Wow, this is from 2008 but it goes to the heart of the problems that we have today.
I am reproducing the timeline of the debacle here from the article.
1938 - The Federal National Mortgage Association, "Fannie Mae," is formed as a government agency to create liquidity in the mortgage market, that is, to buy mortgages from loan originators.
1968 - Fannie Mae is converted into a private shareholder-owned corporation to take it off the government's balance sheet. This is a charade. Fannie Mae carries an implicit government guarantee. If/when it fails, taxpayers will bail it out.
1970 - The Federal Home Loan Mortgage Corporation, "Freddie Mac," is created to compete with Fannie Mae in buying mortgages from loan originators â€" and in repackaging and selling the mortgages to investors in the secondary mortgage market.
1977 - The "Community Reinvestment Act" (CRA) is signed into law by President Jimmy Carter. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. The purpose is to ensure that under-served populations can obtain credit, including home ownership opportunities.
1980s - ACORN (Association of Community Organizations for Reform Now) and other community organizations accuse banks of "redlining" â€" discriminating against minorities in mortgage lending.
1989 - Congress amends the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. The 1989 legislation requires a four-tiered CRA rating system for banks: "Outstanding," "Satisfactory," "Needs to Improve," or "Substantial Noncompliance."
In the view of the current Chairman of Federal Reserve System, Ben Bernanke, the 1989 Act greatly increases the influence of advocacy groups on lending policies.
1992 - July - A Federal Reserve Bank of Boston study indicates that "even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites." The study suggests racism is behind the higher loan denial rate.
1992 - A Democratic-majority Congress requires "that Fannie and Freddie increase purchases of mortgages for low-income and medium-income borrowers." Fannie agrees to "buy more loans with very low down payments â€" or with mortgage payments that represent an unusually high percentage of a buyer's income." (3)
1993 - Forbes Magazine queries Boston Fed Senior Vice President and Research Director Alicia H. Munnell on the default rates of black and white mortgage holders in the Boston Fed's 1992 study purporting to show that racism is behind the higher loan denial rate for blacks. The reporters learn that default rates on loans of whites and minorities are equal. This indicates no discrimination, they point out to Munnell. "[That] is a sophisticated point," she replies. "You need that [lower default rates for blacks] as a confirming piece of evidence. And we don't have it."
Forbes: Did you ever ask the question that if defaults appear to be more or less the same among blacks and whites, that points to mortgage lenders making rational decisions?
Munnell: No . . . I do believe that discrimination occurs.
Forbes: You have no evidence?
Munnell: I do not have evidence . . . No one has evidence. (4)
1994 - Barack Obama represents Calvin Robertson in a lawsuit against Citibank "charging the bank systematically denied mortgages to African-American applicants and others from minority neighborhoods."
Bad Bank Bonanza: CRA's "Selection Effect"
1994 - The Riegle-Neal Interstate Banking and Branching Efficiency Act repeals restrictions on interstate banking, beginning a wave of bank mergers. This gives activist groups like ACORN the "power to demand more loans to their constituents because CRA allowed them to charge noncompliance and stop such mergers." (Wikipedia)
CRA combined with 1994's end to restrictions on interstate banking produces a perverse "selection effect." Banks willing to make bad loans can buy other banks and grow large, their managements compensated extravagantly for recklessness. Prudent banks, who will not jump CRA hurdles, must remain small and vulnerable to takeover. Steve Sailer, journalist, columnist, Vdare.com:
"...sane-smart banks . . . didn't get to get big like WaMu [Washington Mutual, now defunct] did because the government rigged the acquisition process so that crazy-stupid banks were more likely to get merger approval. WaMu got permission from the government to make 29 acquisitions from 1990 onward." (5)
Sailer, in a second essay on the Community Reinvestment Acts' role in the crisis, continues on this theme:
"Not surprisingly, over the years the CRA's chokehold on mergers changed the culture of banking. The most powerful and highest paid executives publicly saluted the CRA, while the CEOs who thought it was politically correct nonsense were relegated to the sidelines in the great game of mergers and acquisitions."
