Exactly 9 Years Ago Today: Fannie Mae Eases Credit To Aid Mortgage Lending

I read this article on John P.’s blog “One Mans Blog” today and I thought I would pass it along. Here is an except:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

I’ve been debating whether or not to post an email from a colleague of mine who in his spare time researches political issues and sends emails out to friends on his findings. I didn’t want to turn my blog into a “political” blog since I mostly focus on technology and web development. However, with all the media pointing their fingers at Bush, I thought I might as well share it:

Playing the Blame Game – Who’s to blame for our economic crisis?

“The Bush Administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” – The New York Times, 9/11/2003

Did it pass?  Is Bush responsible for our present economic crisis? What was McCain saying at the time? What about Obama? Read on.

According to the Investor’s Business Daily, warning signs of this collapse were everywhere. It wasn’t a matter of “if”, but a matter of “when.” So who’s to blame for this situation? The Bush administration? Congress? Wall Street? All of the above?

What do you think? If you had to answer, who or what would you name as being responsible for our economy?

It seems that more and more Americans these days will wholeheartedly jump to the “easy” or “quick” answer – BLAME BUSH!  According to an MSNBC poll, 52% believe the Bush administration is solely responsible. Another 36% believe Bush is at least partly to blame.

We have the unfortunate propensity for laying blame at the feet of the “guy in charge.” And Democrat politicians are certainly doing everything in their power to roll this up and hang it around the neck of Bush, McCain, and all the rest of the Republicans this election.

Speaker of the House Nancy Pelosi, when asked if Democrats should shoulder some of the blame for the crisis, flatly replied with a one-word answer: “No.”

I’m not going to tell you Bush should escape this without blame. He tried to give the USA “guns and cheese,” so the saying goes, and that did contribute somewhat to the housing bubble.  Bush pushed for artificially low interest rates to keep the economy churning while dumping billions into the wars in Afghanistan and Iraq, which in turn led to some unwise investments.

But don’t forget – Bush doesn’t have the power to set interest rates, laws, or even specific economic policy.  In fact, the president has very little direct power over the economy. Even if he was pressuring the Fed for lower interest rates, the Fed still had to go along with it, and that means Alan Greenspan is just as guilty (or more) than Bush for his role in keeping rates down between 2001 and his retirement in 2006.  After Greenspan, Ben Bernanke more or less maintained the status quo so he, too, deserves blame.

Most of this economic situation can be attributed to the mortgage crisis. Many people actually consider the mortgage crisis and the economic crisis to be one and the same. Even with a casual analysis, you should note that lending institutions made some very unwise choices by granting people loans that they really couldn’t afford.

But a more thorough analysis reveals another cause that you probably won’t hear much about on any mainstream news channel (though CNBC mentioned it once that I know of). A major catalyst of the mortgage crisis actually started in 1977.  That’s right, today’s mortgage crisis has been building for 30 years.

In 1977, the Democrat-controlled congress passed the “Community Reinvestment Act” which “is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.”  Basically, the bill encourages (and even provides de facto mandates for) extending credit to subprime (aka risky) borrowers.

The bill was signed into law by President Jimmy Carter. In 1992, President Clinton pushed through some extensive changes to the bill, furthering its impact on the lending sector. Many Republican members of Congress at the time warned against these changes, but they were written off (as usual) as being too pro-business and anti-“disadvantaged”.

The purpose of the law was basically to encourage lending institutions to extend credit to more minorities, even ones who really couldn’t afford to take on such a loan.

If you don’t believe that the Act was about race, all you have to do is look at various statements made regarding the bill.  In ’93, in regards to the CRA, Clinton’s comptroller of the currency stated “We have to use every means at our disposal to end discrimination and to end it as quickly as possible.” Many other politicians have been quoted referring to the bill as a way to expand housing opportunities to minorities. I’m not saying lending to minorities is a bad thing, but banks and lenders should be color blind – all that should matter is a person’s credit-worthiness, not their skin color.

