Politicians Caused Mortgage Meltdown

The following article originally was published July 6, 2009, by the Grand Junction Free Press.

Politicians caused mortgage meltdown

by Linn and Ari Armstrong

If you want to know the basics of how politicians caused the mortgage meltdown and the resulting recession, purchase and read Thomas Sowell’s new book, The Housing Boom and Bust. In just 148 pages of text (plus notes and such), Sowell explains how political economic controls largely started in the 1970s gained force in the 1990s, initiating the housing bubble in the early 2000s and resulting in the bust of 2006.

Sowell begins his account with the 1970s, when various localities around the U.S. — particularly in New York and coastal California — imposed wide-ranging property controls that restricted building and sent housing prices through the roof.

Through such controls as government open space, zoning, “smart” growth, lot size controls, building height restrictions, preservation restrictions, building permit hassles and limits, and planning commissions, various localities forced up housing costs. Meanwhile, housing remained affordable where local governments left it relatively free.

The politically induced pain created the “misconception… that the free market failed to produce affordable housing, and that government intervention was therefore necessary… to enable ordinary people to find a place to live that was within their means,” Sowell writes.

Enter the 1977 Community Reinvestment Act (CRA). The legislation directed federal bureaucrats to “encourage” banks “to help meet the credit needs of the local communities in which they are chartered.” Over time, this developed into federal policies to cajole and threaten banks into making risky loans.

Starting in the 1990s, activists such as ACORN (and, as reported elsewhere, Sonia Sotomayor), media outlets such as the New York Times, and politicians from George H. W. Bush to Bill Clinton pressured banks to make riskier loans, on the pretext of helping some minority applicants. (As Sowell points out, minorities were hurt worst in the resulting housing bust.)

Janet Reno, Bill Clinton’s Attorney General, warned banks, “Do not wait for the Justice Department to come knocking.”

In 1993, the Department of Housing and Urban Development (HUD) brought legal action against banks that failed to meet racial quotas in lending. In 1995, new controls under CRA imposed more stringent quotas. Nevermind whether the recipients of the risky loans were prepared to repay them.

In addition to legal action and threats thereof, bureaucrats threatened banks’ ability to form mergers and branches unless they followed politically-correct lending practices, Sowell reviews.

Also during the 1990s, the politician-created Fannie Mae and Freddie Mac began lowering lending requirements, partly under pressure from HUD. These quasi-governmental entities purchased risky loans originated by others. Other investors rightly predicted that the federal government would not allow these organizations to bear the brunt of their irresponsible policies; they were later bailed out with tax dollars.

In 2002, George W. Bush advocated subsidies for down payments and zero-down loans. The Federal Housing Administration also promoted zero-down loans. Yet Bush’s American Dream Downpayment Act and aligned measures helped create a financial nightmare.

Meanwhile, the Federal Reserve artificially held down interest rates in the early 2000s, encouraging many to buy houses who could not otherwise afford them.

The net effect of all these political controls was to encourage “creative” lending policies, causing an explosion of adjustable-rate and zero-down mortgages, Sowell reviews. When interest rates crept back up in 2004, the houses of cards began to crumble.

Particularly telling is the political reaction to the mortgage meltdown. Many of the same politicians and activists who previously encouraged risky lending quickly turned to blaming the “greed” of the free market. These quotes alone are worth the price of Sowell’s book.

For example, in 2003, Congressman Barney Frank said, “Fannie Mae and Freddie Mac have played a very useful role in helping making housing more affordable.” In 2007 Frank blamed the mortgage meltdown on “too little regulation.” In 2008 Frank blamed “a conservative philosophy that says the market knows best.” So Frank first helped destroy the free market, then blamed the market for not working.

In 2004, Republican Senator Kit Bond threatened to cut the budget of an agency that raised alarms about Freddie and Fannie. Later, Bond complained that the same agency had failed to “look at the practices” of Freddie and Fannie.

In 2004, Senator Christopher Dodd praised Freddie and Fannie as “one of the great success stories of all time.” In 2007, Dodd blamed others for the “adjustable-rate mortgages that today are defaulting and going into foreclosure at record rates.”

In 2003, Congresswoman Maxine Waters said “we do not have a crisis at Freddie Mac” or Fannie Mae and advocated “affordable housing” through “desktop underwriting to 100 percent loans.” In 2004, 76 House Democrats, including Nancy Pelosi, urged President Bush to sacrifice “an exclusive focus on safety and soundness” on the alter of “affordable housing.”

Now that they have devastated the housing market and caused the worst recession since the Great Depression, these are the same clowns who want to seize control of energy and health care.

Don’t let them get away with it again.