"The optimists who agreed with Presidents Clinton, Bush, and Obama that 'underserved' minorities would somehow come up with the scratch to pay off their mortgages were allowed to build empires, while the pessimists were not. Those in the middle camp went with the flow and started believing the CRA propaganda." (6)
1995 - President Clinton establishes new CRA regulations "requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race" and "allowing community groups that marketed loans to targeted groups to collect a fee from the banks." (Wkipedia)
1996 - A study by the Federal Reserve System and academic specialists finds â€" like the 1993 Forbes investigation â€" no evidence "of substantial levels of bias in mortgage lending." Quoting from the abstract of the study:
"Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a
higher likelihood of mortgage default than other borrowers. These findings argue
against allegations of substantial levels of bias in mortgage lending."
1996 - The Department of Housing and Urban Development (HUD) requires that 42% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 12% should be "special affordable" loans typically held by borrowers earning 60% of their area's median income. Note how HUD ratchets up these requirements in 2000 and then again in 2005. (7)
1997 - Bear Stearns, one of the largest global investment banks, makes the first public securitization of Community Reinvestment Act (CRA) loans.
1998 - HUD Secretary Andrew Cuomo announces an "affirmative action" settlement with a Texas bank forcing it to provide $2.1 billion in high risk mortgages to low-income Americans. (Video featured in opening paragraphs.)
1998 - The Clinton administration authorizes Fannie Mae and Freddie Mac to purchase subprime mortgages to satisfy their affordable housing obligations. Note prophetic paragraphs in a 1999 New York Times report on Freddie and Fannie's expanded mission:
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."
1998 - October - Economists Stan L. Liebowitz and Theodore Day investigate the 1992 Boston Fed study suggesting racism in the mortgage market. They are "shocked at the poor quality" of the the data:
'"When we attempted to conduct a statistical analysis removing the impact of . . . obvious data errors, we found that the evidence of discrimination vanished. Without discrimination there would be no reason to try to 'fix' the mortgage market. Nevertheless, our work largely evaporated down the memory hole as government regulators got busy putting the results of the Boston Fed study to use in creating policy. That policy, simply put, was to weaken underwriting standards."
The two economists warn: Bad loans today will mean dispossessed minorities tomorrow:
"After the warm and fuzzy glow of 'flexible underwriting standards' has worn off, we may discover that they are nothing more than standards that led to bad loans . . . If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments." (8)
1999 - Finance professors at the University of Illinois and at Wichita State University disclose findings on the creditworthiness of minorities consistent with the 1993 Forbes report, the 1996 Federal Reserve study cited earlier, and the 1998 findings of Liebowitz and Day:
"[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans . . . [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently 'unfair' because it works as a tax on one group that is used as a subsidy for another."
1999 - November - The 1933 Glass-Steagall Act provisions that prohibit a bank holding company from owning other financial companies are repealed by the Gramm-Leach-Bliley Act signed by President Bill Clinton. Note: Efforts to link the financial meltdown to deregulation â€" or the failure of free markets â€" tend to pin the blame on the Gramm-Leach-Bliley Act. This is nonsense, says economist Peter J. Wallison (the same Peter J. Wallison who foresaw catastrophe ten years earlier):
"Allowing banks and securities firms to affiliate under the same holding company has had no effect on the current financial crisis. None of the investment banks that have gotten into trouble â€" Bear, Lehman, Merrill, Goldman or Morgan Stanley â€" were affiliated with commercial banks."
2000 - HUD requires that 50% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 20% should be "special affordable" loans typically held by borrowers earning 60% of an area's median income. (5)
2002 - June - George W. Bush, at the White House Conference on Increasing Minority Ownership: "...few(er) than half of the Hispanics and half the African Americans own the(ir) homes . . . We've got to work to knock down the barriers that have created a home ownership gap." (Video featured in opening paragraphs.)
