By M. Jay Wells
Obama's economic narrative of the mortgage crisis ignores the facts. He has put free-market capitalism at the root of the current mortgage industry debacle, denying the real history of government interference in that market.
On September 15, with banking giant Lehman Brothers filing for bankruptcy protection, Obama was given the opening to begin weaving his anti-capitalist storyline. And that he did. Artfully blurring the mortgage industry crisis with generalized tax policy, Obama declared,
"I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years, one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else."
The words were carefully chosen. That day in Colorado marked his return to the teleprompter and a strictly refocused campaign message intent on surreptitiously fusing the mortgage industry woes and free-market capitalism in general. Confident the American people are primed for his socialist brand of "change," Obama maintained his anti-capitalist theme, "What we have seen in the last few days is nothing less than the final verdict on an economic philosophy that has completely failed." According to Obama, capitalism has been "rendered . . . a colossal failure."
His chat with a Toledo, Ohio, plumber showcases his socialist, redistributionist ideology:
"It's not that I want to punish your success. I just want to make sure that everybody who is behind you, that they've got a chance for success too. . . . I think when you spread the wealth around, it's good for everybody."
He had already said as much at an April debate where he said his plan was to "look at raising the capital gains tax for purposes of fairness" (after having just admitted that raising the tax would reduce revenues!). For Obama, increased federal revenue be damned, tax increases are nonetheless necessary for redistributionist "fairness."
Contrary to the Obama narrative, however, it is not free-market capitalism at the root of the current mortgage industry crisis, but rather the very socialism Obama hawks. The historical record makes this fact unmistakably clear.
The Growing Government Hand
1933-1938
President Franklin D. Roosevelt initiated a series of "New Deal" reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.
1968As part of President Johnson's Great Society reform plan, much of Fannie Mae became a private owned yet government chartered company, a government sponsored enterprise (GSE) providing authority to issue mortgage-backed securities (MBS). Fannie Mae buys home mortgages in order to preserve liquidity in the secondary mortgage market. Though private, it remained backed by the Federal government.
1970President Nixon chartered Freddie Mac, the Federal Home Loan Mortgage Corporation, as a GSE to compete with Fannie Mae. Designed to help grow the secondary mortgage market, Freddie Mac purchases mortgages from lending institutions to either be securitized as MBS and sold in the secondary market or held by Freddie Mac. At this time the secondary market for conventional mortgages was small.
1977Sen. Proxmire (D-Wisconsin) introduced a "creeping socialism" community reinvestment Senate bill. Opponents argued the bill would allocate credit without regard for merits of loan applications, thereby threatening depository institutions. Proponents countered that it was only to ensure that lenders did not ignore good borrowing prospects in their communities. The bill's sponsor stressed it would neither force high-risk lending nor substitute the views of regulators or those of banks.
President Carter, pressed by grassroots organizations -- though opposed by the banking industry, signed into law the Community Reinvestment Act (CRA). In the years following the Act has undergone several revisions.
To boost community development laws, CRA was a provision designed to stem bank "redlining," the practice of drawing a red line around low-income communities and denying lending in these areas. The original intent of CRA was to encourage banks to foster homeownership opportunities in these underserved communities in which the lending institutions are chartered.
According to Section 801 of title VIII, "regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs [i.e., credit and deposit services] of the communities in which they are chartered to do business." Accordingly, "regulated financial institutions have continuing and affirmative obligation" to meet these needs. Moreover, the title required each "appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions."
1980sWith CRA came increased oversight of lending institutions to ensure they were giving credit to low- and moderate-income communities. Regulators expressed that CRA was not designed to compel credit allocation, nor did it require risky lending practices. Moreover, ECOA (Equal Credit Opportunity Act) and FHA, not CRA, were in place to address discrimination in lending. But community organization groups like the radical ACORN began efforts to reshape CRA into government-imposition, in accord with what "affirmative obligation" might suggest. They began pressing the semantic open door and stretching the "discrimination" provision to complain about enforcement of the regulations as lending institutions resisted bad lending practices in poor minority communities.
August 1989To deal with the savings & loan fallout of the 1980s, Congress enacted the Financial Institutions Reform Recovery and Enforcement Act. In a move with ominous portent, FIRREA mandated public release of lender evaluations and performance ratings, resulting in added pressure on the banking industry. Such public oversight enabled bullying abuses of community organization groups like ACORN to further influence bank lending practices.