The Act established a “CRA rating” to apply to lending institutions. This rating is essentially a grade which rates the “diversity” of an institution’s lending portfolio. In many cases, the institution’s ability to grow and to acquire other institutions was directly related to their CRA rating. As a result, many banks and institutions began extending more and more risky loans in order to raise their CRA rating.

Carter’s original law was well-intended, if perhaps slightly errant in its economic application; Clinton’s changes were downright disastrous. Don’t believe me? Consider this: in 1994 there were $35 billion in subprime loans. By 2008, that number had multiplied by about 30 to over 1 TRILLION DOLLARS in subprime loans.

So back to the NY Times article I mentioned.

I already told you that Pelosi stated Democrats deserved no blame for the current economic crisis.  In the same interview (Sept. 17, ’08), she also stated that President Bush’s “mismanagement” of the economy and lack of regulations were to blame for the situation.

But back in ’93, as you can read in the NY Times archive, President Bush pushed hard for an overhaul of the CRA and  for regulatory changes to the laws governing lending institutions, specifically Freddie Mac and Fannie Mae.  He acknowledged that oversight of the two companies was broken, citing investigations revealing they did not properly hedge against rising interest rates and were intentionally manipulating their accounting to mislead investors.  Bush pushed for a new agency within the Treasury Department to assume stricter supervision of the two lending giants.

Opposing Bush’s plan, Congressman Barney Frank stated “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”  Barney Frank was, at the time, the ranking Democrat on the Financial Services Committee. Other Democrats and some Republicans echoed his sentiments.

As it turns out, Barney Frank was dead wrong about Fannie Mae and Freddy Mac.

Bush, for all the blame he has taken (both fairly and unfairly) and all the ribbing about how dumb he is, actually saw this crisis coming and tried to prevent it, but Democrats and some foolish Republicans in Congress shut him down and the rest is history.  Though Republicans controlled Congress in 2003, Democrats were unanimously against the legislation. Joined by some dissenting Republicans, Democrats succeeded in killing Bush’s suggested policy changes. 5 years later, Fannie and Freddy did exactly what Bush feared would happen.

And now, Pelosi has the audacity to blame Bush for all the problems. As a conservative who regularly reads the rhetoric contained within the DNC email newsletter, this really doesn’t surprise me. But if you’re a Democrat, personally, I think you should be outraged. It’s unconscionable for Pelosi to declare Democrats blameless in this mess while simultaneously attempting to place all blame on one of the only leaders in the past 10 years who tried to prevent this crisis from happening.

What about McCain? In 2005, McCain said “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac post to the housing market, the overall financial system, and the economy as a whole.”  Not a bad prediction for a self-described economic weakling. I guess even in his weakened state (at the ripe-old age of 69) he was still one or two steps ahead of the Democrats in Congress.

And I’m sure you’re wondering what Obama was doing at the time.  Well in 2005, as a member of the Congressional Black Caucus, Barack Obama was being referred to as “family” and “[our] conscience” by Daniel Mudd, CEO of Fannie Mae – a man who made about $13 million in 2007 while his company was posting $2 billion in losses. You can find this speech on YouTube.  Between that speech and present day, Obama has accepted a total of $126,349 in campaign contributions from Fannie Mae, reaching #3 on a list of top recipients over the last 20 years, despite having only been a Senator for four. He joins 6 other Democrats in the list of top 10 recipients of Fanny/Freddy lobby money (the top 5 are all Democrats).  I guess he didn’t turn out to be much of a conscience for Fannie Mae after all.

It took me 30 minutes to find all this information.  So next time you see or hear something or someone blaming Bush – or any single individual – for our current economic crisis, I encourage you to react with skepticism. Do some of your own research before you hop aboard the Bash Bush Bandwagon.  I guarantee you’ll learn something, and you just might be surprised.

You can read this article for more details if you’re interested: http://www.ibdeditorials.com/IBDArticles.aspx?id=306632135350949

P.S.  – If you learned something, send this to your friends and family.  Republican or Democrat, each and every one of us has been screwed by one or more members our party in this economic situation and we owe it to ourselves, each other, and our country to know and acknowledge the truth, even if it means admitting your own party was partly to blame.

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