By Larry Kudlow and Stephen Moore
From National Review:
The seeds of the mortgage meltdown were planted during Bill Clinton’s presidency. Under his HUD secretary Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in “credit-deprived” areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting. If banks didn’t comply with these rules, regulators reined in their ability to expand lending and deposits.
These new HUD rules lowered down payments from the traditional 20 percent to 3 percent by 1995 and to 0 percent by 2000. What’s more, within Bill Clinton’s push to issue home loans to lower-income borrowers, Fannie Mae and Freddie Mac made it common practice to virtually end credit documentation, low credit scores were disregarded, and income and job histories were thrown aside.
Under Bill Clinton, the phrase “subprime” became commonplace. What an understatement.
Next, the Clinton administration’s rules ordered taxpayer-backed Fannie and Freddie to expand their quotas of risky loans from 30 percent of portfolio to 50 percent as part of a big push to expand home ownership. Fannie and Freddie were securitizing these home loans and offering 100 percent taxpayer guarantees of repayment. So now taxpayers were on the hook for these risky, low-down-payment loans.
Tragically, when prices fell, lower-income folks who could not afford these mortgages under normal credit standards suffered massive foreclosures and personal bankruptcies. Many will never get credit again. It’s a perfect example of liberals using government allegedly to help the poor, while the consequences are disastrous for the poor.
Ultra-easy money from the Fed also played a key role in the mortgage breakdown. Rates were held too low for too long between 2002 and 2005. This created asset-price bubbles in housing, commodities, gold, and oil. And when the Fed finally tightened, prices collapsed. So did mortgage collateral (homes) and mortgage bonds that depended on the collateral. Most bond packages were resold to Fannie and Freddie, based on the fantastical idea that home prices would never fall. The Fannie and Freddie bailout, by the way, cost the taxpayers $187 billion.
Making this story worse, senators Hillary Clinton and Barack Obama voted to filibuster a Republican effort to roll back Fannie and Freddie. In addition, while Hillary was propping up these entities, she was taking contributions from their foundations.
Here is how a Washington Times investigative report concluded: “Freddie Mac and Fannie Mae’s political action committee and individuals linked to the companies donated $75,500 to Mrs. Clinton’s senatorial campaign.” On top of that, the embattled Clinton Foundation received a $50,000 contribution from Freddie Mac, according to the Times.
There was plenty of blame to go around among both political parties and the horde of housing lobbyists who helped set up this real estate house of cards. It’s a sordid story. And the Fannie/Freddie chapter is still not solved. It now includes profit-sweeping from shareholders to the government, thereby ending any chance to sell the mortgage agencies back to the private sector.
Read more from National Review.