1990sWith the mechanisms in place, the community organizing groups began developing directed strategies to exert more and more pressure on the lending industry in the cloak of complicity with CRA. Community organizer Barack Obama worked closely with ACORN activists. Employing the radical Alinsky intimidation tactics Obama had learned and was teaching -- "direct action" -- activists crowded bank lobbies, blocked drive-up teller lanes and demonstrated at the homes of bankers to browbeat risky lending in poor and minority communities. Those who resisted were accused of racism to the media and government officials.
The agitators could now stall or hijack bank mergers by filing complaints of non-compliance against the institutions. Lawsuits alleging redlining and racism began flooding the court system. With the prospect of expansions and mergers threatened, banks settled cases and, significantly, increasingly made loans they would not have normally made. The net effect, as ACORN litigation increased, was that credit standards lowered.
Initially the GSEs resisted purchasing these risky mortgages but eventually the Clinton Administration instructed them to substantially increase the percentage of these mortgages in their portfolios. The government-backed Fannie Mae and Freddie Mac of the Clinton reforms became "a feeding trough," in the phrase of Peter Ferrara.
The poor communities and their exploitive leaders benefited from the capitalization with a surge of homeownership, at least on the surface. Wall Street benefited from increased sales of Fannie Mae and Freddie Mac and guaranteed mortgage-backed securities, as the housing market benefited from new capital channeled from Fannie and Freddie. And the GSE heads profited, with political support in Washington in the form of campaign contributions.
In the period 1989-2008, topping the list of recipients of contributions from Fannie Mae and Freddie Mac is the chairman of the Senate Banking Committee, Sen. Dodd (D-Connecticut), who received $165,400. Second on the list is Sen. Obama (D-Illinois), receiving $126,349 with only three years in the Senate. Rep. Frank (D-Massachusetts), received $42,350.
February 1990
Madeline Talbott, a well-known radical ACORN leader and banking industry agitator, challenged the merger of a Chicago thrift, Bell Federal Savings and Loan Association, who responded that they were being bullied into irresponsible "affirmative-action lending policy."
1991ACORN interfered with a House Banking Committee meeting for two days protesting a move to bring CRA reform.
1992Enforcement of CRA was "sporadic," as the Washington Times notes, until a Federal Reserve Bank of Boston study asserted that there were "substantially higher denial rates for black and Hispanic applicants than for white applicants." Co-author Lynn Browne was approached by co-author Alicia Munnell to do the study because "community activists were complaining that mortgage loans were not being made in minority communities."
According to the Times, however, "the study had mishandled statistics on minority default rates. When the errors were accounted for, the same study showed no evidence that nonwhite mortgage applicants were being discriminated against."
Frank Quaratiello, writing in the Boston Herald, cites Stan Liebowitz, "My guess is that they were interested in finding a particular result." Said Liebowitz, "Richard Syron was head of the Boston Fed at the time. He went on to be the head of Freddie Mac. They were looking for mortgage discrimination and they found it."
According to Quaratiello, Syron became Freddie Mac CEO and chairman in 2003 and "faced increasing pressure to buy up more and more risky mortgages, some of which the Boston Fed's guide had, in effect, served to legitimize." Regarding Syron's total compensation in 2007 of $18.3 million, Liebowitz reportedly quipped, "Nice reward for presiding over unprofessional research behavior, bankrupting Freddie Mac and crippling our financial system, all in the name of politically correct lending."
September 1992The Chicago Tribune described the ACORN agenda as "affirmative action lending." And, writes Kurtz, "ACORN was issuing fact sheets bragging about relaxations of credit standards that it had won on behalf of minorities."
October 1992Congress, enacting the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, allowed legislation to "amend and extend certain laws relating to housing and community development." The Act created the Office of Federal Housing Enterprise Oversight (OFHEO) within HUD to "ensure that Fannie Mae and Freddie Mac are adequately capitalized and operating safely." It also "established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas."
Rep. Jim Leach (R-Iowa) warned about the impending danger non-regulated GSEs posed. As the Washington Post reports, his concern was that Congress was "hamstringing" the regulator. Complaint was that OFHEO was a "weak regulator." Leach worried that Fannie Mae and Freddie Mac were changing "from being agencies of the public at large to money machines for the stockholding few."
Rep. Barney Frank (D-Massachusetts) countered, as the Post reports, "the companies served a public purpose. They were in the business of lowering the price of mortgage loans."
