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Sep 19 2008

Who's Fault is the Mortgage Crisis?

The mainstream media is parroting the line that "there's plenty of blame to go around" for the recent mortgage and financial crisis. If you're at all familiar with the slant of the mainstream media, you'll immediately see this as an indicator that the Democrats may be primarily to blame. So, I set out to find the answer to the question who's to blame and this is what I found:

Jimmy Carter - 1977:
025-jimmy-carter.jpgIn 1977, Democratic President Jimmy Carter was in the White House and Democrats controlled both houses of Congress. They passed and signed into law the Community Reinvestment Act ("CRA"), which was designed to prohibit lenders from "redlining" unprofitable neighborhoods. The term "redlining" was coined in the late 1960s by community activists in Chicago. It describes the practice of marking a red line on a map to delineate the area where banks would not invest.

While redlining was real, it's origin had nothing to do with race, discrimination or anything malevolent or improper. It was solely about profitability. Banks weren't lending to people in certain locations because doing so was not profitable. If this weren't true, a company could easily come in, or start up, and open up branches in redlined neighborhoods and have a monopoly on the amazingly profitable business that was being ignored by the big bad old-time lenders. However, no such business came in, or started up, simply because there was no money, or insufficient money, to be made in such locations.

What could an innocent little law from 1977 possibly have to do with the mortgage and financial crisis of 2008? Actually, not too much. The lenders were able to either squeak out a little profit from the poor neighborhoods, break even or absorb their losses during the economic boom years brought about by Reagonomics in the '80s and the internet boom of the '90s. But, the CRA was a foot-in-the-door. After all, you don't boil a frog by throwing him in boiling water, you put him in room temperature water and slowly turn up the heat. You don't take more than half a man's earnings when you first pass an income tax, you just take a percent or two. You don't get paid family leave on the first try, you have to lie and tell the voters that small businesses won't be shackled with paying workers for 3 months of paid leave every year. Then, once everyone is used to unpaid leave, tell everyone how unfair it is that only the rich can afford to take family medical leave and that out of "fairness" we have to force businesses to pay people to sit at home and not work. Same thing with the CRA, it wasn't the worst piece of needless economic legislation the Democrats had ever hobbled the American people with but, rather, simply a foundation on which bad policy could be built.

Bill Clinton - 1993:
bill-clinton.jpgIn 1993, Democratic President Clinton was in the White House and Democrats controlled both houses of Congress. President Clinton initiated revisions to the CRA and regulatory scheme which substantially increased the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. The revisions also allowed, for the first time, the securitization of CRA loans containing subprime mortgages. The first company to pool and repackage the loans into securities was the now defunct Bear Sterns.

White House Press Briefing by Clinton Administration Robert Ruin, Assistant to the President for Economic Policy, December 8, 1993:

"In July the President asked the four banking regulators to reform CRA, to reduce paperwork in process and reward performance, and to get that done by January 1, 1994. We're delighted to report that that has been accomplished on schedule. And in conjunction with the President's Community Development Bank and financial institution legislation, which recently passed the House of Representatives, CRA reform will generate billions of dollars in new lending and extend basic banking services to the inner cities and to distressed rural communities around the country."

Clinton's strengthening of the CRA required lenders to find ways to provide mortgages to their poorer communities by loosening their underwriting standards. In other words, the banks had to make bad loans...officially called "sub-prime loans." So how do you give loans to people who simply don't qualify? Pursuant to the CRA, you get rid of objective color-blind criteria like the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, things like participation in a "credit-counseling" programs should be taken as evidence of an applicant's ability to manage debt. More on these bogus "credit-counseling" programs below.

George Bush - 2003:
026-george-w-bush.jpgIn 2003, President George Bush tried to pass what the liberal New York Times described as, "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago":

"The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios."

"The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates."

"The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session."

So, we have President Carter laying the foundation for disaster with Bill Clinton worsening the situation beyond which even the greatest economic engine in the world can sustain, all with the help of clueless and/or corrupt Democrats along the way. Finally, the supposedly "stupid" President George Bush attempts to bring a solution to what he knew was a major problem, but the Democrats blocked him.

Follow the Money...to the Democrats:
The New York Times also said there was a "lobbying battle" over Bush's proposal to reign in Fannie Mae and Freddie Mac...so, lets follow the money! Over the last ten years, from 1989 to 2008, the top three recipients of Fannie Mae and Freddie Mac campaign contributions are...drum roll please: (1) Democratic Senator Christopher Dodd and Chairman of the Senate Banking Committee, (3) Democrat Senator John Kerry. What about number 2 you ask? I think someone stepped in number two because, in less than four years in office, a certain inexperienced, junior Senator from Illinois somehow managed to rise to the number (2) spot in most campaign contributions received from the, now under Federal conservatorship, Fannie Mae and Freddie Mac: Democratic Senator Barack Obama. Change!

