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The Democrats Caused The Housing Crisis!

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There has been a lot of disinfo out there about the causes of the economic fail.  I’m frankly sick of it, so as a public service, I thought I might lay it to rest right now.  This is a long article, and will remain on a static page for all to see.

The roots of the fail can be traced back to the Carter Administration.  President Carter signed the Community Reinvestment Act (CRA) in 1977.  This was basically feel-good legislation that forced banks to serve all customers in a several mile radius of the branches.  This was intended to end the practice of “redlining,” where banks would refuse to service “bad” neighborhoods, ie, low income.

Fast forward to the Clinton Administration.  In 1995, President Clinton signed an extensive revision of the act.  This act forced banks to document how they were complying with CRA regulations.  For more, see this.

  • The Clinton Administration and the Democrats in power added massive new provisions to authorize — require — sub-prime loans be made.  The revisions went further, by allowing the securitization of CRA loans containing sub-prime mortgages.
  • That forced banks to issue $1 trillion in new “sub-prime” Loans.
  • The CRA requires that deposit-taking financial institutions (read: banks) offer equal access to lending investment and services to all those in an institution’s geographic assessment area — at least three to five miles from each branch. Before the CRA, many bankers excluded low-income neighborhoods and people from  their lending products, investments and financial services — a practice  known as “redlining”
  • By 2000, the CRA was funneling millions, perhaps billions of dollars to left-wing  “community activist” groups. The Clinton Administration had turned the Community Reinvestment Act into a Democrat piggy-bank and “a scheme against the nation’s banks”.
  • And created sub-prime mortgage securities.  Bear Sterns was the first company to do it. Remember them?
  • Fannie Mae added fuel to the fire by purchasing $2 billion of dodgy “MyCommunityMortgage” loans.
  • And sub-prime mortgages started  to grow. Between 1995 and 1999, Fannie Mae Sub-prime Alt-A & Other Purchases grew from under $2 billion to over $16 billion  per year!
  • Now home prices started to rise – from under 2% to over 6% per year, year-after-year.
  • Fannie Mae is a “Government Sponsored Enterprise”. Fannie Mae guarantees mortgages and then Fannie Mae sells them to banks and investors. The more mortgages, the more money Fannie Mae makes.
  • So how do you increase the number of mortgages? You move down the ‘income ladder’ (see: Washingtonpost.com: Fannie’s Perilous Pursuit of Sub-Prime Loans).
  • With “affordable mortgages”, fixed-rate loans were replaced by variable-rate loans (ARMS) and in turn by interest-only loans.  These new loans gave “flexibility to lenders by allowing variances that borrowers need to qualify for loans”. (CSRwire). These variances applied to: loan-to-value ratio, borrower contribution, housing expense-to-income ratio, among others. In other words, to flakes.
  • Remember, the banks had to issue sub-prime loans or pay big penalties to the government.
  • How do you keep these loans “affordable”
  • No money!  No money down! Interest only! Low variable rate! No income verification!  Bad Credit! No credit! No problem! Just sign here!
  • By 2004, 92% of Fannie Mae’s sub-prime loans were variable rate.
  • Fannie Mae told the banks “Make the loans — we’ll guarantee them”.
  • Home ownership kept rising — and so did prices, and the demand for houses rose too.
  • But demand for loans caused the  interest rate to rise. Basic supply and demand 101 stuff. High-school students are taught this. Apparently not Senators or Representatives.
  • Then, gas prices shot up. Paychecks got squeezed.  Especially low-income paychecks. Some borrowers stopped paying — so banks stopped lending.
  • New ARMS and other “affordability loans” dropped from  nearly 20% of total market share in 2006 to just 10% in 2007.
  • So the sub-prime market collapsed. From Fourth Quarter 2006 to Fourth Quarter 2007, Sub-prime mortgage originations dropped from $140 billion to under $18 billion, a drop of 88%.
  • Foreclosures started pilling up. No buyers, only sellers.
  • Home prices started falling. Down 2%, 4%, 6%, 8%…
  • More borrowers stopped paying. 60 day+ delinquencies went from under 8% in 2006 to over 25% by mid-2007
  • Fannie Mae “Guarantees” became worthless – because they kept overstating their assets. (See Bloomberg.com: Regulators Spin Public to Boost Fannie, Freddie).
  • Banks collapsed due to worthlessness. Government Sponsored Securities issued by Fannie Mae became worthless. Jobs disappeared — and here we are. (See Guardian.co.uk: ‘IMF says US crisis is largest financial shock since Great Depression’).

Why is the expansion of the Government’s Community Reinvestment Act to blame?