September 1993The Chicago Sun-Times reports an initiative led by ACORN's Talbott with five area lenders "participating in a $55 million national pilot program with affordable-housing group ACORN to make mortgages for low- and moderate-income people with troubled credit histories." Kurtz notes that the initiative included two of her former targets, Bell Federal Savings and Avondale Federal Savings, who had apparently capitulated under pressure.
July 1994Represented by Obama and others, Plaintiffs filed a class action lawsuit alleging that Citibank had "intentionally discriminated against the Plaintiffs on the basis of race with respect to a credit transaction," calling their action "racial discrimination and discriminatory redlining practices."
November 1994President Clinton addresses homeownership: "I think we all agree that more Americans should own their own homes, for reasons that are economic and tangible and reasons that are emotional and intangible but go to the heart of what it means to harbor, to nourish, to expand the American dream. . . . I am determined to see that you have the opportunity and together we can make that opportunity for the young families of our country. I am committed to a new and unprecedented partnership between industry leaders and community leaders and Government to recommit our Nation to the idea of homeownership and to create more homeowners than ever before."
June 1995Republicans had won control of Congress and planned CRA reforms. The Clinton Administration, however, allied with Rep. Frank, Sen. Kennedy (D-Massachusetts) and Rep. Waters (D-California), did an end-around by directing HUD Secretary Andrew Cuomo to inject GSEs into the subprime mortgage market.
As Kurtz notes,"ACORN had come to Congress not only to protect the CRA from GOP reforms but also to expand the reach of quota-based lending to Fannie, Freddie and beyond." What resulted was the broadening of the "acceptability of risky subprime loans throughout the financial system, thus precipitating our current crisis."
The administration announced the bold new homeownership strategy which included monumental loosening of credit standards and imposition of subprime lending quotas. HUD reported that President Clinton had committed "to increasing the homeownership rate to 67.5 percent by the year 2000." The plan was "to reduce the financial, information, and systemic barriers to homeownership" which was "amplified by local partnerships at work in over 100 cities."
Kurtz concludes, "Urged on by ACORN, congressional Democrats and the Clinton administration helped push tolerance for high-risk loans through every sector of the banking system -- far beyond the sort of banks originally subject to the CRA. So it was the efforts of ACORN and its Democratic allies that first spread the subprime virus from the CRA to Fannie and Freddie and thence to the entire financial system. Soon, Democratic politicians and regulators actually began to take pride in lowered credit standards as a sign of ‘fairness' -- and the contagion spread."
Attorney General Janet Reno, with a number of bank lending discrimination settlements already, sternly announces, "We will tackle lending discrimination wherever it appears." With the new policy in full force, "No loan is exempt; no bank is immune." "For those who thumb their nose at us, I promise vigorous enforcement," reiterated Reno.
1997
HUD Secretary Cuomo said "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas . . ."
1998By falsifying signatures on Fannie Mae accounting transactions, $200 million in expenses was shifted from 1998 to later periods, thereby triggering $27.1 million in bonuses for top executives. James A. Johnson received $1.932 million; Franklin D. Raines received $1.11 million; Lawrence M. Small received $1.108 million; Jamie S. Gorelick received $779,625; Timothy Howard received $493,750; Robert J. Levin received $493,750.
April 1998HUD announced a $2.1 billion settlement with AccuBanc Mortgage Corp. for alleged discrimination against minority loan applicants. The funds would provide poor families with down payments and low interest mortgages. Announcing the Accubank settlement, Secretary Cuomo said, "discrimination isn't always that obvious. Sometimes more subtle but in many ways more insidious, an institutionalized discrimination that's hidden behind a smiling face."
Before the camera, Cuomo admitted the mandate amounted to "affirmative action" lending that would result in a "higher default rate." The institution would "take a greater risk on these mortgages, yes; to give families mortgages who they would not have given otherwise, yes; they would not have qualified but for this affirmative action on the part of the bank, yes. It is by income, and is it also by minorities? Yes. . . . With the 2.1 billion, lending that amount in mortgages which will be a higher risk, and I'm sure there will be a higher default rate on those mortgages than on the rest of the portfolio."
May 1999The LA Times reports that African Americans homeownership is increasing three times as fast as that of whites, with Latino homeowners is growing five times as fast, attributing the growth to breathing "the first real life into enforcement of the Community Reinvestment Act." This breath of "life" mandated that Fannie Mae and Freddie Mac buy mortgages with deviant down-payments and debt-to-income ratios which allowed lenders to approve mortgages for lower-income families that would have been denied otherwise.