Barack Obama - $$$:
027-barack-obama.jpgNow, why would these lending institutions spend such a disproportionate amount of money on a baby Senator? Because they knew it was money well spent and it all goes back to Obama's days as a community rabble-rouser, I mean, "organizer." The original lobbyists for passage of the CRA were hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they personally benefited from. These included various "community organizations" such as "ACORN" (Association of Community Organizations for Reform Now). As mentioned above, it is groups like ACORN which, for a handsome fee, provide the bogus "credit-counseling" to poor borrowers to qualify for loans instead of actually having a way of paying back the loan.

Neighborhood organizations, like ACORN, also benefit themselves from the CRA through a process of legalized extortion. The CRA is enforced by four different federal government bureaucracies: the Federal Reserve, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any new branch creation, branch expansion or bank merger can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a community organization. The delays and expenses associated with such a protest can cost banks huge sums of money, and the community organization not only understand this perfectly well, but count on it. The community organizations use the threat of protests to get the banks to give them millions of dollars in "donations" (read that as bribes) as well as promising to make a certain amount of bad loans in their communities. With his history as a "community organizer," the lobbyists for Fannie Mae and Freddie Mac knew Senator Obama was a good buy for their money.

Christopher Dodd - Friend of Corruption:
028-christopher-dodd.jpgIn 2003 Senator Dodd refinanced the mortgages on his homes in Washington D.C. and Connecticut through Countrywide Financial with below-market rates because he was part of Countrywide's VIP program known as "Friend of Angelo" - Angelo being Countrywide CEO Angelo Mozilo. But, Dodd failed to disclose the preferential loans in any of his congressional financial disclosures. Completely unrealted to such preferrencial treatement, in June of 2008, Dodd introduced a bill in congress to bail out mortgage companies like Countrywide as the expense of hundreds of billions of dollars to the American taxpayers.

As recently as July of this year, Democratic Senator Christopher Dodd, the Chairman of the Senate Banking Committee, the guy who should know more than anyone how these institutions are doing...if he wasn't corrupt and/or incompetent said the following:

"To suggest somehow that [Fannie Mae and Freddie Mac] are in trouble is simply not accurate...the facts are that Fannie and Freddie are in sound situations...they have more that adequate capital." CNN - July 13, 2008

Don't forget, as detailed above, Democratic Senator Dodd is the number one recipient of campaign contributions from Fannie Mae and Freddie Mac. I'm sure it was just a coincidence and not incompetence or corruptions that led him to believe that Fannie Mae and Freddie Mac were in sound financial condition and not in any trouble just two months ago.

Barney Frank - 2003 & 2008:
029-barney-frank.jpgBack to President Bush's attempted reforms of 2003, Barney Frank, then ranking Democrat on the Financial Services Committee, said at the time:

"These two entities -- Fannie Mae and Freddie Mac -- 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." New York Times - September 11, 2003
"I do not want the same kind of focus on safety and soundness [in the regulation of Fannie Mae and Freddie Mac] that we have in the Office of the Comptroller of the Currency and the Office of Thrift Supervision. I want to roll the dice a little bit more in this situation towards subsidised housing." The Independent - September 25, 2003

As recently as August 25, 2008, this clueless turd told Money magazine:

"Fannie and Freddie are better off than the market thinks." Money Magazine - August 25, 2008

Such sentiments were echoed in 2003 by other Democrats who blocked President Bush's attempts at reform like Representative Melvin Watt, also on the Financial Services Committee: "'I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

John McCain - 2005:
030-john-mccain.jpgWhat about Senator John McCain? Well, in 2005, while Obama was just figuring out how to get his congressional parking sticker while taking his first bribe campaign contribution from Fannie Mae and Freddie Mac, John McCain (62 on the list of Mae/Mac recipients) was the co-sponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, which the Democrats succeeded in defeating in congress. On May 25, 2006, John McCain had this to say about the need for the legislation:

"If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole." - John McCain, 2006

And, just what would the bill co-sponsored by Senator John McCain have done? From the Congressional Research Service Summary:

"Sets forth operating, administrative, and regulatory provisions of the Agency, including provisions respecting: (1) assessment authority; (2) authority to limit nonmission-related assets; (3) minimum and critical capital levels; (4) risk-based capital test; (5) capital classifications and undercapitalized enterprises; (6) enforcement actions and penalties; (7) golden parachutes; and (8) reporting."

