says:

    Here is some more fuel for this fire. Every one needs to be trumpeting this message. The MSM will bury it otherwise.

    http://www.youtube.com/watch?v=H5tZc8oH–o

    http://www.youtube.com/watch?v=AiEWCnpNnBQ

    Digg it if you like what you saw.

    http://digg.com/2008_us_elections/Burning_Down_The_House_What_Caused_Our_Economic_Crisis

  4. Kuanonymous says:

    Jeff…….Obama on his website has admitted Dual Citizenship

    Go to Texas Darlin for details.

  5. Anonymous says:

    This is not political – just basic math…
    *Think about this recovery plan, I like it a lot.

    This is a much better idea!

    ‘I’m against the $85,000,000,000.00 bailout of AIG.
    Instead, I’m in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.

    To make the math simple, let’s assume there are 200,000,000 bona fide U.S. Citizens 18+.

    Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up…

    So divide 200 million adults 18+ into $85 billion that equals $425,000.00.

    My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

    Of course, it would NOT be tax free.

    So let’s assume a tax rate of 30%.

    Every individual 18+ has to pay $127,500.00 in taxes.

    That sends $25,500,000,000 right back to Uncle Sam. But it means that every adult 18+ has $297,500.00 in their pocket. A husband and wife has $595,000.00.

    What would you do with $297,500.00 to $595,000.00 in your family? Pay off your mortgage – housing crisis solved. Repay college loans – what a great boost to new grads. Put away money for college – it’ll be there. Save in a bank – create money to loan to entrepreneurs. Buy a new car – create jobs. Invest in the market – capital drives growth. Pay off your Brooks tennis dues. Pay for your parent’s medical insurance – health care improves. Enable Deadbeat Dads to come clean – or else.

    Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

    If we’re going to re-distribute wealth let’s really do it…instead of trickling out a puny $1000.00 ( ‘vote buy’ ) economic incentive that is being proposed by one of our candidates for President.

    If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!

    As for AIG – liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up. Here’s my rationale. We deserve it and AIG doesn’t.

    Sure it’s a crazy idea that can ‘never work.’ But can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom?

    I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC .

    And remember, This plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

    Lets send this to everyone you know and get the USA out of trouble!

  6. Karen says:

    “This is not political – just basic math…
    *Think about this recovery plan, I like it a lot.”

    Anonymous, I sure like how you think! Tell me, have you ever considered running for public office?

    ——————————–

    Many thanks, Jeff, for your thoughtful analyses. I always look forward to reading them.

  7. Donald says:

    I think anonymous has an interesting idea, however I think he has three too many zeros. BTW, please do not accept the suggestion to run for office. We have enough politicians who are poor at math. Don

  8. Karen says:

    Donald, of course you are absolutely right, though I wouldn’t mind a politician with a sense of humor.

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