The Republican Roots of the Subprime Crisis...
News Type: Opinion — Wed Oct 1, 2008 12:28 PM EDT
Many people are still snookered by the right-wing blogosphere's accusation that the Democratic Party is solely to blame for the current financial crisis. As I noted in The Liberal Subprime Crisis: Myth and Reality, claims that the cause of the crisis was the Community Reinvestment Act of 1977 are particularly overblown. Not only was there not much CRA activity during the period in which the current crisis bloomed, but the number of CRA loans involved in the crisis is particularly small.
Nevertheless, the hard Right insists that without Democrats pushing banks to make risky and ill-considered loans, the economy would be just fine. In their universe, it was perfidious Democrats who insisted that mortgage firms and banks grant loans to people who were high credit risks, and who could not afford mortgages. Again, one has to consider the facts before reaching a conclusion, and facts seem in scarce supply in these accusations against liberals and Democrats. How true is the assertion that Democrats forced reluctant bankers to give out loans to bad credit risks over the protests of the Republican party?
You'll no doubt be shocked to learn that the answer is "not very." Consider the following facts:
* President Bush's "America's Home Ownership Challenge" pushed the private lending sector (as well as Fannie Mae and Freddie Mac) to make more than 5.5 million new minority and low income mortgage loans. To meet his challenge to the private lending industry, twenty four of our largest banking and lending companies pledged to make 1.1 trillion dollars in low income and minority loans. Bush's "America's Home Ownership Challenge" pushed private lenders to "create more creative" loan products, and encouraged them to "loosen underwriting standards." In the Bush press release "A Home of Your Own EXPANDING OPPORTUNITIES FOR ALL AMERICANS, PRESIDENT GEORGE W. BUSH JUNE 2002", the administration even pushed Freddie Mac and Fannie Mae to increase the capital available for such loans--
The government-sponsored corporations created to increase the liquidity of mortgage markets, so more capital would be available for mortgage loans, are supposed to lead the market in reaching underserved populations. While these corporations have increased their commitments to these efforts, they lag behind private lenders in this regard, according to government studies. The Administration will revisit the regulatory goals for these corporations’ purchases of affordable housing loans, which are set to expire in 2003. The federal government should demand more and should hold such publicly-chartered corporations accountable for better performance. In this instance, "better performance" is seen as an increase in capital available for mortgage loans to underserved populations. That's the opposite of what should have been happening if Republicans were concerned about the fragility of the industry.
* The Bush administration was on the forefront of pushing risky mortgages. From Bush Administration’s White House Press Release entitled, "Focusing on the Nation’s Priorities – Meeting America’s Housing Needs":
In 2002, the President issued America’s Homeownership Challenge to increase first-time minority homeowners by 5.5 million through 2010. The Federal Housing Administration (FHA) mortgage program is an important tool for reaching that goal. In 2006, 31 percent of those using FHA mortgages were minorities purchasing their first home. The 2008 Budget continues Administration efforts to modernize FHA by improving its ability to reach traditionally underserved homebuyers (aka those who do not normally qualify for loans), such as low- and moderate-income families, individuals with blemished credit, and families who have little savings for a down payment. It's a bit of a problem to claim that the Democrats were responsible for pushing risky loans and relaxed underwriting, when the Republican President, with the complicity of his party, demanded loans be extended to individuals with blemished credit, or who could not afford down payments.
* While in Georgia in 2002, Bush made a speech in which he directly stated
"One of the barriers to homeownership is the inability to make a downpayment. And if one of the goals is to increase homeownership, it makes sense to help people pay that downpayment.
... And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system -- I introduced two of the leaders here today -- they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It's a commitment that conforms to their charters, as well, and also conforms to their hearts.
This means they will purchase more loans made by banks after Americans, Hispanics and other minorities, which will encourage homeownership. Freddie Mac will launch 25 initiatives to eliminate homeownership barriers. Under one of these, consumers with poor credit will be able to get a mortgage with an interest rate that automatically goes down after a period of consistent payments." It was the Republican administration which directed Fannie Mae and Freddie Mac to more aggressively serve risky markets, and threatened their charter if they did not do so.
* On December 16, 2003, President Bush signed into law the American Dream Downpayment Act of 2003, which will help approximately 40,000 families a year with their down payment and closing costs, and further strengthen America’s housing market. This legislation complements the President’s aggressive housing agenda announced in 2002 to dismantle the barriers to homeownership.
(From White House Press Release "American Dream Downpayment Act of 2003 – Expanding Homeownership Opportunities for All).
The American Dream Downpayment Act of 2003 followed Bush's admonishment that capital must be made available to "low- and moderate-income families, individuals with blemished credit, and families who have little savings for a down payment."
* The Republican administration had HUD offer "zero down payment" mortgages, and risky 3, 5, and 7-year ARMs.
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE Initiative Aimed at Removing Major Barrier to Homeownership LAS VEGAS - As part of President Bush's ongoing effort to help American families achieve the dream of homeownership, Federal Housing Commissioner John C. Weicher today announced that HUD is proposing to offer a "zero down payment" mortgage, the most significant initiative by the Federal Housing Administration in over a decade. This action would help remove the greatest barrier facing first-time homebuyers - the lack of funds for a down payment on a mortgage. Speaking at the National Association of Home Builders' annual convention, Commissioner Weicher indicated that the proposal, part of HUD's Fiscal Year 2005 budget request, would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.
John Weicher was a Bush appointee, and the elimination of the requirement for a 3% downpayment for a HUD/FHA loan was part of Bush's initiative.
