On Thursday, January 10, the new Consumer Financial Protection Bureau (CFPB), a by-product of the Dodd-Frank Wall Street Reform and Consumer Protection Act, released new mortgage rules for lenders. The rules are intended to prevent the sort of lending abuses that, beginning in the mid-90s, caused many borrowers to take out home loans that they had no ability to repay. The result was the real estate “bubble” and the ensuing financial crisis of 2007-08.
Under the new regulations, lenders are required to insure that:
- Borrower’s income and assets are sufficient to repay the loan;
- Borrowers must document their jobs and sources of income;
- Borrower’s credit scores must meet minimum standards;
- Borrower’s monthly payments must be affordable;
- Borrowers must be able to afford other debts associated with the property such as home equity loans;
- Borrowers must be able to afford all home-related expenses such as property taxes, upkeep, and maintenance; and
- Borrower’s income must be sufficient to cover other personal obligations such as student loans, car loans, and credit card payments.
Pardon me, but aren’t these the exact same practical considerations that mortgage lenders used to rely on back in the days before Democrats forced bankers to abandon them… buying millions of votes by simply requiring lenders to make loans to people with little or no ability to repay?
Richard Cordray, director of the CFPB, is quoted as saying, “When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.” Well, duh! Where was Mr. Cordray when Bill Clinton and other Democrats decided to do exactly what he warns against, secure in the knowledge that Fannie Mae and Freddie Mac would be there to bail out the numbskulls who were too dumb to know that they couldn’t afford the monthly mortgage payments? Cordray was 33 years old and a defeated congressional candidate when Bill Clinton was inaugurated, so he can hardly plead ignorance. Let’s take a look at the record.
The problem dates back to the Carter’s administration’s Community Reinvestment Act (CRA), which encouraged lenders to make loans to qualified borrowers who had previously been denied, based solely on the color of their skin. The CRA, designed to correct a terrible wrong, was intended to eliminate a practice called “redlining,” in which realtors and lenders discriminated against potential buyers in low-income and depressed neighborhoods, approving home loans for lower-income whites but not for middle or upper-income blacks.
Throughout the Reagan and Bush (41) years, between 1981 and 1993, the CRA was enforced in a straightforward manner. Lenders were encouraged to abandon the “redlining” practice and to meet the credit needs of all members of the community, consistent with sound lending practices.
However, when Democrats took back the White House in 1993, in the person of Bill Clinton, Democrats began to act like Democrats. They decided that the CRA, if strategically enforced with a political end in mind, could be a very effective carrot-and-stick operation. It provided a unique opportunity to “lock-in” the votes of those at the lower end of the economic spectrum.
Under the Clinton administration, regulators paid particularly close attention to whether or not lenders were meeting the credit needs of all borrowers in their local communities, regardless of borrowers’ ability to repay. With that information in hand, they used those finding to interfere in the normal business operations of banks… deciding whether or not to approve mergers and acquisitions, and whether or not to approve applications for new branch banks. Lenders soon found that the CRA was more stick than carrot.
As a result, lenders abandoned traditional lending criteria and made mortgage loans to almost anyone who walked in the door, regardless of their income level or credit worthiness. Under normal circumstances, no prudent lender would ever lend money to those with little or no ability to repay, but these were not normal circumstances. Two of the Democratic Party’s favorite patronage cesspools… Fannie Mae and Freddie Mac… were standing ready to buy up any and all mortgages. And why should Fannie and Freddie worry about the quality of the mortgages they bought? They had no reason to worry because, as quasi-public institutions, they had access to the cash assets of the American taxpayer… the U.S. Treasury.
Here’s how it worked. When a home buyer took out a home loan from a bank or a savings & loan association, the mortgage was then sold to what was known as a Government Sponsored Enterprise (GSE), i.e. Fannie Mae or Freddie Mac. Fannie and Freddie then bundled that loan with other sub-prime mortgages and sold the bundle to private investors… promising not only attractive returns, but a high degree of security as well. By year end 2010, Fannie and Freddie had acquired more than half of the $11 trillion mortgage loan market in the United States.
