Throughout our lives we are reminded to act responsibly. Our parents, neighbors, teachers, employers etc all have extolled the virtues of responsibility. But all this wisdom was washed down the drain by politicians.
In the dark days of the Carter Administration, congress passed The Community Reinvestment Act (CRA). The CRA essentially reduced the requirements to buy houses. But in 1995 under the Clinton Administration, the CRA lending standards were lowered even further. The Boston Federal Reserve produced a manual for mortgage lenders that said: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” Lenders were told credit history, proof of income, and source of downpayment were outdated criteria. Would you loan someone a significant amount of money without some assurance of repayment?
The intimidation did not stop there. The Fed warned the banks that “…Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions.” There was no question that the lenders were threatened with charges of violating the CRA if they didn’t make home loans to people with poor credit ratings. Community activist groups like ACORN patrolled the lenders to make sure that unqualified buyers could get loans. When Obama was a lawyer/community activist he represented ACORN and sued Fannie Mae to reduce the requirements for getting mortgages. So the lenders complied and loaned to high risk buyers. As any banker will tell you, your credit rating determines your interest rate. So these high risk buyers wound up with adjustable rate mortgages (ARMs).
To insure that these lenders were not stuck with all these bad loans, lenders could sell these loans to the Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), both are publicly owned government sponsored enterprise (GSE). The department of Housing and Urban Development (HUD) urged Freddie and Fanny to buy more loans. Freddie and Fannie were encouraging lenders to make more home loans. Developers, builders, real estate agents, appraisers, loan officers and lenders were eager to comply, after all everybody was making money.
As the sub-prime market increased, investment banks also wanted in on this money making machine and bought Mortgage Backed Securities (MBS). The (MBS) came with implied government guarantees – so what was the risk? The buyer didn’t care because they were getting a house. The lenders didn’t care because they were going to sell to Freddie and Fannie. Freddie and Fannie didn’t care because they were going to sell to investment banks. And the investment banks didn’t care because they thought the loans were backed by the government. All went well until the housing market stumbled, the interest on the ARMs increased, and the house of cards collapsed.
But the threat was not unknown. While president, Bill Clinton realized that Freddie and Fannie were out of control – but the Democrats in congress blocked action. Every year since he took office, including 17 times in 2008, President Bush echoed Bill Clinton’s warnings on Freddie and Fannie. But congress ignored Bush like they did Clinton.
Why did congress ignore the warning from both President Clinton and President Bush? The answer is simple – MONEY. Freddie and Fannie acted like a piggy bank for politicians. Some of the same politicians that caused this financial crisis are advisors/supporters to Barack Obama and control both the House and Senate committees. In 2005 the Democrats blocked legislation that would have prevented this crisis. But Speaker of the House Nancy Pelosi said, “This came out of no where, this is all about the Republicans. We had nothing to do with this.” Pelosi should talk to fellow Democrats Franklin Raines, Jim Johnson, Barney Frank, Chris Dodd, Maxine Waters, Charles Schumer and Jamie Gorelick who are just a few of the Democrat politios that raked in millions in this scam while encouraging irresponsibility.
September 11, 2003