Roots of financial crisis in Clinton housing policy
By: Examiner Newspapers
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September 15, 2008
Barack Obama held the Bush administration responsible yesterday for what he calls “the most serious financial crisis since the Great Depression.” Obama is hopelessly wrong on the facts. One need look no further than The Washington Examiner and The Washington Post to see that the roots of this crisis sprouted during the Clinton administration’s politically motivated effort in the 1990s to use Fannie Mae and Freddie Mac to expand home ownership. Fannie and Freddie are Government-Sponsored Entities (GSEs) that dominate the U.S. mortgage market. Fannie was created during the New Deal, while Freddie came into being in 1970. According to the Post, Fannie and Freddie have “enjoyed the nearest thing to a license to print money” because they are private companies that offer investors government-backed – i.e. taxpayer - guarantees against loss. Fannie and Freddie increase the amount of money available for mortgages by buying mortgages on the secondary market, pooling them, then selling them as mortgage-backed securities to investors on the open market.
In an oped article published on these pages last February, former Wall Streeter Robert Cox noted that “in response to political pressure at the time, the GSEs took steps to make homeownership more affordable for lower-income Americans and those with a poor credit history.” Those steps encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions, loosening required debt-to-equity ratios to allow borrowers to make small or even no down payments at all, and encouraging lenders the use of floating or adjustable interest-rate mortgages, including those with low “teasers.” Home ownership rates soared to historic highs and all was well as long as home prices increased and lenders could comfortably convert floating-rate mortgages to fixed-rate obligations. Then home values declined. Lenders foreclosed when buyers missed payments as adjustable mortgage rates increased. When the mortgage-backed securities plunged in value as a result, Fannie and Freddie turned to Congress to cover the losses.
This result was entirely predictable, as the Post detailed in a front-page story on Sunday. Towards the end of the Clinton administration, some officials worried about letting Fannie Mae and Freddie Mac continue their loose-lending policies. Then, Treasury undersecretary Gary Gensler alerted Congress to the risk in 2000, but the Republican-controlled Senate and House did nothing. Since then, Bush officials have occasionally but only meekly advocated reforms. When the current crisis presented an opportunity to force needed reforms, Bush caved to demands of the Democratic Congress to bail out Fannie and Freddie with tax dollars. Thus, Fannie and Freddie illustrate a familiar truth: Government regulation too frequently ends up simply adding to the already excessive burdens heaped on federal taxpayers.