  • Before CRA expansion, home prices simply increased with the underlying inflation rate, going up by 200% from 1975 through 1995 as the dollar dropped in value by the same amount. Home prices and home ownership rates were essentially flat – after adjusting for inflation. After CRA, home prices  became unhinged from inflation, jumping 100% from 1996 to 2006 while  inflation increased by ‘only’ 33%.
  • CRA caused home prices to rise too fast. Economic fundamentals did not support this growth. Government regulation-mandated credit did.

Not believing that loose lending practices were mandated?  Check out this video from 1998.  Wait until about 2:19.  Guess what you’ll hear?

OK then, still in doubt?  Tale a look at this time line.

  • 1992: Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities; Office of Federal Housing Enterprise Oversight (OFHEO) created to oversee them.
  • 1993: The Federal Reserve Bank of Boston published “Closing the Gap: A Guide to Equal Opportunity Lending” which recommended a series of measures to better serve low-income and minority households, including loosening income thresholds for receiving a mortgage, influencing government policy and housing activist demands on banks thereafter.
  • 1994: Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) repeals the interstate provisions of the Bank Holding Company Act of 1956 that regulated the actions of bank holding companies.
  • 1995: New Community Reinvestment Act regulations break down home-loan data by neighborhood, income, and race, enabling community groups to complain to banks and regulators about CRA compliance. Regulations also allows community groups that market loans to collect a broker’s fee. Fannie Mae allowed to receive affordable housing credit for buying subprime securities.
  • 1995-2001: Dot-com bubble and collapse
  • 1997: Mortgage denial rate of 29 percent for conventional home purchase loans. Investors purchased more than $60 billion of subprime mortgage backed securities, six times more than 1991’s volume of $10 billion. (private label securities, not GSE backed)
  • July: The Taxpayer Relief Act of 1997 expanded the capital-gains exclusion to $500,000 (per couple) from $125,000, encouraging people to invest in second homes and investment properties.
  • November: Freddie Mac helped First Union Capital Markets and Bear Stearns & Co launch the first publicly available securitization of CRA loans, issuing $384.6 million of such securities. All carried a Freddie Mac guarantee as to timely interest and principal. First Union was not a subprime lender.
  • 1998: Incipient housing bubble as inflation-adjusted home price appreciation exceeds 10% per year in most West Coast metropolitan areas.
  • October: “Financial Services Modernization Act” killed in Senate because of no restrictions on Community Reinvestment Act-related community groups written into law.
  • Federal Reserve Bank of New York rescues Long-Term Capital Management hedge fund in 1998, which a Government Accountability Office critic said encouraged risky loans on assumption government will bail out “too big to fail” banks and companies.
  • 1998-2008: With increase in sales of mortgage-backed securities, companies buy more Credit default swaps, unregulated insurance contracts used to protect debt holders; these increased 100-fold from, with estimates of the debt covered by such contracts, as of November 2008, ranging from $33 to $47 trillion.
  • 1999:
  • September: Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans.
  • November: Gramm-Leach-Bliley Act “Financial Services Modernization Act” repeals Glass-Steagall Act, deregulates banking, insurance and securities into a financial services industry allow financial institutions to grow very large; limits Community Reinvestment Coverage of smaller banks and makes community groups report certain financial relationships with banks.
  • 2000: Lenders originating $160 billion worth of subprime, up from $40 billion in 1994. Fannie Mae buys $600 million of subprime mortgages, primarily on a flow basis. Freddie Mac, in that same year, purchases $18.6 billion worth of subprime loans, mostly Alt A and A- mortgages. Freddie Mac guarantees another $7.7 billion worth of subprime mortgages in structured transactions.
  • October: Fannie Mae commits to purchase and securitize $2 billion of Community Reinvestment Act eligible loans,
  • November: Fannie Mae announces that the Department of Housing and Urban Development (“HUD”) will soon require it to dedicate 50% of its business to low- and moderate-income families” and its goal is to finance over $500 billion in Community Reinvestment Act related business by 2010.
  • December:Commodity Futures Modernization Act of 2000 defines interest rates, currency prices, and stock indexes as “excluded commodities,” allowing trade of credit-default swaps by hedge funds, investment banks or insurance companies with minimal oversight, and contributing to 2008 crisis in Bear Stearns & Co, Lehman Brothers, and AIG.