* Of course, these goals were reiterated in the 2004 GOP platform
The most significant barrier to homeownership is the down payment. We support efforts to reduce that barrier, like the American Dream Downpayment Act and Zero Downpayment Mortgages.
* It was the Gramm Leach Bliley Act that allowed banks to deal in mortgage-backed securities. Without passage of the GLBA by a Republican-controlled Congress, the subprime mess couldn't have happened. Chief architect of the GLBA? John McCain's economic adviser, Phil Gramm. Yes, that Phil Gramm. The GLBA was passed on a vote split along party lines (John McCain voted "aye," by the way).
The GLBA eliminated regulatory oversight that was essential to prevent the sorts of naked fraud that have fueled the current crisis. As a result of the GLBA and Republican love of deregulation, the banking industry was allowed to "opt out" of regulation, something that SEC Chairman Chris Cox now blames for the current crisis--
“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.
...In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.
...In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.
With the economy facing a recession, Congress looked to stimulate the economy by stimulating the housing market. Bush often pointed to the increase in home ownership as an indication that he had, in fact, done exactly that. Mortgage-backed securities were in such demand because they allowed banks and lenders to turn an illiquid asset - mortgages-- into a liquid asset by bundling the mortgages and selling them as securities. Many people thought that they were great securities to buy because they were secured by collateral -- the homes -- and if the debt went bad, the collateral could be sold. As a result, demand for these "products" exceeded supply. What did the Republican administration do? Pushed aggressively for ways to increase the supply, including forcing Fannie Mae and Freddie Mac to offer risky loans to people with bad credit. And with Republicans in Congress, effective regulation and oversight of the markets was made "voluntary"-- in other words, nonexistent.
Additionally, there are a lot of claims that the Republicans attempted to push through legislation requiring oversight of the subprime market, and that Democrats stymied the bill. A corollary to that claim is that McCain cosponsored the legislation, and sounded the clarion bell on the impending crisis. We should take a moment to evaluate both claims.
The Federal Housing Enterprise Regulatory Reform Act of 2005 (S190) was introduced in the Senate on Jan 26, 2005, sponsored by Chuck Hagel and co-sponsored by Elizabeth Dole and John Sununu. John McCain was not a co-sponsor at that time. After some discussion in the Republican-controlled committee, the bill was tabled for revision. In other words, in a Republican controlled Congress, in a Republican controlled committee, the bill died, and was never reconsidered.
17 months later, the Office of Federal Housing Enterprise Oversight (OFHEO) issued the results of their 27 month long investigation of Fannie Mae. It was widely reported and was scathing in its criticism of Fannie Mae. News reports picked up the criticism the following day. The day after that, May 25, 2006, John McCain (in an act of "prescience") regurgitated some of the findings of the report, and signed on as a co-sponsor to the defunct bill. That's the last McCain talked about reforming Freddie Mac and Fannie Mae.
And what would the reform instituted by S190 have consisted of? S190 would have been reconciled with the almost identical HR1461 before being enacted, if it had become law. What would that have meant? S190 was the stronger of the two bills, but in reconciliation with HR1461, it's entirely possible that the result would have been a weakening of regulatory oversight of Fannie Mae and Freddie Mac.
Nevertheless, as the American Enterprise Institute noted:
The bill that emerged from the Senate Banking Committee is exactly what the White House wants, and it is doubtful that this administration--and this particularly determined president--will let the opportunity pass. An administration that has gained some measure of tort reform, approval of the Central American Free Trade Agreement, bankruptcy reform, and an energy bill--none of which received significant bipartisan support--is unlikely to shrink from pushing through Congress a bill that achieves one of its most important government reform priorities.
...After the administration and the Fed have declared that the GSEs’ portfolios are a dangerous source of taxpayer and systemic risk, the administration can hardly do nothing if Congress fails to act. In this respect, the administration always has a card to play--it can always use the Treasury’s authority to restrict the GSEs’ issuance of debt. The GSEs must realize this and must see that the only effective way to prevent the use of this authority in a wholesale manner is to reach a legislative compromise of some kind.
Sadly, the AEI was absolutely incorrect on this. The White House refused to press the issue, and the bill was allowed to die in committee, despite Republican control of its fate.
S190 was resurrected in the 110th Congress by Chuck Hagel as S1100. Co sponsoring the bill were Sen. Elizabeth Dole , Sen. Mel Martinez , and Sen. John Sununu . S1100 was introduced on April 12, 2007.
John McCain did not support S1100, nor has he (before or since) introduced any legislation to address the issue.
So let's have the rundown, here.
* Were the Republicans responsible for (and did John McCain vote for) the Gramm-Leach-Bliley Act that allowed this deregulation that created this problem, way back in 1999? Yes.
* Does John McCain currently have Phil Gramm serving as his economic adviser on his campaign? Again, yes.
* Did the Republicans, in control of sending S190 to the floor of the Senate for a vote, fail to do so? Yes.
* Did the White House, putatively desiring to see the risks of Fannie Mae and Freddie Mac ameliorated, fail to take action when comprehensive regulatory legislation failed to emerge from Congress? Yes.
* Did McCain support reform of Fannie Mae and Freddie Mac? Not in any way that mattered, and certainly not when it would have done any good.
* Did McCain presciently predict problems with either GSE? Nope. He simply regurgitated the findings of the report created by the OFHEO.
* Given a second opportunity in the current Congress to address reforming either Fannie Mae or Freddie Mac, did McCain act or even speak toward convincing his compatriots to assert more regulation in order to avoid disaster? Clearly not.
more here...
http://iarnuocon.newsvine.com/_news/2008/10/01/1940028-the-republican-roots-of-the-subprime-crisis
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