However, the sale of mortgages to private investors was not a totally arms-length proposition because, even though Fannie and Freddie had sold the bundled mortgages, they continued to have a financial interest in them. They guaranteed the securities for the investors, promising to continue making payments on the mortgages even if the homeowner stopped paying. In 2008, when the overheated real estate market collapsed and a great many homeowners stopped paying all at once, the cash reserves of Fannie and Freddie were soon depleted, forcing them to default on their guarantees and precipitating a major economic crisis.
One might ask, how could something like this happen directly under the noses of our political leaders without anyone taking notice? The fact is, shortly after taking office in 2001, the Bush administration did notice and took steps to reform Fannie Mae and Freddie Mac. In spite of an uninterrupted and unabashed attack on George W. Bush, insisting that he did nothing to forestall the Fannie and Freddie disasters, the facts are these: The Bush administration warned Congress of impending insolvency at Fannie Mae and Freddie Mac in April 2001, May 2002, November 2003, February 2004, August 2007, December 2007, March 2008, April 2008, May 2008, and June 2008. In addition, officials of the Bush administration testified before Congress, calling for reform of Fannie and Freddie, in September 2003, June 2004, April 2005, and February 2008.
In each instance the warnings were either ignored or were the subject of ridicule by Democrats who charged Republicans with opposing home ownership by the poor and minorities. Most often the push-back came from Senator Chris Dodd (D-CT), Chairman of the Securities and Investment Subcommittee of the Senate Banking Committee, the recipient of a sweetheart loan from Countrywide Financial, and Rep. Barney Frank (D-MA), Ranking Member of the Housing and Community Opportunity Subcommittee of the House Financial Services Committee. Not surprisingly, one of Frank’s homosexual partners, Herb Moses, was a high-ranking official of Fannie Mae at a time when he and Frank were “playing house” together on Capitol Hill.
What the Bush people apparently failed to understand was that Fannie and Freddie existed in a world of their own, a world in which Democrats who were either owed big favors, or who were being paid to keep their mouths shut for one reason or another, were well taken care of.
Franklin Raines, former Clinton White House budget director, who served as chairman and chief executive officer of Fannie Mae, took “early retirement” on December 21, 2004 after the Office of Federal Housing Enterprise Oversight accused him of participating in widespread accounting irregularities, including the shifting of losses so that senior Fannie Mae executives could earn maximum bonuses. Some $90 million was paid to Raines based on overstated earnings… earnings initially reported at $9 billion but later found to be in the neighborhood of $6.3 billion.
Tim Howard, Chief Financial Officer under Raines, was a former Senior Economic Advisor to Barack Obama. When Howard was terminated at Fannie Mae he walked away with a “golden parachute” reported to be worth approximately $20 million.
Jim Johnson, a former Lehman Brothers executive who headed Obama’s vice presidential search committee, is also a former Fannie Mae CEO who was forced to resign. Johnson’s 1998 Fannie Mae compensation was reported at between $6-7 million. In truth, it was $21 million.
And last, but not least, Bill Clinton’s former Deputy Attorney General, Jamie Gorelick, the woman who erected the infamous “Gorelick Wall” which prevented the CIA and the FBI from sharing intelligence that could have prevented the 9/11 attacks on the World Trade Center and the Pentagon. Gorelick resurfaced as Vice Chairman of Fannie Mae from 1997 to 2003. And although she had no training or background in finance, whatsoever, during the six years she worked at Fannie Mae she earned over $26 million.
In short, the financial crisis that our country now faces is almost exclusively the product of Democratic political excess. And now that a new federal bureaucracy has been created to fix the mess they created, we find Democrats taking a victory lap, patting themselves on the back and acting as if they’ve done something quite noble. They’re very much like the spoiled child who looks his parent squarely in the eye and says, “Who, me?” They have absolutely no shame.