Now, you might ask yourself, Why didn’t anyone warn about this?   Well, dear reader, warnings were made.  Many times, but they were ignored, as the evidence will show.   Read on here…

  • In April of 2001, the Bush Administration first red flagged Fannie and Freddie stating that “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”
  • On September 10th of 2003, Treasury Secretary John Snow recommended to the House Financial Services Committee that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.
  • The new agency was a recommendation from the Bush Administration for a serious regulatory overhaul in the housing finance industry. The plan was an acknowledgment of two things. First, more oversight was necessary for both institutions that have managed to accumulate over 1.5 trillion dollars in outstanding debt – averaging a 20% increase in residential debt per year. And second, the supervisory system in place did not have the tools to deal effectively with the size, scope, and complexity of Fannie and Freddie. Subsequently, the recommendation was staunchly opposed by Congressional Democrats and National Association of Home Builders who thought that tighter regulation of Fannie and Freddie would reduce their commitment to financing low-income and affordable housing.
  • On September 10th of 2003, in response to the Bush’s regulatory overhaul proposal, Barney Frank, a ranking Democrat on the Financial Services Committee, defended Fannie and Freddie saying,
  • “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing . . . I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger. . . I don’t think we face a crisis; I don’t think that we have an impending disaster. . . . Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.”
  • At a Congressional Hearing in 2003, Rep. Maxine Waters, Democrat of California objected to the proposal of stricter regulations and stated,
  • “I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn’t broke. [sic] …These GSEs have more than adequate capital for the business they are in: providing affordable housing. As I mentioned, we should not be making radical or fundamental change… If there is anything to fix or improve, it is the [regulators].”
  • Rep. Gregory Meeks, Democrat of New York, agreed with Rep. Waters and demonstratively stated,
  • “…I have to go to another hearing, I will try to be just real quick… I am just pissed off at [the regulator] because if it wasn’t for you I don’t think that we would be here in the first place. …we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum [to change the] mission of what the GSEs had, which they have done a tremendous job… There has been nothing that was indicated is wrong, you know, with Fannie Mae… The question that then presents is the competence that your agency has with reference to deciding and regulating these GSEs.”
  • Rep. Melvin L. Watt, Democrat of North Carolina said,
  • “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.”
  • Rep. Artur Davis, Democrat of Alabama, went a little further in his statement. Instead of defending Fannie and Freddie like his colleagues, he tried turning the tables on the regulatory agency saying,
  • “A concern that I have… is you are making very specific… broad and categorical judgment about the management of this institution, about the willfulness of practices that may or may not be in controversy. You have imputed various motives to the people running the organization… That sounds to me as if you have gone from being a dispassionate regulator to someone who is very much involved and has a stake in this controversy… And I will follow up on Ms. Waters’s point because I think it is very well taken: Her observation is that the political context surrounding your investigation was that serious doubts were being raised about OFHEO… In fact, frankly, doubts were raised about your leadership of OFHEO. And all of a sudden, the response to that is to produce an enormously critical report.”
  • Rep. Lacy Clay, Democrat of Missouri, followed suit by shifting the burden saying,
  • “This hearing is about the political lynching of Franklin Raines.”
  • And ranking Democrat Barney Frank stuck to his guns and concluded,
  • “But I have seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as kind of a general shibboleth when it does not seem to me to be an issue.”
  • In October of 2003, less than a month later, Fannie Mae disclosed 1.2 billion dollars in accounting errors.
  • In November of 2003, the Bush Administration upgraded their warning to a “systemic risk” that could very well extend beyond the confines of the housing market. In a July report, written by external investigators, it concluded that Freddie Mac manipulated its accounting to mislead investors. And other critics pointed out that Fannie Mae did not adequately hedge against rising interest rates.
  • In November of 2003, Council of the Economic Advisers, Chairman Greg Mankiw, argued that “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.” And in order to do such, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE.”
  • In February of 2005, President Bush’s Budget plan emphasized the risk posed by the explosive growth of the GSEs and their sub-par levels of capital. The Budget plan called for the creation of a new, world-class regulator saying, “The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator.
  • On February 17th of 2005, Alan Greenspan suggested that Congress limit the growth of Fannie and Freddie saying, “Enabling these institutions to increase in size – and they will once the crisis in their judgment passes – we are placing the total financial system of the future at substantial risk.”
  • In April of 2005, Treasury Secretary John Snow called for GSE reform, saying “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system.”
  • On April 6th of 2005, Chairman Alan Greenspan told the Committee on Banking, Housing, and Urban Affairs, U.S. Senate,
