Didn't Pelosi say don't blame us.? .Forbes article

oldelkhunter · 09-25-2008, 08:15 AM

Oh yeah no fault of theirs(Dimocrats) at all. Thanks Clinton and Obama hopefully will be losing some of his campaign advisers to the Federal Penn

http://ibdeditorial.com/IBDArticles.aspx?id=307149667289804

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?

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IBD Exclusive Series: What Caused The Loan Crisis?

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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.

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ipscshooter · 09-25-2008, 08:45 AM

I made a similar statement and was told that I was "bleating"... So posted an article by an economics professor on the subject. Unfortunately, it got lost among a Big D vs VC war of words...

Since this thread is along the same lines, here's my prior post:

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ORIGINAL: SP10

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ORIGINAL: ipscshooter

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The past week will mean a momentous change in the nature of the U.S. Economy which will much more closely resemble those of Europe and ***an in the future. We have just been shown that unbridled capitalism produces economies that are inherently too unstable to be viable in the long run. At some point the government has to be a strict regulator of most of the economy and at least a partial owner of critical industries in order to create an economic environment in which private property and some amount of free enterprise can survive. These are hard words for me to write since I have always strongly believed in capitalism to the extreme. However, what we saw last week was the total failure and ruin of unfettered capitalism with the only prospect of rescue coming from massive government intervention into the private sector economy.

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Gee, I thought we were just shown that government shouldn't meddle. The private sector had said "I'm not going to loan money to people who don't meet certain underwriting criteria because they are too big a risk. If I loan them money, they will default, and I will suffer losses." The government made the decision that everyone should have the opportunity to buy a house, so they said to the private sector "you must make loans to those people and we'll back it up." The private sector said "OK, we'll make the loans, but it's not a good idea." The folks who wouldn't have qualified for financing, but for the government mandate, then default on the loans causing massive losses to the private sector because their underwriting criteria had been re-written by a meddling government. Now... tell me why government meddling was a good idea... It was their meddling that got us here. Now you want even more meddling...

By the way, if you like Euro-Economies so much, you might want to take a look at their unemployment rates compared to ours.

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The bleat that lenders were somehow forced to make these sub-prime loans is at best an urban myth and more likely an out and out lie. What happened is the lenders found they could charge huge fees by steering borrowers into these ARMs and other sub-prime loans. Then, with real estate prices skyrocketing the lenders could just foreclose when the borrower defaulted and sell the property at a handsome profit. These lenders were so blinded by greed, the big fees they were getting for putting people into these loans and the prospect of more profit to come when they sold the repossessed properties at a huge profit, they lost sight of the fact that real estate values could fall as well as go up. Then they suddenly found themselves repossessing properties with market values less than the loan balances and now how have the nerve to expect the taxpayers to put up $700 billion dollars so they can sell these greatly devalued assetts to the government at a profit and not have to accept the "firesale" prices the private sector is offering for them. I have no desire to bail out the greedy and stupid, let them sell those loans to the private sector at the best price they can get for them. That is the American way.

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Baaa baaa baaa

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THE REAL SCANDAL HOW FEDS INVITED THE MORTGAGE MESS
By STAN LIEBOWITZ

February 5, 2008

PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.

In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances.

Yet a "landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

Yet the political agenda triumphed - with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "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."

Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.
Sound crazy? You bet. Those "outdated" standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with "100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns." Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.

In an earlier newspaper story extolling the virtues of relaxed underwriting standards, Countrywide's chief executive bragged that, to approve minority applications that would otherwise be rejected "lenders have had to stretch the rules a bit." He's not bragging now.

For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage caused by relaxed lending standards.
This damage was quite predictable: "After the warm and fuzzy glow of 'flexible underwriting standards' has worn off, we may discover that they are nothing more than standards that lead to bad loans . . . these policies will have done a disservice to their putative beneficiaries if . . . they are dispossessed from their homes." I wrote that, with Ted Day, in a 1998 academic article.

Sadly, we were spitting into the wind.

These days, everyone claims to favor strong lending standards. What about all those self-righteous newspapers, politicians and regulators who were intent on loosening lending standards?

As you might expect, they are now self-righteously blaming those, such as Countrywide, who did what they were told.

Stan Liebowitz is the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas.

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Fieldmouse · 09-25-2008, 08:51 AM

You must be wrong. Everyone knows Phill Gramm caused all of this.

Alsatian · 09-25-2008, 01:04 PM

But ipscshooter, it can't be true, because I don't hear that on NBC/ABC/CBS/CNN and I don't read it in NYT and WP.

This reminds me of a passage in Thucydides' History of the Peloponesian War, in the early passage describing some of the near term history leading up to the PW, specifically the revolution at Corinth (Corcyra? I'm not sure I remember). The chilling passage I remember was Thucydides' observance that language became changed -- what was formerly called cowardice wasthen called bravery, what was formerly called prudence and forebearance was then called laziness and opposition. I don't remember the exact words, but clearly Thucydides is describing political spin. That is precisely what we are experiencing to such an unprecedented extent in this country now. It wasn't always so. How can government function well when the people vote these clowns into office on the basis of lies and disinformation spread by the likes of Nancy Pelosi -- "don't blame it on us" -- and there is no challenge from objective parties of this misinformation?

burniegoeasily · 09-25-2008, 01:25 PM

2.5% of capital for backing.

What the frank?

Shut the front door.

Mother Fletcher.

oldelkhunter · 09-25-2008, 01:30 PM

The infamous Cuomo family wonderful lot they are. There was a time when Ed Koch mayor of NY was running for Governor against Andrews Daddy Mario. The enlightened parties slogan was " Vote for Cuomo not for the Homo"