San Diego Housing Bubble News and Analysis

Why don't you tace the problem back to the root cause when assigning blame. Carter and Clinton wer the problems here.

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
By TERRY JONES
INVESTOR'S BUSINESS DAILY | Posted Wednesday, September 24, 2008 4:30 PM PT

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 and Freddie Mac, 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.

In addition to the outright BRIBES from lobbyists (can we seize their funds first?) we have another reason for the policies. Greenspan in his last book says he was very worried about income inequality and stopping potential seeds of populist revolt.

Greenspan says he believes looser mortgage terms for "subprime" borrowers — those with spotty credit histories or low incomes — raised financial risks. However, he said, the benefit of expanded home ownership in the United States was worth the risk.

At his re-confirmation hearing before the US Senate Banking Committee in 1996, he said that he did not want to discriminate against individuals who were not wealthy and therefore needed to borrow in order to play the stock market (sic). As he well knew, the traders buying stocks on margin were mainly not poor and needy but professional traders out for a free lunch, which Greenspan well knew. Interesting, however, was that that was precisely the argument Greenspan would repeat for justifying his advocacy of lending to sub-prime poor credit persons, to let the poorer get in on the home ownership bonanza his policies after 2001 had created.

Ray, I ask this question before.

Bush undid many of the Clinton deeds. If the Clinton rules were so bad, Bush had eight years to undo them by executive order.

Bush is a tar-baby. Everything he touches turns into muck.

McCain will be 100 times more fiscally responsible than that imbecile.

patientlywaiting

Completely agree with your statement. But undoing this would have been political suicide at that point. Bush would have been cast as a racist denying access to minorities.

What I contend is that it was a poorly conceived plan. It only looked at the moment and never looked out to the potential consequences.

I saw this same logic used when Ted Kennedy talked about cutting incentives to Student Loan Providers. His logic was "we'll take from the student loan providers and create grants for students and it won't cost the taxpayers money." It never works that way. Loan providers exited the market cut incentives and both students and the US taxpayer were both worse off

The ideology is off. It is paved with good intentions but it is off. It is not governments role to redistribute wealth.

Oversight for Fannie and Freddie falls on OFHEO headed by Bush appointee James Lockhart. His backgound includes heading a risk management software firm that sold its products to banks, insurance companies, S&L's, etc. You know, all the folks that are now needing to get bailed out. He also worked in the oil business. One big, happy family that W put together.

When you hear the phrase "deer in the headlights" you only need to watch a replay of Bush last night to understand its meaning.

"But undoing this would have been political suicide at that point."

Bush didn't just "not undo" CRA he *expanded.* Nothing in CRA ever told low-income would-be homeowners they could have "as nice a home as anybody else," and nothing in CRA ever pressed lenders to use creative financing to lend people many times more than what their actual incomes qualified them to borrow.

And this entire discussion overlooks the fact that CRA had no real impact on loans to homebuyers in the affluent areas that saw the greatest rises during the bubble and are now seeing the greatest drops.

I thought most of Rich's charts showed that the greatest gains in % increase were in the low and middle income groups. Ironically those same groups are responsible for the majority of the decline from peak to date.

DWCAP,
The situation is very bad in the 600k to 1M range too.The fudging on loans was profilgate throughout all housing values. Some of these homes, though by no means all, were purchased with higher down payments but still used the liar loan method of financing.There has been some equity to burn through.
We have already seen many realtors who were in nicer areas go up in smoke with their purchases. When other professions or investor types, face loss of income that most Realtors have already faced we will see more distress. Alternately maybe we will see less failures with the only difference being that people upside down in this range can hold out long enough to be recipients for "rescues" and any inflation scenarios, whereas the poorer have already succumbed. Some of them may be using up their inheritances, before their parents pass,to survive, which is an option many people in areas like Encanto, which imploded, don't have.

It will be interesting to see how this unfolds.

Rus, I couldnt agree more. I just wanted to point out that the highest cost third of the market is not the one going down the fastest. Nor was it the one going up the most in %age terms. Therefore, I find it alittle off when someone states that all the gov programs, which mostly effect the other two catagories, had little effect.

Those government programs (CRA) were the fuel which enabled the zero-down deadbeats to pay $500K for crapshacks in O'side.

The sellers of the houses in O'side (who bought during normal times) now had **hundreds of thousands** which they used for down payments on the next level up (say a 3/2 in Carlsbad)...and on up it went, right into the $1MM category. They could get $300K from their first home, use that plus a $600K no-doc, neg-am loan to buy a $900K house.

They haven't been foreclosed on because plenty of them cashed out the $300K equity (from the down payment) and are using that to make the monthly payments.

The housing bubble was fed from the bottom up via all the "give poor people a mortgage they can't afford" loans. The very bottom had NO equity (zero down), but the move-ups often had very large down payments which enables them to hold on longer. They have equity to strip and they can sell instead of foreclose...for now.