  • “The strong belief of investors in the implicit government backing of the GSEs does not by itself create safety and soundness problems for the GSEs, but it does create systemic risks for the U.S. financial system as the GSEs become very large. Systemic risks are difficult to address through the normal course of financial institution regulation alone and, as I will stipulate shortly, can be effectively handled in the case of the GSEs by limiting their investment portfolios funded by implicitly subsidized debt . . . When these institutions were small, the potential for such risk, if any, was small. Regrettably, that is no longer the case. From now on, limiting the potential for systemic risk will require the significant strengthening of GSE regulation and the GSE regulator . . . The GSEs will have increased facility to continue to grow faster than the overall home-mortgage market; indeed since their portfolios are not constrained, by law, to exclusively home mortgages, GSEs can grow virtually without limit. Without restrictions on the size of GSE balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership.”
  • On April 6th of 2005, Democrat Senator Chuck Schumer said in response to Alan Greenspan,
  • “I think Fannie and Freddie have done an incredibly good job and are an intrinsic part of making America the best-housed people in the world…. if you look over the last 20 or whatever years, they’ve done a very, very good job.”
  • In May of 2006, Senator McCain co-sponsored the legislation for more regulation on Fannie Mae and Freddie Mac, however it never became law because it lacked the sufficient amount of votes.
  • In June of 2005, Deputy Secretary of Treasury, Samuel Bodman, highlights the risk posed by the increasing GSEs and subsequently called for reform. He said, “We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System.”
  • On May 25th of 2006, Senator John McCain made his statement,
  • “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac-known as Government-sponsored entities or GSEs-and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”
  • In August of 2007, President Bush calls upon Congress to push through a reform package for Fannie Mae and Freddie Mac, saying “First things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.”
  • In December of 2007, President Bush warns Congress to pass legislation reforming GSEs, saying “These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I’ve called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon.”
  • In March of 2008, President Bush calls on Congress to “move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages.”
  • In April of 2008, President Bush urges Congress to “modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes.”
  • On May 3rd of 2008, Bush pleads with Congress to make legislation before Fanny and Freddie start to collapse. In his radio address, Bush says, “Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans.”
  • On May 19th of 2008, Bush pleads with Congress again with his radio address saying, “The government ought to be helping credit-worthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator.”
  • On May 31st of 2008, Bush makes yet another radio address saying, “Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans.”
  • In June of 2008, Bush told Congress, “We need to pass legislation to reform Fannie Mae and Freddie Mac.”
  • In July of 2008, Congress finally passed a reform bill addressing Fannie Mae and Freddie Mac only after it became clear that the institutions were failing.
  • On September 10th of 2008, after the economic turmoil set in, Democrat Senator Christopher Dodd sat down for an interview with Bloomberg. In an astounding display of manifest hypocrisy, Senator Dodd said,
  • Why weren’t we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? I have a lot of questions about where was the administration over the last eight years.”
  • However, Senator Dodd failed to mention that the Bush Administration had warned Congress 34 times about the economic risk that Fannie and Freddie posed on our financial systems, while in 2008, the Bush Administration pressed Congress harder than ever by issuing 17 warnings in just 6 short months.
  • On September 30th of 2008, shortly after Rush Limbaugh had played on his radio program an 8 minute audio of Congressional Democrats obstructing the regulatory efforts of the Bush Administration and Congressional Republicans, Congressman Artur Davis of Alabama (featured in the youtube video defending Fannie and Freddie) issued an apology on Fox News saying,
  • “Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong.”
  • Although it’s fairly clear that Fannie and Freddie aren’t the only reason our economy is in the proverbial toilet, their excessive mortgage debt, less than stringent credit and down-payment requirements, and their eventual spread of risk throughout the financial system certainly contributed to our current mess. Couple this with legislation like “The Community Reinvestment Act” that forced banks to lend to consumers who lacked credit-worthy qualifications and the “moral hazard” that encouraged lenders to make high-risk loans due to the expectation of federal bailout, Congressional Democrats played a significant role in today’s economic crisis by their refusal to recognize the troublesome signs and symptoms of Fannie and Freddie’s demise

Enough facts, dates, and figures?  I know…overkill.  However, I wanted the argument to be bulletproof.  The left is solidly to blame for the current economic mess.  Now, before some liberals says that I’m making it all up, lets see some more videos.

There you have it.  Their own words.  They did it.  They count on you not to read up on it.  They hope you’ll forget.  And of course, they have their friends in the MSM who won’t play or report any of it.

h/t on last two videos:  Porcupine Rim

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  • dr blais

    wow put down the crack pipe. it is all Regan and bush 1 and 2. Clinton got us out of debt and the only thing repugnicans could complain about when he was in office was a blow job. deport all republicans keep the immigrants at least pay taxes and keep more money in the usa they can’t compete with the off shore tax havens for ruining the USA and sending our money to other countries

    • http://conservativehideout.com Matt

      OK, I listed volumes of facts. It’s something we like to call “evidence.” You might want to consult the meaning of that word-right after you learn spelling and punctuation.

      After that, why don’t you refute the evidence I provided, or are you just going to use more insults, which are the last bastion of the person who has no evidence? You can hurl all the insults you want, you cannot change the truth.