A government crusade in the 1990s set the stage for the mortgage and housing bubble. As detailed in previous columns, Congress passed laws and Presidents took actions to make cheap money available to unqualified borrowers, and punished banks that didn’t comply.
The dawning of the 2000s decade saw the federal housing locomotive roaring down the track, with the liberals in Congress pouring on the coal. Social-engineering regulators had already pushed banks to lend almost $1 trillion for mortgages to low-income clients and inner-city projects, mostly funneling the money through HUD to questionable leftist “community groups” like ACORN. The goal of these groups was to force mortgage giants Fannie Mae and Freddie Mac to slacken mortgage-loan standards. These groups taught their “clients” that the government was their savior and their key to well-being, while the financial system was their enemy. Barack Obama worked for one of these groups in Chicago.
The poster children for wrong-headedness and villainy in Congress’s promotion of the rising mortgage bubble were legislators Rep. Barney Frank and Sen. Chris Dodd.
Fannie and Freddie, backed by taxpayers, had funded hundreds of billions in subprime loans and purchased hundreds of billions more, some with down payments of less than 10 percent. By 2000, it was becoming clear they were out of control. But Frank opposed a bill to reform Fan and Fred, saying “there is no federal liability there whatsoever.” Later, he proclaimed that they “posed no threat to the treasury,” that their problems were “overblown” and “exaggerated”. (The federal bailout of Fan and Fred would later cost taxpayers $224–$360 billion.) But his most astounding statement came in 2003, when he proposed Fan and Fred should make risky loans: “I want to roll the dice a little bit more in this situation towards subsidized housing…” Barney Frank has a near-perfect record of opposing any sort of reform of Fan and Fred.
Sen. Dodd kept the mortgage money gushing, labeling Fan and Fred “one of the great success stories of all time” and urged “caution” in restricting their activities. Sen. Chuck Schumer chimed in, defending the two mortgage giants for having “done a very, very good job.” It was also Frank who allowed Fan and Fred to securitize and guarantee larger mortgages.
In 2001, President George Bush raised red flags and sounded warning bells in his 2002 budget request, saying “Fannie and Freddie are potential problems.” In his 2003 budget, Bush’s warnings were upgraded to “systemic risk that could spread beyond the housing sector”, and he pushed Congress to establish a “strong, world-class regulatory agency to oversee Fannie and Freddie”. Bush’s legislation was blocked by Dodd, Schumer, and Obama in the Senate, who conveniently accepted significant campaign contributions from Fan and Fred. Over in the House, Barney Frank stated that Fan and Fred were “financially sound…. I do not see financial losses…scenarios.” In 2003, Bush proposed a capital-reserve requirement for Fan and Fred, but was again ignored by Congress.
In 2004, an OMB investigation found fraudulent bookkeeping at Fannie Mae. The Wall Street Journal stated “the company was cooking the books — big time.” Yet, the Republican Congress held no hearings, no one went to jail or was punished. But in 2005, the Fannie’s CEO Franklin Raines and CFO Tim Howard were forced to leave when the accounting scandal was confirmed. Unbelievably, the combined “golden parachute” exit payment to them was $260 million! This was their reward for contributing upwards of $20 million in campaign contributions to politicians, and spending $150 million to $170 million on lobbying Congress. Obama ranked number two in campaign donations from Fan and Fred, taking over $125,000, and Chris Dodd was tops at $165,000. Rahm Emanuel – later chief of staff to President Obama – pocketed $320,000 for a 14-month stint at Freddie.
The evidence is overwhelming that the financial bubble that later burst was caused by multiple Washington mistakes, including missteps and easy money policies of the Federal Reserve that kept interest rates too low for too long.
So, by pressuring banks to loan to poor borrowers, politicians could cause increases in home ownership without needing to commit funds. “Another political free lunch,” as one newspaper put it, which was ultimately paid for by taxpayers.
This is what happens when government decides that every citizen is entitled to own a home. There is a documented explanation for how it came to pass that Fannie Mae and Freddie Mac, the “Toxic Twins” along with the mortgage housing industry, nearly destroyed themselves. It is not because the free market failed. It is because the free market was never allowed to work. Government set up a flawed structure, played nasty politics, and stoked the crisis.
This meltdown was directly caused by an activist federal government intervening in the free market process of making mortgage loans. The government forced lenders to loan money to low income borrowers, too many of whom defaulted on their loan payments. This caused massive failures and defaults in the nationwide mortgage market, resulting in a market crisis as home values dipped below the remaining debt owed by borrowers on their mortgages. Politicians put the nation’s prosperity at risk so they could make political hay about helping the poor, and now they point the scapegoating finger of blame at “Wall Street.”