
The Government Did Cause the Housing Crisis (2011) - nickles
http://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/?single_page=true
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woodandsteel
Here is some more on Fannie Mae and Freddie Mack and the housing crisis

[http://useconomy.about.com/od/criticalssues/a/Fannie_Cause.h...](http://useconomy.about.com/od/criticalssues/a/Fannie_Cause.htm)

[https://en.wikipedia.org/wiki/Fannie_Mae#2000s](https://en.wikipedia.org/wiki/Fannie_Mae#2000s)

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woodandsteel
The conservatives say the bubble and crash were caused by Fannie Mae, Freddie
Mack, and the Community Reinvestment Act. But at the time the bubble was
happening, they said housing prices were just great, and it was the liberals
who said we were heading for a disaster. Then, after the bubble burst, the
conservatives changed their story overnight.

For a good discussion, see:
[https://en.wikipedia.org/wiki/Causes_of_the_Great_Recession](https://en.wikipedia.org/wiki/Causes_of_the_Great_Recession).

~~~
rskar
Snippets from NY Times, September 30, 1999, "Fannie Mae Eases Credit To Aid
Mortgage Lending", by STEVEN A. HOLMES
([http://www.nytimes.com/1999/09/30/business/fannie-mae-
eases-...](http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-
to-aid-mortgage-lending.html)):

In a move that could help increase home ownership rates among minorities and
low-income consumers, the Fannie Mae Corporation is easing the credit
requirements on loans that it will purchase from banks and other lenders.

...

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage loans
among low and moderate income people and felt pressure from stock holders to
maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings are not
good enough to qualify for conventional loans, can only get loans from finance
companies that charge much higher interest rates -- anywhere from three to
four percentage points higher than conventional loans.

...

In moving, even tentatively, into this new area of lending, Fannie Mae is
taking on significantly more risk, which may not pose any difficulties during
flush economic times. But the government-subsidized corporation may run into
trouble in an economic downturn, prompting a government rescue similar to that
of the savings and loan industry in the 1980's.

"From the perspective of many people, including me, this is another thrift
industry growing up around us," said Peter Wallison a resident fellow at the
American Enterprise Institute. "If they fail, the government will have to step
up and bail them out the way it stepped up and bailed out the thrift
industry."

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage
with an interest rate one percentage point above that of a conventional,
30-year fixed rate mortgage of less than $240,000 -- a rate that currently
averages about 7.76 per cent. If the borrower makes his or her monthly
payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend
money directly to consumers. Instead, it purchases loans that banks make on
what is called the secondary market. By expanding the type of loans that it
will buy, Fannie Mae is hoping to spur banks to make more loans to people with
less-than-stellar credit ratings.

~~~
woodandsteel
But once Bush became President, the bubble started, and the Bush
administration backed it because the recovery from the 1990 recession was
slow, the conservatives stopped talking about Fannie Mae and Freddy Mac. They
told us it was good home ownership was rising, the prices were sound, and
there was no chance they would suddenly collapse, much less cause the economy
serious financial harm.

I know because I am rather independent and think the conservatives have a lot
of good points on economics, and so I listen to both sides.

Which leads me to ask you, rskar, what was your position during the boom, and
what did you think when the conservatives suddenly changed their views
immediately after the bubble burst?

~~~
rskar
I think the sort of people who ran (and run) the financial industry leveraged
the political sentiments behind the Community Reinvestment Act for their own
personal gains. It should be noted that the CRA got legislative changes in
1999 (enacted November 12, 1999, Gramm-Leach-Bliley Act, a.k.a. "Financial
Services Modernization Act") that are co-incident with the repeal of the part
of the Glass–Steagall Act which prohibited a particular bank from offering a
full range of investment, commercial banking, and insurance services since its
enactment in 1933.

It's quite eye-opening to see all that the Gramm-Leach-Bliley Act did
([https://en.wikipedia.org/wiki/Community_Reinvestment_Act#Leg...](https://en.wikipedia.org/wiki/Community_Reinvestment_Act#Legislative_changes_1999))
in terms of rolling back the standards for CRA compliance, forms of allowed
banking under one roof, and failure to give to the SEC or any other financial
regulatory agency the authority to regulate large investment bank holding
companies.

I don't know the particulars about Fannie Mae's pilot program in 1999, but it
and Freddie Mac, while both Government Sponsored Entities, were both expected
to operate much the same as any commercial for-profit enterprise. The people
who ran (and run) them come from the same talent pool that runs the rest of
the industry.

Just my opinion, but it seems to me that much rides on how much "churn" a
financial company can do. Churn as in sales in financial services which
include the repackaging of other financial "products" into a new ones.
Compensation for most of the people involved is a straightforward percentage
of sales, independent of actual profitability or long-term sustainability for
the company (let alone their clients).

By "the Conservatives" I'm (safely) assuming you mean mostly GOP politicians.
I'm also assuming you well understand the connections between politics and
money. Their apparent changes in their collective views are nothing more than
the usual specious talking-points one has come to expect from political
animals. Their choices of talking-points are regularly "re-balanced" with the
political winds.

The political timeline is quite simple. Before the Gramm-Leach-Bliley Act, the
CRA was doing no favors for the financial industry, hence the decries from
representatives who "feel-the-pain" from that segment of their constituency.
Then the Act is passed, regulations are dropped, allowable banking services
expanded (CitiGroup is now legal!), subprime mortgages spur even more home
ownership (that's what the CRA was about, right?), Wall Street gets to do the
Fannie Mae/Freddy Mac thing but in their own inimical ways (liar loans anyone?
but, shhh, nobody knows anything about that yet) - so it's churn! churn!
churn!

So for a while the financial industry was making big bucks, banks can
originate subprime loans profitably to "satisfy" CRA, poor people and
minorities can now get houses - so what's not to love? So the Gramm-Leach-
Bliley Act is a smashing success, and it is very much a GOP idea. What GOP
type is going to make noises about Fannie Mae/Freddy Mac now when their
buddies in finance are doing rather much the same thing?

And then the 2008 crash, and fingers are pointed at the culprits: It was the
CRA! (a half-truth); It was the repeal of Glass–Steagall Act (3/4 truth).
Mostly I see it as the consequence of rolling-back or repealing so many
regulations, restrictions, and standards that have accrued over the decades in
response to various crises of the past. The industry mostly wants to do as it
pleases and will push to be as unfettered as it can get. I'm guessing we're in
agreement here.

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ThrustVectoring
This is another one of those situations where people made non-obvious
tradeoffs against systemic stability and resilience in favor of other goals
(specifically, economic growth and home ownership).