Banks to Illegals: No Problemo
2002 - October - The Treasury Department instructs banks that the "know your customer" requirements of the Patriot Act do not prohibit banks from accepting Mexican matricula consular cards to verify a customer's identity when opening an account. (9) The insecure matriculas are issued by Mexico's 47 consulates throughout the United States to Mexican nationals â€" regardless of immigration status. Since 80-85 percent of immigrants from Mexico since 1990 are illegal, according to the Pew Hispanic Center (10), then the Treasury Department is telling banks: Feel free to provide a full array of services to illegal aliens.
2003 - The Federal Reserve engineers a federal-funds rate of 1.25%, a 40-year low â€" fueling the credit expansion. Interest rates on adjustable loans reach historical lows.
2003 & 2004 - Accounting fraud is detected at Fannie Mae and Freddie Mac. The intent of the fraud was to maximize bonuses of executives. Freddie ousts CEO Leland Brendsel. Fannie Mae head Franklin Raines resigns.
2003 - September - Treasury Secretary John Snow testifies before the House Financial Services Committee: "We need a strong world-class regulatory agency to oversee the prudential operations of the GSEs . . ."
Barney Frank, D-MA, ranking member (now chairman) of the House Financial Services Committee: "These two entities â€" Fannie Mae and Freddie Mac â€" are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
Among groups denouncing Snow's proposal: the National Association of Home Builders and Congressional Democrats "who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing." (11)
2004 - January - The Bush administration announces the FHA will insure "zero down payment" mortgages. Acting HUD secretary Alphonso Jackson:
"Offering FHA mortgages with no down payment will unlock the door to home ownership for hundreds of thousands of American families, particularly minorities. President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal."
Federal Housing Commissioner John C. Weicher:
"This initiative would . . . allow many renters to afford their own home, it would help these families build wealth and become true stakeholders in their communities."
2004 - June - The SEC (Securities Exchange Commission) adopts Basel II standards for establishing the "net capital" requirements of investment banks. Basel II standards â€" developed by the world's central banks after years of research â€" embrace the theory that a "more intensive study of the risks of particular assets would yield both more efficient use of capital and a more stable financial system." (12)
Sounds sensible. What's the policy implication?
Â "...instead of a fixed capital ratio [capital-to-loans] standard, Basel II uses mathematical models crunching historical data to determine how risky an institution's assets are and therefore how much capital it needs."
Alas and alack: " . . . when the investment banks switched to Basel II in the middle of a housing boom, AAA-rated mortgage-backed securities appeared almost as safe as cash. Oops. The models allowed Wall Street to add too much leverage." (13)
Comment: So much for international planning as a panacea. International coordination produced the faulty Basel II standards, helping to create the U. S. mortgage meltdown while simultaneously turning it into a global crisis.
Fannie, Freddie, and Friends
2004 - October - House hearings on accounting fraud at Fannie Mae and Freddie Mac: Democrats defend the two GSEs and savage the director of the Office of Federal Housing Enterprise Oversight (OFHEO) for seeking stronger regulation. (Video featured in opening paragraphs.)
2004-2007 - Fannie and Freddie accelerate their high-risk lending. Peter J. Wallison (the same Peter Wallison who predicted the current crisis in 1999) and co-author Charles W. Calomiris, explain:
"In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of 'affordable housing.' They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion."
Watch Fannie Mae CEO Daniel Mudd "curry congressional support" in this 2005 footage (four minutes) of Mudd with his "family," the Congressional Black Caucus. Wallison continues:
"...Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that [loan] originators were scraping the bottom of the barrel [of borrowers] to find product for [mortgage] buyers like the GSEs."
2005 - HUD requires that 52% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 22% should be "special affordable" loans typically held by borrowers earning 60% of their area's median income. (5)
2005 - February - Federal Reserve Chairman Alan Greenspan: "Enabling these institutions [Fannie Mae and Freddie Mac] to increase in size, and they will, once the crisis in their judgment [over discoveries of accounting irregularities] passes . . . We are placing the total financial system . . . at a substantial risk."
