Historians know that they can never claim wars start with a clash of armies. They know that the root causes of war start long before. In the same way that the seeds of war germinate well in advance of battle action, so too did the causes of this country’s mortgage meltdown, housing collapse, and credit crisis.
Champions of Big-Brother-Government want you to blame everyone else except government intrusion for the economic plagues that currently assail us. But there’s no getting around the truth. In the 1990s and 2000s, activist leftist groups like ACORN, AFL-CIO, and NEA conspired with liberal politicians to push private financial institutions into creating financial products enabling unqualified individuals to buy homes they couldn’t afford. Now, those same leftists not only deny involvement in the havoc they caused, some are in the streets screaming shrilly that “Wall Street” caused the whole mess.
The root cause of the housing disaster occurred after the federal government gave the green light and bullied lenders onto an 8-lane highway toward making money available to all comers for home mortgages. Here is the true and fascinating story of how that started:
President Jimmy Carter sponsored the well-meaning Community Reinvestment Act (CRA) in 1977. It required banks and savings and loans to offer credit to “underserved populations” so they could obtain credit, including home ownership.
In 1991, the Home Mortgage Disclosure Act required lenders to report rejection rates by race. Lenders were informed that their loans would be examined for evidence of bias. Violators would face fines — get this — as high as $500,000. The Democratic Congress in 1992 passed the Federal Housing Enterprise Act, providing HUD the hammer to carry out Congressional intent to “meet the mortgage credit needs of all potential home buyers, including those with low and moderate incomes.”
The 1992 act was the fuse that lit the largest housing blow-up the U.S. has ever seen, because one provision required that mortgage giants Fannie and Freddie “should accept down payments of 5 percent or less, ignore impaired credit if the blot was over one year old, and otherwise loosen (their) lending guidelines.”
The Federal Reserve had a hand in creating the problem: “An influential 1992 report from the Boston Fed recommended: ‘Policies regarding applicants with no credit history or problem credit history should not be seen as a negative factor’”. Food stamps and welfare checks were allowed to be counted as “income” on loan applications. Racial quotas and penalties were imposed on lenders with unfavorable “CRA ratings”. “Banks that failed to make enough of these loans were often held hostage by activists when they sought some regulatory approval.”
Next, President Bill Clinton re-wrote the CRA Act in 1994, using his HUD Secretary Henry Cisneros to “put it on steroids”, and juice it into overdrive. It “required the banks to lend to people who were poor credit risks, in the name of ‘housing rights.’” This precipitated a huge surge in mortgage lending to unqualified buyers because Fannie Mae was under unrelenting pressure from Clinton’s Administration “to expand mortgage loans among low and moderate income people.” The CRA was a club “used to force banks to subsidize poor communities with close to $1 trillion in high-risk loans…”
If she didn’t like the reports on who was getting loans and who wasn’t, then Attorney General Janet Reno bullied the banks with quotas and faulty statistics to literally extort millions of dollars from banks by alleging racial discrimination if they didn’t play along. This intimidated many banks to agree to pay cash settlements so they could avoid trials and negative publicity.
It turned into a free-for-all of banks approving loans for people who clearly couldn’t afford to repay them. By 1996, 42 percent of Fannie and Freddie’s mortgage financing went to borrowers with below-median income. This target increased in 2000 to 50 percent, and was 52 percent by 2005.
This series of political events, this flood of risky loans that were distributed around the globe by Congressional creatures Fannie and Freddie, was the root cause that inflated the credit bubble to the bursting point and brought our financial system near the brink of destruction.