Liberals criticized the bill because it transferred oversight and eliminated certain minor, redundant or irrelevant reporting requirements. Their complaints ring hollow when asked how in the world Mae and Mac could have possibly been less regulated? Actually, reading the bill (63 pages and 31,000+ words in my version) reveals that it may very well have provided the necessary reforms to have, if not avoided, significantly lessened the current mortgage and financial crisis.

Sounds like Senator John McCain understood the economy and economic ramifications of uncontrolled Fannie Mae and Freddie Mac better than the Democrats ever have.

[If I have time, I'll add all the ex-Fannie Mae and Freddie Mac officials who were paid millions while they their drove their companies into the ground who are now advisers to Barack Obama's, on his vice-presidential search team and hold other close personal and professional relationships with Obama.]

[As long as this is, I've had to shorten it quite a bit and leave a lot out. There are a lot more bills, laws, corruptions and scandal involved. I've just touched on the highlights.]

[Rest assured, there is blame for heads of the companies involved in this crisis as well as the consumers (more on one or both of these in the future), but primary blame rests with legislators and regulators who created the rules by which the game was played.]

Posted by Don |

17 Comments

  1. #1
    Scott Harris said on September 21, 2008 | Reply

    Excellent posting!

    I'm glad someone took the painstaking time to look into thiis financial mess and understand how it came to be. Granted, the low interest rates we have enjoyed since the last recession helped fuel the fire, but like dealing with any other fire, if you don't have the proper safegaurds in place beforehand, you may not catch the fire until it is too late. Your posting clearly illustrates how the necessary safeguards were removed and never put back in place.

    I'll be curious to see any future updates you have on this.

  2. #2
    Migue said on September 22, 2008 | Reply

    Both parties to blame. Please read the Gramm-Leach-Biley Act of 1999. Rep Congress, Dem Prez, deregulated markets, caused a perfect storm for subprime to flourish and allow "gaming" in the security markets. This is an equal opportunity blame. As for money, check out opensecrets.org and you will see all the money both candidates receive from lobbyists. This is legal and allowed, but is the root cause of this debacle. the money they both received from Lehman Bros, Goldman Sachs, Morgan Stanley, Bear Stearns is about 10 times greater than what they received from Fannie or Freddie. And Obama has raised double of what McCain has raised. That is a big harbinger of who may be prez. McCain's big take (one of a few) is in the oil and gas sector. Obama received much less (maybe quarter) from the same industry. Remember McCain co-sponsored McCain-Feingold and then sold out to lobbyists. Obama unfortunately plays the game very well. And again, both sides are to blame for the current state of lobbying. Thank you Mitch McConnell. Of course, Dems were content to take the money. This is not the Reps are pure and the Dems are the problem. It is both parties. However, Phil Gramm's actions were the catalyst to get this thing rolling. And Harry Reid voted in favor of it.

  3. DZ, I've been going nuts with notes for days now and have been wondering how I'm going to formulate what's going on. Favor -- may I cut and paste your post as long as I give you credit?

    Love your posts and adore the babies,
    Jane

  4. #4
    Don replied to Jane on September 22, 2008 | Reply

    Absolutely, I would consider it a compliment!

  5. Greetings from MinnesOta! Excellent post! I just wish more people would open their eyes to the real danger the liberal left poses.

    They don't call it the RIGHT wing for nothing!

    -JD

  6. #6
    Pearl said on September 25, 2008 | Reply

    Oh come on stop it with Partisan BS already... remember "Divided we fall" don't let yourselve be corrupted.

    Heres is where the REAL blame lies:

    1: The people that took out Morgages they couldn't afford

    2: The Morgage lenders that gave the bad loans to the people who couldn't afford them

    3: Deregulation

  7. #7
    Don replied to Pearl on September 25, 2008 | Reply

    Pearl, you are ignoring the facts! The Democrats created the screwed up mortgage system and both Bush and McCain attempted to reform it and were stopped by Democrats. Could Bush and other Republicans have tried to do more? Sure, but, the primary blame lies squarely with the Democrats.

    Deregulation isn't to blame as much as plain old regulation which created incentives and requirements to make bad loans.

    While I certainly attribute blame to buyers and lenders, assuming no criminal action by them, one could argue they were just playing by the rules congress gave them.

  8. #8
    Linda said on September 26, 2008 | Reply

    Interesting...great research... I tried calling Dodd, Reid....etc today... their lines were busy. I'm tired of their pointing fingers (the lot of them!) I'm not surprised that good old Jimmy Carter had his hand in this somehow..