2005 -Freddie Mac secretly pays GOP consulting firm DCI $2 million to kill the GOP regulatory overhaul bill sponsored by Senator Chuck Hagel (R-NE). All Democrats on the Senate Banking, Housing and Urban Affairs Committee oppose the bill. The measure dies. (Between 1998 and 2008, Freddie would spend $94.9 million and Fannie $79.5 million lobbying Congress.)
2006 - January 4 - Julie Myers is named head of Immigration and Customs Enforcement (ICE). Lax enforcement turns on a dime. Myers launches an aggressive interior enforcement campaign. Particular targets: work sites. The Washington Post would report upon Myers' departure three years later:
"Myers has presided over a dramatic increase in enforcement activities . . . setting records for three fiscal years in arrests of illegal immigrants with criminal records and those violating administrative deportation orders. Actual deportations also soared to record levels during her tenure."
Comment: This very effective head of ICE would help trigger the collapse of the mortgage-built house of cards. She was about to replace near-zero interior enforcement â€" a period when banks began opening accounts for illegal aliens and issuing them mortgages â€" with unpredictable raids on companies with illegal workforces. Odds that illegal alien mortgage holders could sustain their presence began to drop. Quoting Investors Business Daily on the extent of illegal alien participation in the mortgage debacle:
"By law [since 2002] , banks don't have to check immigration status, and after heavy lobbying by Hispanic housing advocates, they made loans to illegals â€" lots of them. By some estimates, millions of undocumented workers became undocumented borrowers almost overnight." (14)
2007 - December - Barack Obama, speaking at a gathering of ACORN and other community organizations, invites the community organizers to help set his legislative agenda by serving on his transition team. Video (2min, 30sec). (15)
All Fall Down
2008 - March - JPMorgan Chase, in coordination with the Federal Reserve Bank of New York, provides an emergency loan to Bear Stearns to prevent the firm's insolvency and avert a market crash. Two days later, Bear Stearns merges with JP Morgan Chase in a stock swap worth less than 10 percent of Bear Stearns' market value. (16)
2008 - July 11 - Senator Chris Dodd, D-CT, chairman of the Senate Banking Committee, says of Freddie Mac and Fannie Mae: "These are viable, strong institutions." Within three weeks both firms collapse.
2008 - September 7 - The U.S. government seizes control of Fannie Mae and Freddie Mac, putting the liability for more than $5 trillion in mortgages on taxpayers. Both companies are placed in government conservatorship.
2008 - Septermber 15 - Lehman Brothers becomes the largest bankruptcy in U. S. history. The global financial services firm is insolvent because it holds large positions in subprime and other lower-rated mortgages.
2008 - September 16 - AIG (American International Group) falls to $1.25 per share â€" a drop of 95 percent from its 52-week high. The insurance giant had tried to insure $57.8 billion in debt securities backed by subprime loans. The Federal Reserve Bank of New York loans $85 billion to AIG and, a few days later, another $37.8 billion.
2008 - October 3 - President Bush signs the Emergency Economic Stabilization Act, which provides $700 billion to purchase troubled assets of failing banks. Within days, the plan changes. The U. S. will purchase stakes (invest) in banks instead.
What to make of these events, studies, people?
Washington's effort to "close the white-minority home ownership gap" might be described as a social engineering project with colossal "cost overruns." It's a project akin â€" in quality of leadership, denial of reality, results for intended beneficiaries, terrible costs on the larger population â€" to our government schooling monopolies' forty-year obsession with closing the white-minority achievement gap.
The subprime mortgage fiasco, in fact, exemplifies an American proclivity, the PC-blinded calamity. The mortgage meltdown with its sudden, powerful effects world-wide no doubt has unique particulars from which much can be learned, but this financial disaster is but one more in a special category of American failures and ought to be studied as such.
Let's hope the genre gets due attention before it's too late.