The Welfare Housing that Caused the Financial Crisis is Making a Comeback
May 23, 2015 by Daniel Greenfield 7 Comments
Everything old is new again. The financial crisis was caused by a dirty crony capitalist partnership. The financial institutions took the blame for government and got bailed out. And now we’re doing the time warp again.
Government policies encouraged the granting of mortgages to non-creditworthy homebuyers, and government-sponsored enterprises Fannie Mae and Freddie Mac funneled securities laced with high-risk mortgages into major financial institutions. When house prices suddenly and unexpectedly dropped in 2007, these mortgage-backed securities became unsellable and the financial crisis quickly followed.
Wallison traces the policy mistake back to 1992, when Congress passed a law requiring the GSE’s to purchase a certain percentage of its mortgages granted to low- and moderate-income homebuyers–30 percent originally, later adjusted up to 56 percent by the Department of Housing and Urban Development.
Previously the GSE’s bought only mortgages in which the buyer made 10 to 20 percent down payments. That was revised downward to 3 percent and even zero. Such subprime mortgages proliferated until in 2008 when they accounted for more than half of U.S. mortgages, 76 percent of which were on the books of the GSE’s or government agencies such as the FHA.
This was in line with the policy priorities of the Clinton and Bush administrations. They hailed the increase of homeownership from the 64 percent that prevailed from the mid-1960s up eventually, and temporarily, to 69 percent.
They emphasized the importance of increasing homeownership by blacks and Hispanics who did not qualify as creditworthy under traditional credit standards, which were treated as superstitions.
The result was a house price bubble of unprecedented magnitude. Low-down payment mortgages inflated housing prices because buyers could afford a larger house with the same down payment. Above-average households, though not the intended beneficiaries of lowered mortgage standards, took advantage of them by converting inflated housing values into cash by refinancing their mortgages.
But the people responsible carefully worked around the truth.
In a just-released book, former FCIC member Peter Wallison says that a Democratic Congress worked with the commission’s Democratic chairman to whitewash the government’s central role in the mortgage debacle. The conspiracy helped protect some of the Democrats’ biggest stars from scrutiny and accountability while helping justify the biggest government takeover of the financial sector since the New Deal.
In 2009, then-House Speaker Nancy Pelosi appointed her California pal Phil Angelides, a long-time Democrat operative, to lead the commission. The fix seemed to be in, and Wallison’s account of the inner workings of the 10-member body confirms it. Here’s what took place during the FCIC’s 18-month, $10 million probe:
• Angelides provided no staff to help Wallison and other Republicans interview witnesses, conduct research or draft the report. But commission Democrats were assigned almost 80 staffers to help formulate their single theory that bank risk-taking and greed unleashed by deregulation caused the crisis.
• Angelides never notified Wallison or other commissioners about the hundreds of witnesses he called to testify in closed-door interviews with his staff, denying them the chance to cross-examine the witnesses.
• Staffers failed to put these private witnesses under oath, even though the final report was based almost exclusively on their testimony with little or no documents or data to back up their statements, which simply validated the Democrat narrative.
• Angelides buried evidence revealing that by 2008, three in four high-risk mortgages wound up on the books of HUD-controlled Fannie Mae and Freddie Mac or agencies such as the Federal Housing Administration. A data-rich memo by former Fannie Mae chief credit officer Ed Pinto proved that government, not the private sector, drove risky lending. But Pinto’s research “was never formally made available by the chair or staff to the other members of the FCIC,” Wallison writes.
Government couldn’t hold the banks accountable for the same reason that cartel kingpins don’t hold drug dealers accountable for selling drugs.
“When 76% of these poor quality mortgages are on the books of these government agencies, it shows who wanted these mortgages,” Wallison said. “They were the buyers.”
“There are couple things about what the private sector did which are not well understood,” Wallison told me. “They were a minority in the subprime sector. If the government hadn’t wanted them, these mortgages never would have been made because nobody would buy them.”
Conservatives and liberals both bear blame, since it was a strongly held faith among many conservatives that home ownership would bring stability and wealth accumulation to less affluent communities. That belief is still apparently running strong: In a triumph of faith over recent experience, Fannie Mae is once again lowering down-payment standards and accepting borrowers with FICO scores as low as 620.
History suggests that is a dumb move. Wallison’s data show that defaults rise exponentially as lenders relax their underwriting standards even a little bit. All else being equal, a borrower with a FICO score above 660 is 3.3 times more likely to default if his down payment is less than 20%. If the down payment is more than 20% but the borrower’s FICO score is between 621 and 660, the risk of default is 15 times greater. Lend to a borrower with a FICO score below 621, and even with a high down payment the default risk is 47 times greater.
Greed for votes and greed for ideological supremacy caused the crisis more than old fashioned financial greed.
http://www.frontpagemag.com/2015/dgreenfield/the-welfare-housing-that-caused-the-financial-crisis-is-making-a-comeback/
