[T]he U.S. government’s housing policies were the major contributor to the financial crisis of 2008. These policies fostered the development of a massive housing bubble between 1997 and 2007 and the creation of 27 million subprime and Alt-A loans, many of which were ready to default as soon as the housing bubble began to deflate.
It is not surprising the Democrats appointed by Harry Reid and Nancy Pelosi tried to cover up the Democrats culpability in the housing crisis which was the major factor in a world wide financial crisis. The final report issued this month was approved only by Democrat appointees.
Many issues raised by Republicans were ignored or downplayed to protect the basic philosophies and big government programs of the Democrats.
Commissioner Peter J. Wallison wrote a well documented dissent for the minority Republican nominees none of whom voted for the final report. Wallison’s credentials from the commissions website:
Peter Wallison holds the Arthur F. Burns Chair in Financial Policy Studies and is co-director of the American Enterprise Institute (AEI)’s program on Financial Policy Studies. Prior to joining AEI, he practiced banking, corporate and financial law at Gibson, Dunn & Crutcher in Washington, D.C. and New York.
Mr. Wallison is the author of Ronald Reagan: The Power of Conviction and the Success of His Presidency, published in December 2002 by Westview Press. On financial or regulatory matters, he is the author of Back From the Brink, a proposal for a private deposit insurance system, and co-author of Nationalizing Mortgage Risk: The Growth of Fannie Mae and Freddie Mac; The GAAP Gap: Corporate Disclosure in the Internet Age; and Competitive Equity: A Better Way to Organize Mutual Funds, all of which were published by AEI. He is also the editor of Optional Federal Chartering and Regulation of Insurance Companies, and Serving Two Masters, Yet Out of Control: Fannie Mae and Freddie Mac, also published by AEI. On campaign finance, he is the author (with Joel Gora) of Better Parties, Better Government, (AEI Press 2009).
His conclusion in the Dissenting Statement of the report lays the blame squarely on the Democrat policies of ‘affordable’ housing and the push to force banks and lenders to make loans to unqualified borrowers:
“This dissenting statement argues that the U.S. government’s housing policies were the major contributor to the financial crisis of 2008. These policies fostered the development of a massive housing bubble between 1997 and 2007 and the creation of 27 million subprime and Alt-A loans, many of which were ready to default as soon as the housing bubble began to deflate. The losses associated with these weak and high risk loans caused either the real or apparent weakness of the major financial institutions around the world that held these mortgages—or PMBS backed by these mortgages—as investments or as sources of liquidity. Deregulation, lack of regulation, predatory lending or the other factors that were cited in the report of the FCIC’s majority were not determinative factors.
The policy implications of this conclusion are significant. If the crisis could have been prevented simply by eliminating or changing the government policies and programs that were primarily responsible for the financial crisis, then there was no need for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, adopted by Congress in July 2010 and oft en cited as one of the important achievements of the Obama administration and the 111th Congress.
The stringent regulation that the Dodd-Frank Act imposes on the U.S. economy will almost certainly have a major adverse effect on economic growth and job creation in the United States during the balance of this decade. If this was the price that had to be paid for preventing another financial crisis then perhaps it’s one that will have to be borne. But if it was not necessary to prevent another crisis—and it would not have been necessary if the crisis was caused by actions of the government itself—then the Dodd-Frank Act seriously overreached.
Finally, if the principal cause of the fi nancial crisis was ultimately the government’s involvement in the housing fi nance system, housing fi nance policy in the future should be adjusted accordingly.”
In a particularly telling event in the report Fannie Mae CEO Daniel Mudd seems to have arrogantly dismissed a warning by Fannie’s risk officer, Enrico Dallavecchia about continuing to purchase and guarantee higher-risk mortgages.
“Management told the board that Fannie’s risk management function had all the necessary means and budget to act on the plan. Chief Risk Officer Dallavecchia did not agree, especially in light of a planned 16% cut in his budget. In a July 16, 2007, email to CEO Mudd, Dallavecchia wrote that he was very upset that he had to hear at the board meeting that Fannie had the “will and the money to change our culture and support taking more credit risk,” given the proposed budget cut for his department in2008 after a 25% reduction in headcount in 2007. In an earlier email, Dallavecchia had written to Chief Operating Officer Michael Williams that Fannie had “one of the weakest control processes” that he “ever witnessed in [his] career, . . . was not even close to having proper control processes for credit, market and operational risk,” and was “already back to the old days of scraping on controls . . . to reduce expenses.” These deficiencies indicated that “people don’t care about the [risk] function or they don’t get it.”
Mudd responded, “My experience is that email is not a very good venue for conversation, venting or negotiating.” If Dallavecchia felt that he had been dealt with in bad faith, he should “address it man to man,” unless he wanted Mudd “to be the one to carry messages for you to your peers.” Mudd concluded, “Please come and see me today face to face.””