    As much as I hate it I know something has to be done and it's gonna cost US!
    I'm retired living on a fixed income and investments... always pay my bills on time... don't buy anything I can't afford... bought a smaller home even tho I'd like a bigger one. Never took out an equity loan to help pay for big screen HD TVs(still don't have one), cell phones, ipods, fancy cars....... and now I'm bailing someone out who will do this again if we let them.

    Personal responsiblity was and is missing here. On Main Street and Wall Street.

    These loans were made to people who couldn't afford them...but didn't YOU know that! WAKE UP people YOU are the reason we are in this mess!

    Thanks for letting me rant.
    L

  9. #9
    open wide said on September 30, 2008 | Reply

    Unfortunately Bushtard signed the Mortgage Forgiveness Debt Relief Act of 2007 removing the last incentive for borrowers to remain in "their" homes.

    This law should be replaced with the Patriotic Mortgage Repayment Act of 2008.

    The Patriotic Mortgage Repayment Act of 2008 - If a borrower defaults on a mortgage and the market value of the collateral is insufficient to repay the money borrowed, the Treasury will recover 105% of the residual amount using IRS collection methods and interest schedules. Such a law would prevent the general population from bailing out the speculators that purchased more house than they could reasonably afford.

    Flippers bought on margin. The general taxpayer owes them nothing.

  10. #10
    Don replied to open wide on October 1, 2008 | Reply

    I agree, but technically it's Bush-Democratic-Congress-Tards...although that's a little wordy.

    For those not aware, prior to the Mortgage Forgiveness Debt Relief Act of 2007, if someone borrowed $300,000 from a bank, and the next day the bank said, "Hey, just pay us back $200,000," obviously the individual just got $100,000 for free. Any idiot can recognize that $100,000 as income to the individual. Dept forgiveness is income and taxable by the IRS...always has been.

    Now, thanks to Bush-Democratic-Congress-Tards, not only do idiots who buy more house than they can afford get a gift from their bank if they "renegotiate" (also known as stealing...well, what would you call it if the bank forced you into paying more despite all the contracts they agreed to?), they also get a gift from you and me (aren't we nice) in the form of a full rebate of the tax owed on the income they made when their loan was "renegotiated." (OK, it's not actually a rebate...even better, they don't have to pay it in the first place.)

    I do disagree with "open wide" about the "flippers" comment as the Act is supposed to only apply to primary residences. So, it only applies to the poor who want to live like the middle-class, the middle-class who want to live like the wealthy, the wealthy who want to live like the super-wealthy and most of California who think a crappy little two-bedroom in a bad neighborhood should cost more than half-a-million dollars.

  11. #11
    Kristin said on October 21, 2008 | Reply

    Don, you are awesome! This information is awesome! Too bad people have trouble seeing past the facade of things, they see that because Bush is in office right now and this crisis must be his fault (and only his fault) because he is the president right now.

  12. #12
    Chris replied to Linda on November 4, 2008 | Reply

    Linda,

    Hi kettle, you're black.

    Signed, Pot.

    You're tired of pointing fingers? Why do you agree with another finger pointer, not to mention one who doesn't supply all the facts?

    You're right, though, about the fact that everyone's to blame. Except me, of course.

  13. #13
    robert bachman said on February 15, 2009 | Reply

    What about Bush's rubber stamp congress he could pass anything

  14. As I said in the post, Bush tried to pass legislation to correct the problem in 2003:

    In 2003, President George Bush tried to pass what the liberal New York Times described as, "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago"

    Could Bush have done more, and tried again and again and again to pass reforms, sure. But, the vast majority of the blame clearly lies with liberals, with Democrats and all those that opposed Bush's attempts at reform.

  15. #15
    Greg said on September 29, 2009 | Reply

    Excellent Analysis sir. I will be sending this link to absolutely everyone I know.

  16. Another sign that supports the possibility of a long-drawn-out recovery is the Federal Reserve’s resolve to keep rates down at 0 to 0.25 percent, the lowest benchmark rates have ever been, for a longer, indefinite period.

  17. Excellent post. Its a few years old, and it has all proved TRUE! As a real estate professional, it has always irked me that they teach in the licensing course that steps by the government to stop 'redlining' is an example of government success in promoting fair housing. Just posted to Facebook. N

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#1
How McCain Can Win from American Thinker

This crisis was created by policies enacted by the government, specifically Congress and the Clinton Administration. It can even be argued that significant responsibility goes all the way back to the Jimmy Carter and his Community Reinvestment Act of 1... Read More