Whose “Irresponsibility,” Mr. President?


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© Jack Cashill

April 10, 2009 

“We've just emerged from an era marked by irresponsibility,” President Obama told those students in Strasbourg, France, not at the moment burning down hotels and border posts.

Left unsaid, of course, was just whose “irresponsibility” caused the financial crisis to which the president was alluding.

Based on his bumbling dissection of the presumed cause— a “ mismatch between the regulatory regimes that were in place and er the highly integrated, er, global capital markets that have emerged”--I am not sure Obama knows.

It would help if he did. A September 1999 New York Times article offers a useful, if unlikely, place for our president to jump start his education.

The article blithely cheers on the work of the Fannie Mae Corporation, then in the process of prodding banks to provide mortgages to those whose credit was “not good enough to qualify for conventional loans.”

The article leaves the oddball impression that the lenders begged to be prodded. Banks, the Times tells us, were “pressing Fannie Mae to help them make more loans to so-called subprime borrowers.”

Only as seen through the looking glass of the diversity movement does this account make any sense at all.

In the world before diversity, banks were in business to make money. They and other lenders shied from lending to subprime borrowers of any race, creed, color, gender, or orientation.

For the record, “subprime” refers not to a kind of loan, but to a kind of borrower, those who cannot afford to cover either the traditional 20 percent down payment, a monthly nut less than 28 percent of their income, or, most likely, both.

So why did lenders now want to get into the subprime business? The Times alludes to the answer. Fannie Mae, it seems, had been “under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.”

The lenders faced the same pressure. Clinton’s primary extortion tool was the Community Reinvestment Act. Signed into law by Jimmy Carter in 1977, the Clinton administration loaded up the previously benign CRA with real firepower in 1995.

Other than free market groups like CATO and the American Enterprise Institute, few in official Washington protested the re-arming of the CRA.

Clinton used the CRA and other new legislation to compel banks to make loans to people who could otherwise not qualify. Not surprisingly, “diversity” was the moral engine that drove this illogic.

Street enforcers from OBAMA-friendly ACORN harassed lenders and contested their plans to expand into new branches or new states unless they could show that they were CRA-compliant.

With a gun to their head, the lenders turned to Fannie Mae and its sister agency, Freddie Mac, also a government sponsored entity (GSE), to relieve them of the stupid loans they were now being forced to make.

These two GSEs were designed to help keep lenders liquid by buying their loans and, for a small fee, assuming the risk of default. This was known as a secondary mortgage market.

Before the Clinton shakedown, Fannie and Freddie had sufficiently tough lending standards that default was not much of an issue. That would change.

In 1999, Clinton’s newly appointed CEO, Franklin Raines, was boasting of the changes Fannie Mae had already made and the changes to come.

As this future Obama advisor told the Times, Fannie Mae had lowered the down payment requirements for a home and now planned to extend credit to borrowers a “notch below” its traditional standards.

At the same time, especially in states like California, wannabe eco-warriors were taking over the regulatory agencies and turning the residential permitting process into a long, green nightmare.

This slowdown was creating a genuine housing shortage, a useful, if shaky, foundation for a mestasizing housing bubble.

In late 1997, Wall Street got into the subprime business when Bear, Stearns launched the first publicly available securitization of CRA loans.

Guaranteed by Freddie Mac, this first offering had an implied "AAA" rating. Given the rating and Freddie Mac’s history for stability, investment managers, understandably, found the offering attractive.

Now, they could pat themselves on the head for helping make the home owning class “look more like America” and still get a smart return on their investment.

With housing prices on the rise, private investment groups began to actively buy and bundle non-traditional loans and sell them to investors on the private market.

As the demand surged in key areas, and fresh capital flooded the market, lenders came up with innovative new ways to attract subprime borrowers, most notably the interest-only, adjustable-rate mortgage (IO ARM).

As it typically worked, borrowers would make little or no down payment on a home--in 2006, for instance, the average for subprime folks was only six percent–and would pay just the loan’s interest for the first two years.

After those two years, the loan would convert to a conventional principal and interest amortization plan for the next 28 years.

In swelling bubble areas, these loans attracted grasshopper borrowers of all colors and creeds. Rapid appreciation offered them the illusion of another income, one whose equity they could draw upon to pay their mortgage and even their credit card debts.

Lenders did not need to worry about default. They would get their origination fees and pass the loans along to a growing secondary market. Besides, with prices continuing to rise, default was not even an issue.

To keep the bubble inflated, many lenders resorted to “stated-income loans” or, as they were more accurately known, “liar loans.” At the bubble’s peak, half of all subprime borrowers were self-reporting their income.

With the FED suppressing interest rates, and FED chairman Alan Greenspan blessing adjustable rate mortgages, borrowers continued to borrow, lenders to lend, and investors to invest, stewing up an unprecedented bouillabaisse of “risk synergy” in the process.

Although Wall Street was creating new instruments to securitize and insure bundled mortgages, make no mistake: this was a government spawned, sustained, and mismanaged bubble.

Throughout it all, Democrats in Congress, especially the Black Caucus, famously fought off attempts to reign in Fannie and Freddie.

Like college deans more concerned with minority admissions than graduations, they boasted of how many people of color they were putting in homes of their own.

Too many people, too few homes. At the bubble’s peak in 2006, a Los Angeles family of median income could afford only two percent of the area’s homes (In Kansas City, by contrast, that figure was 87 percent).

Alas, something had to give, and it did. The market essentially ran out of new buyers. When prices began to flatten, credit began to tighten, all but driving the credit-challenged out of the market.

Without appreciation to sustain their adjusting mortgages, subprime borrowers began to default. All but unspoken was the fact that females, single females especially, were overrepresented among them.

From the bubble’s beginning around 1995 until its collapse in 2007, single female homebuyers climbed from 14 to 22 percent of the total market with even higher percentages among subprime borrowers.

By encouraging single parent families, and now rewarding them with homes of their own, the government had made “subprime” very nearly synonymous with “non-traditional.”

Yes, there was “irresponsibility” aplenty, but there has been no greater irresponsibility that our president’s failure to acknowledge how things went awry.

Who is Jack Cashill?


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