By now all pretense had disappeared, lending practices were based upon concerns of discrimination in the banking system regardless the consequences. The administration threatened to veto a bill passed by the Senate which had "shortsightedly voted to retrench" CRA, as the advocative Times put it.
Under pressure, Fannie Mae was resisting increased targeting, arguing that the result would be more loan defaults. Barry Zigas, heading Fannie Mae's low-income efforts, argued, "There is obviously a limit beyond which [we] can't push [the banks] to produce," the Times reported.
Fall of 1999Treasury Secretary Lawrence Summers warned, "Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly."
September 1999With pressure from the Clinton Administration, Fannie Mae eased credit requirements on loans it would purchase from lenders, making it easier for banks to lend to borrowers unqualified for conventional loans. Raines explained that "there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market," reported the New York Times.
With this action, Fannie Mae put itself at substantial risk in the event of an economic downturn. "From the perspective of many people, including me, this is another thrift industry growing up around us," warned Peter Wallison. "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." The danger was known.
September 1999A study by Freddie Mac, confirming earlier Federal Reserve and FDIC studies, contradicts race discrimination arguments for CRA. The study found that African-Americans with annual incomes of $65-$75,000 have on average worse credit records than whites making under $25,000, showing that the difficulty in qualifying was not because of race but because of bad credit records. The Federal Reserve Bank of Dallas accordingly entitled a paper "Red Lining or Red Herring?"
2000The National Community Reinvestment Coalition instructed on how to exploit the new CRA regulations, "Timely comments can have a strong influence on a bank's CRA rating." NCRC asserted, "To avoid the possibility of a denied or delayed application, lending institutions have an incentive to make formal agreements with community organizations." That is, the mere threat to intervene in the CRA review process had equipped the ACORN groups for the massive shakedown.
Moreover, ACORN had been given a compelling incentive, as CRA allowed the organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee had estimated that, as a result of CRA, $9.5 billion had gone to pay for services and salaries of the organizers.
Winter 2000City Journal warned that the Clinton administration had turned CRA into "a vast extortion scheme against the nation's banks," committing $1 trillion for mortgages and development projects, most of it funneled through the community organizers.
March 2000Rep. Richard Baker (R-Louisiana) proposed a bill to reform Fannie and Freddie's oversight in a House Subcommittee on Capital Markets.
Rep. Frank (D-Massachusetts) dismissed the idea, saying concerns about the two were "overblown" and that there was "no federal liability there whatsoever."
Treasury Undersecretary Gary Gensler testified in favor of GSE regulation. He argued that the bill would promote private market discipline, increase transparency and preserve market competition, reducing the potential for subsidized competitors to distort financial markets.
Fannie Mae spokesmen responded by calling the testimony "inept," "irresponsible," and "unprofessional."
Wallison of the American Enterprise Institute testified to the subcommittee that the bill was "a milestone in Congressional efforts to gain control of the Government Sponsored Enterprises." He added that the "political courage and stamina that was required to introduce this bill and to continue to press it forward cannot be overstated." He emphasized that the bill was only an "interim step in the necessary process of dismantling the GSEs and eliminating both their threat to the taxpayers and to the private financial sector of our economy."
Wallison explained why Fannie and Freddie "pose a serious problem for both the public and private sectors." First, they contain an inherent contradiction. "It is a shareholder-owned company, with the fiduciary obligation to maximize profits, and a government-chartered and empowered agency with a public mission. It should be obvious that it cannot achieve both objectives. If it maximizes profits, it will fail to perform its government mission to its full potential. If it performs its government mission fully, it will fail to maximize profits."
He sounded an alarm on a "vicious and dangerous cycle." "Fannie and Freddie must grow in order to maintain their profitability and hence their high stock prices, but there is no countervailing check on their growth - no effective competition, no required government approvals, and no fear in the financial markets that there is any risk associated with financing this growth. Moreover, their fiduciary obligations to their shareholders require them to exploit their subsidy to the fullest extent possible. These are agencies that are - in the fullest sense of the phrase - out of control."
Congressional Democrats and GSE representatives vigorously attacked any such criticism. "We think that the statements evidence a contempt for the nation's housing and mortgage markets," rebuffed Sharon McHale, Freddie Mac spokeswoman. Congressional Democrats and GSE representatives prevailed.
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