Federal Government Was Culprit in Housing and Economic Crisis, Says Congressional Report

The claims in the report have long been advanced by conservatives, who argue that the Community Reinvestment Act and other federal programs fed the housing bubble that burst in 2007 and led to the economic downfall in 2008.

But the report explains in detail how Fannie and Freddie -- government sponsored enterprises (GSE) that were not subject to the same oversight as other publicly traded firms -- “privatized their profits but socialized their risks.”

“In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate,” says the report, the result of an investigation launched last fall by Republican members of the House Oversight and Government Reform Committee.

“However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy,” says the report. “While government intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention.”

The report talks about the Clinton administration’s National Homeownership Strategy, citing President Clinton’s directive to “lift America’s homeownership rate to an all-time high by the end of the century.”

The Clinton strategy further said that Freddie and Fannie should reduce down-payment requirements and, according to the report, “called for increased use of ‘flexible underwriting criteria,’ which it said could be achieved in concert with ‘liberalized affordable housing underwriting criteria.’”

“That is the perfect smoking gun that tells how Barney Frank [D-Mass.], the Clinton administration and others would do it in those days,” Rep. Darrell Issa (R-Calif.), the ranking member on the House Oversight and Government Affairs Committee, said Tuesday in a speech at the Heritage Foundation.

“The seeds of the meltdown began with the well-intentioned goal that everyone have a home even if they can’t afford it,” he said. “It led to one of the biggest ponzi schemes ever.”

Fannie Mae and Freddie Mac made 54 percent of the “subprime” mortgage loans from 2002 to 2007, or about $1.9 trillion in mortgage loans to borrowers with credit scores lower than 660.

The report comes after Rep. Barney Frank (D-Mass.) – who fought against regulation of the two quasi-public mortgage giants -- and Rep. Anthony Weiner (D-N.Y.) wrote a letter in June to Fannie Mae and Freddie Mac calling on the GSEs to lower lending standards on condo buyers.

The report argues that lowered lending standards were the cause of the housing crisis and did not exempt the Republicans or the Bush administration from blame. It said placing certain lending quotas for under-served populations allowed “both Democratic and Republican administrations to consistently make campaign promises to boost homeownership through government intervention in the market.

Consequently, under both the Clinton and Bush administrations, HUD dramatically increased these quotas, which reached their zenith when the Bush administration raised them to 56 percent, 27 percent and 39 percent, respectively.”

“As home prices continued their dizzying rise, many people decided to cash in by buying a house with an adjustable rate mortgage featuring a low introductory teaser rate set to increase after a few years,” the report continues.

“These borrowers, confident in the oft-cited assertion that U.S. home values had never before fallen in the aggregate, planned to sell or refinance their investment before the mortgage rate adjusted upward, pocketing the difference between the initial purchase price and the subsequent appreciation in value,” says the report. “However, buyers failed to grasp the effect of a government policy that had quietly eroded the prudential limits on mortgage leverage, creating a dangerous speculative bubble.”

The report also talks about how the two GSEs became a powerful lobby. Fannie Mae CEO Jim Johnson opened up “partnership offices” in congressional districts, hired relatives of members of Congress, and GSE employees contributed $15 million to federal campaigns from 1998 to 2008. Throughout that time, all attempted reforms in Congress were blocked.

Also, in 1995, “Johnson seeded the Fannie Mae Foundation with $350 million of Fannie stock. The company used this foundation to spread millions of dollars around to politically connected organizations like the Congressional Hispanic Caucus Institute,” states the report.

Fannie and Freddie were not subject to regulation by the Securities and Exchange Commission, while executives were paid well. Former Fannie CEO Franklin Raines earned more than $50 million in compensation during his six-years at the helm, the report says. Fannie and Freddie paid billions more to shareholders. “Thus, the government subsidizations of GSE operations amounted to little more than corporate welfare,” the report says.

The report cites Frank’s accusations that to blame Fannie and Freddie is to blame only the lender and not the borrower.

“This misses the mark entirely. In fact, responsibility for the erosion of mortgage lending standards, which began with government affordable housing policy, rests squarely on the policy makers who advocated these ill-conceived policies in the first place,” the report says. “Borrowers quite naturally responded to the incentives they were given, irrespective of their socioeconomic status, and risky lending spread to the wider mortgage market.”

Fannie Mae and Freddie Mac were the chief culprits in the housing crisis because they encouraged people who could not afford payments to borrow money, according to a congressional report released Tuesday....

“In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate,” says the report, the result of an investigation launched last fall by Republican members of the House Oversight and Government Reform Committee.

Well shut my mouth. They actually had the family jewels to print this. Simply amazing.
<>I have just one bone to pick with what I clipped and pasted above. Until the last payment is made, it isn't really home ownership. We had people living in those homes who shouldn't have been.

What I hear above, is that it was a high minded effort. No it wasn't. It was an ill advised program based on fraud, and doomed to fail. We trash Madoff and wish him to spend the rest of his life in prison for bilking tens of billions out of people, and we're literally talking what, 2 to 6 trillioin paid out by the government so far to stabalize things, stock losses of multiple trillions. People who can't make payments should not be given loans. When you give those loans to them anyway, it's based on the idea there could be any other outcome other than default. And there couldn't have been. Any moderately inquisitive person with a 1.5 grade point average could have figured this one out. The whole thing was a big lie from the beginning to the end by leftists from both parties.

It caused massive destruction to banks and lending instutions. It caused a number of other massive institutions to go under. We are still seeing a list of banks each Friday that have bought the farm. Massive corporations have gone under as a result. Our automotive industry is in a shambles due to this. The ripple effect has cost millions of jobs and a destabalized economy that may not fully rebound for a decade or more, and has destroyed the savings of tens of millions of U.S. Citizens. Something like $7 billion or more was said to have evaporated in the U.S. alone at one point. I'd imagine the figure is larger by now. And that's just the U.S. It contributed to European economic destabization. It caused economic problems for China. It has caused the world's powers to question if the U.S. Dollar and U.S. Treasuries are sound places for them to park their money.

To top it all off, we have the U.N., the E.U., Russia, China, and others giving us advice on how to run our monetary policy.

Other that that, it was a great program.

Once again, heads should roll. Many people should be drummed out of Congress on this alone. Nobody who didn't speak out, should remain in Congress. Senators and Congressmen who allowed this to take place, should be required to leave office at once.

Won't happen. Madoff was a crook. Those who mismanaged our affairs and made Madoff's fraud become 0.000000005% of the totals lost by our elected officals, won't spend one day having to worry about what they ushered in.

Madoff, you got just what you deserve. I can't help it if those who made what you took look like pocket change continue to live on in the lap of government luxury.

I can sure be furious about it though.

Well, you don’t dump all your money in one investment. How many times can that be said? I still don’t like seeing some guy operate under the government radar to the tune of tens of billions like this guy did.

As for the rich white guys argument, it’s my take that Barney Frank and Janet Reno let it be know, those loans were going out like it or not.

If I were a bank, I wouldn’t want to hang on to that paper. So sure you can blame the rich white guys if you like, but businesses will do the best they can to limit their exposure when the big cahuna white folks in Congress and the Justice Department tell them to shove their concerns where the sun don’t shine.

Reno took banks to court. Obama even filed charges from his position at ACORN. What are you going to do, if you’re a lending institution. You comply and cover your ass as best you can.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.