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Townhall...
I Hate to Burst Your
Bubble; U.S. Government Is To Blame
By Donald Lambro
WASHINGTON -- The Democratic-run investigative panel’s 600-page report
on what caused the financial crisis was promptly thrown onto a dusty
shelf, where most congressional inquiries are soon forgotten, late last
month.
From the beginning, the report’s conclusions were tilted, placing much,
if not most, of the blame on Wall Street, greedy lenders in the private
sector and the lack of adequate federal regulation. Notably, it played
down the government’s central role in the mortgage scandal that drove
the economy into a deep recession.
The Financial Crisis Inquiry Commission’s six-member Democratic
majority approved the report, while all four of the Republicans on the
panel opposed it. The chief point of contention was the key role that
Fannie Mae and Freddie Mac -- the government-created mortgage giants --
played in the financial collapse that toppled banks, shook Wall Street
to its foundations and flattened the housing market.
The six Democrats maintained that while Fannie and Freddie played a
role in the financial disaster, the major cause was Wall Street and the
failure of government regulators and policymakers to do their jobs. The
panel’s Republican members said the facts showed that the two
government-created agencies were in fact the chief cause of the crisis
that led to their bankruptcy and federal takeover, costing the Treasury
more than $130 billion to date.
In a strongly worded dissenting report from the GOP side of the
commission, Peter J. Wallison of the American Enterprise Institute
sharply criticized the Democratic majority for the way it conducted the
inquiry -- overlooking key factors in government policies that led to
much lower mortgage-lending standards for minority, low-income home
buyers. Such policies burst the subprime mortgage bubble and led to the
gargantuan number of home foreclosures that continue to this day.
“From the beginning, the commission’s investigation was limited to
validating the standard narrative about the financial crisis -- that it
was caused by deregulation or lack of regulation, weak risk management,
predatory lending, unregulated derivatives, and greed on Wall Street.
Other hypotheses were either never considered or were treated only
superficially,” Wallison wrote.
It wasn’t Wall Street banks that led to the crisis, but government
housing policy -- charted by Democratic leaders in Congress -- that
pressured the Department of Housing and Urban Development and mortgage
giants Fannie and Freddie to buy up massive numbers of high-risk,
subprime mortgages provided to low-income and minority borrowers who
couldn’t afford them.
“If the U.S. government had not chosen this policy path -- fostering
the growth of a bubble of unprecedented size and equally unprecedented
number of weak and high-risk residential mortgages -- the great
financial crisis of 2008 would never have occurred,” Wallison said.
Among the volume of evidence Wallison offers in his dissent is a 2005
HUD report that openly admits: “(L)enders have been encouraged by HUD
and banking regulators to increase lending to low-income and minority
households ... Sometimes these borrowers are higher risk, with
blemished credit histories and high debt or simply little savings for a
down payment. Lenders have responded with low down payment loans and
automated underwriting.”
He charges that the Democrats who wrote the report refused to
acknowledge the reckless role that government housing policy played in
the run-up to the subprime mortgage collapse, which is still wreaking
havoc in the nation’s depressed housing industry and in the larger
economy.
While Democrats have tried to lay the entire subprime collapse at the
doorstep of George W. Bush’s administration, the roots of the subprime
scandal really go back to the Clinton administration in the early
1990s, when he and Democratic leaders were pushing policies that
sharply raised the number of mortgages to minorities and low-income
home buyers.
“In 1993 (home ownership) was 63 percent; by the end of the Clinton
administration it was 68 percent. The growth in the Bush administration
was about 1 percent,” Wallison wrote in his analysis: “The True Origins
of This Financial Crisis” in the February 2009 issue of The American
Spectator.
The New York Times “reported in 1999 that Fannie Mae and Freddie Mac
were under pressure from the Clinton administration to increase lending
to minorities and low-income home buyers -- a policy that necessarily
entailed higher risks. Can there really be a question ... where the
push to reduce lending standards and boost home ownership came from?”
he writes.
The two major policy culprits in the federal push to lower lending
standards were the Community Reinvestment Act and what was known as the
affordable housing “mission” that Freddie and Fannie were instructed to
administer.
By the mid-1990s, under Clinton administration pressure, federal
regulators created new lending rules under which banks had to show
“that they had actually made a requisite number of loans to low-and
moderate-income borrowers” by using “innovative or flexible” lending
practices,” Wallison writes.
HUD pressed for new mortgage lending policies under the 1994 National
Homeownership Strategy developed at Clinton’s request. Among its
provisions, it called for “financing strategies, fueled by the
creativity and resources of the private and public sectors, to help
homeowners that lack cash to buy a home and to make the payments.”
According to the Joint Center for Housing Studies at Harvard
University, subprime loans made to borrowers with poor credit records
rose from 7.2 percent to nearly 19 percent. Standards for other loans
fell as well. Fannie and Freddie eagerly bought them up, with the
government guaranteeing them. And the bubble grew until it burst in
2008, and the rest is history.
The blame for this scandal rests first and foremost with the federal
government.
Read it at Townhall
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