Wallison did not pull any punches in criticizing the majority’s report as a whitewash and not a thorough investigation:
“Like Congress and the Administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and a financial system addicted to excessive risk-taking. The Commission did not seriously investigate any other cause, and did not effectively connect the factors it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally failed to show how practices that had gone on for many years suddenly caused a world-wide financial crisis. In the end, the majority’s report turned out to be a just so story about the financial crisis, rather than a report on what caused the financial crisis.” [emphasis added]
And don’t forget Franklin Raines. Obama’s housing ‘advisor’ was CEO of Fannie Mae and pushed Fannie to buy subprime loans. From the report:
“The top executives of Freddie Mac and Fannie Mae [Richard Syron and Franklin Raines] made no bones about their interest in buying loans made to borrowers formerly considered the province of nonprime and other niche lenders. …Fannie Mae Chairman and [CEO] Franklin Raines told mortgage bankers in San Francisco that his company’s lender-customers ‘need to learn the best from the subprime market and bring the best from the prime market into [the subprime market].’ He off ered praise for nonprime lenders that, he said, ‘are some of the best marketers in financial services.’… We have to push products and opportunities to people who have lesser credit quality,” he said. [emphasis supplied]”
Raines and others at Fannie falsified accounting reports to manipulate bonuses for themselves. Raines’ total compensation at Fannie through 2004 was over $91 million, including some $52.6 million in bonuses, according to OFHEO. A Seattle Times article describes Raines’ settlement with the government for his fraudulent dealing. “Raines, a Seattle native and prominent Washington figure who was President Clinton’s budget director, is relinquishing company stock options, proceeds from stock sales and other benefits. His part of the settlement is worth $24.7 million.” He walked away with $66.4 million and no jail time. And he was able to be on Obama’s advisory team. Not bad for someone who was instrumental in causing the world wide financial melt down.
It is also interesting to note that Wallison did not use the Obama lawsuit in his dissent or investigation. As a fresh lawyer pushing the redistributive change in affordable housing, Obama shared in the $950,000 in attorney fess in Buycks-Roberson v. Citibank Fed. Sav. Bank a 1994 class action lawsuit that forced Citibank to organize a “lending consortium” to:
“establish a review process whereby low to moderate income denied mortgage loan applicants (as defined, infra, at p.lO) of a participating lender may be eligible to have their declined loan applications reviewed by a loan committee established by the consortium. The loan committee would then reevaluate their loan application to determine if any of the other lending institutions participating in the consortium could approve the loan request under their particular loan policies and programs. Lending institutions participating in the consortium would not be obligated by any terms previously quoted by the originating institution.”
To be eligible to appeal to the committee, the following criteria (or such other criteria as agreed to by the consortium members) would have to be met:
(a) the applicant must have applied for either a purchase or refinance mortgage loan of a one or two unit owner occupied residence;
(b) the applicant intends to be a primary resident of the property for which financing is sought;
(c) the location of the property to be financed must be in the Illinois counties of either Cook, Lake, DuPage or McHenry;
(d) the amount of the loan applied for must not exceed the maximum amount permitted by Fannie Mae and Freddie Mac under their conforming loan programs;
(e) the combined household income must not exceed 80% of the median income for the county in which the applicant resides (i.e., the low to moderate income range);
(f) the lending institution that denied the applicant’s loan request must be a participating member in the consortium.
This was the type of legal action precipitated by the Community Reinvestment Act which created the environment that led to a great expansion of subprime loans. Of course the shareholders and depositors picked up the costs of this lending consortium and the lost money on any defaulted loans. An Obama magic way to redistribute wealth.
Other telling excerpts from the report:
The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at75 to1.
[T]he percentage of borrowers who defaulted on their mortgages within just a matter of months after taking a loan nearly doubled from the summer of 2006 to late2007. This data indicates they likely took out mortgages that they never had the capacity or intention to pay.
The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at 112 billion.
Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm. But they did not stop.
That same month, Fed Chairman Greenspan acknowledged the issue, telling the Joint Economic Committee of the U.S. Congress that “the apparent froth in housing markets may have spilled over into the mortgage markets.” For years, he had warned that Fannie Mae and Freddie Mac, bolstered by investors’ belief that these institutions had the backing of the U.S. government, were growing so large, with so little oversight, that they were creating systemic risks for the financial system. Still, he reassured legislators that the U.S. economy was on a “reasonably firm footing” and that the financial system would be resilient if the housing market turned sour. “The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable rate mortgages, are developments of particular concern,” he testified in June.
Government Policies Resulted in an Unprecedented Number of Risky Mortgages
Three specific government programs were primarily responsible for the growth of subprime and Alt-A mortgages in the U.S. economy between 1992 and 2008, and for the decline in mortgage underwriting standards that ensued.
The GSEs’ Affordable Housing Mission. The fact that high risk mortgages formed almost half of all U.S. mortgages by the middle of 2007 was not a chance event, nor did it just happen that banks and other mortgage originators decided on their own to off er easy credit terms to potential homebuyers beginning in the 1990s.
In 1992, Congress enacted Title XIII of the Housing and Community Development Act of 19926 ( the GSE Act), legislation intended to give low and moderate income7 borrowers better access to mortgage credit through Fannie Mae and Freddie Mac. Th is effort, probably stimulated by a desire to increase home ownership, ultimately became a set of regulations that required Fannie and Freddie to reduce the mortgage underwriting standards they used when acquiring loans from originators.
The GSE Act, and its subsequent enforcement by HUD, set in motion a series of changes in the structure of the mortgage market in the U.S. and more particularly the gradual degrading of traditional mortgage underwriting standards. Accordingly, in this dissenting statement, I will refer to the subprime and Alt-A mortgages that were acquired because of the affordable housing AH goals, as well as other subprime and Alt-A mortgages, as non-traditional mortgages, or NTMs.
Not only were Wall Street institutions small factors in the subprime PMBS market, but well before 2002 Fannie and Freddie were much bigger players than the entire PMBS market in the business of acquiring NTM and other subprime loans.
Taken together the report and the Dissent Statement provide overwhelming evidence that government intervention and specifically the ‘affordable housing’ philosophy and resulting legislation created the subprime mortgage bubble which directly led to a world wide financial crisis that endures today and may not have reached a peak.
READ the Dissent Statement:
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