The mortgage crisis blame game

By Deon Roberts, Online Editor

As American taxpayers provide a $700 billion rescue of the financial industry in hopes of saving the nation’s economy, there have been many attempts to assign blame for the mortgage meltdown that led to the mess.

Republicans blame Democrats. Democrats blame Republicans. Some blame the Bush administration. Others say the seeds of the problem were planted before Bush took office.

The accusations and explanations are all over newspapers, the radio, TV and, of course, the Internet. Here’s a look at some of them.

In an Oct. 3 opinion piece for The Wall Street Journal, a professor of economics at George Mason University looked back to 1992, when “Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers.”

Here’s more from the piece, “How Government Stoked the Mania”:

We need a careful analysis of public policy’s role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs — from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred.

Here’s the headline from a Sept. 30, 1999, story by The New York Times: “Fannie Mae Eases Credit to Aid Mortgage Lending.”

The story opens with this:

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.

The story then goes on to say that the program will encourage banks to give home loans “to individuals whose credit is generally not good enough to qualify for conventional loans.”

Here are the next two paragraphs:

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.

Further in the story, there’s a paragraph that, today, sounds prophetic:

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 1980s.

The Wall Street Journal, in an Oct. 2 opinion piece, “What They Said and Fan and Fred,” lists comments politicians and policymakers made during House Financial Services Committee and Senate Banking Committee hearings dating to 2003. 

A Wikipedia entry on former Sen. William Gramm, R-Texas, includes “Gramm’s relationship to the 2008 Subprime Mortgage Crisis.” Here’s more from that Wikipedia entry:

Many believe that legislation written primarily by Gramm in 1999 (signed into law by Clinton), is in large part to blame for leading to the 2008 mortgage crisis. The Gramm-Leach-Bliley Act is perhaps most famous for repealing the Glass-Steagall Act which regulated the financial services industry. The legislation allowed Swiss Bank UBS to purchase several American institutions. Gramm later became a lobbyist for UBS, collecting over 750,000 USD in fees. UBS alone issues over 18 Billion USD in subprime mortgages.

A May 30 piece on Salon.com, which focuses on liberal politics, also blames Gramm for the mortgage crisis.

But for every accusation aimed at Republicans, there’s one aimed at Democrats. Here’s an excerpt from a piece of commentary published Sept. 22 on Bloomberg.com. The excerpt is about a 2005 bill.

For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter.•