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| Private lenders issued vast majority of sub-prime loans |
Did Fannie Mae, Freddie Mac Or The Community Reinvestment Act Cause the Recession
In the four years since the housing bubble burst, triggering a collapse in global financial markets whose value had been propped up through the repackaging and trading of home loans via complex financial instruments, there's been plenty of blame to go around. The Occupy Wall Street protests have called new attention to the root causes of the crisis, and led Republicans to reiterate their claim that government-backed lenders Fannie Mae and Freddie Mac were the primary villains. The facts about the subprime mortgage market prove that claim false: Private firms dominated the subprime market boom of 2004-06, and were not even subject to the 1977 Community Reinvestment Act some Republicans vilify. Thanks to decades of financial deregulation, capped by President Bush's decision to appoint Wall Street regulators who believed their job was to help banks rather than curb banking abuses, financial giants were able to turn the mortgage market into a high-stakes casino. As investigative reporters and Congress' Financial Crisis Inquiry Commission have all shown, it was deregulation mixed with irresponsible and potentially illegal practices by private firms on Wall Street that caused both the bubble and the collapse.
Republicans Blame The Financial Crisis On Fannie Mae, Freddie Mac, And Government Policy
Facts Show Private Lenders Who Were Not Subject To CRA, Not Government-Backed Ones Who Were, Drove The Subprime Mortgage Market
Deregulation Of Financial Markets And GOP-Appointed Absentee Regulators Paved The Way For The Subprime Bubble To Cause A Broad Collapse
"Financial Crisis Inquiry Commission" Expert Panel Found Wall Street Recklessness Caused The Crisis
Author Of Top Book On Financial Crisis Says There Is No Evidence For Blaming Either The CRA Or Fannie And Freddie
Republicans Blame The Financial Crisis On Fannie Mae, Freddie Mac, And Government Policy
Speaker Boehner: "Government Mortgage Companies...Triggered The Whole Meltdown." From House Speaker John Boehner's (R-OH) May 9, 2011, speech on Wall Street: "And the government mortgage companies that triggered the whole meltdown went untouched." [Boehner Remarks, 5/9/11]
Sen. Graham: "Fannie Mae And Freddie Mac" Were Behind "The Problem That Got Us Into This Mess." On the January 2, 2011, edition of NBC's Meet the Press, Sen. Lindsey Graham (R-SC) said: "[T]he financial regulation bill really left unattended Fannie Mae and Freddie Mac, and when you have government entities this large who own this much of housing, who've been pushing mortgages on people who couldn't afford to pay them, and you do nothing about it, it's pretty hard for me to say you've reformed the problem that got us into this mess. [...] To me, [the solution] is to get Fannie Mae and Freddie Mac in a, in a more privatized environment where risk/reward is, is, is more traditionally accepted. That--the American dream is to own a home you can afford. And to look at these entities and get more private-sector involvement and control who they lend money to and basically wind them down and make them more private." [Meet the Press, 1/2/11]
Sen. DeMint: "Liberal Housing Goals...Fueled The Housing Crisis." From Sen. Jim DeMint's (R-SC) blog: "Senator McCain has offered an amendment that would repeal their liberal housing goals that encouraged more risky lending and fueled the housing crisis, as well as end their dominance of the mortgage market and let the private sector back in. While more needs to be done to quickly end the permanent bailout of these mortgage giants, the McCain amendment is an important first step. True financial reform must include Freddie Mac and Fannie Mae. Congress cannot pretend to have ended 'too big to fail' without ending these out of control institutions." [DeMint.Senate.gov, 5/11/10]
Rep. Hensarling: "The Financial Crisis Was Caused By Failed Federal Policies" With Fannie And Freddie "At The Epicenter." From Rep. Jeb Hensarling's (R-TX) website: "The financial crisis was caused by failed federal policies that strong-armed, incented, and cajoled financial institutions into loaning money to people to buy homes that they couldn't afford to keep. At the epicenter of this were Fannie Mae and Freddie Mac." [Hensarling.House.gov, accessed 10/13/11]
At GOP Presidential Debate, Rep. Bachmann Blamed The Community Reinvestment Act And Fannie Mae And Freddie Mac For The Crisis. At the October 11, 2011, GOP presidential primary debate, Rep. Michele Bachmann (R-MN) said: "I think if you look at the problem with the economic meltdown, you can trace it right back to the federal government, because it was the federal government that demanded that banks and mortgage companies lower platinum-level -- level -- lending standards to new lows. [...] It was the federal government that pushed the subprime loans. It was the federal government that pushed the Community Reinvestment Act. It was Congressman Barney Frank and also Senator Chris Dodd that continued to push government-directed housing goals. They pushed the banks to meet these rules. And if banks failed to meet those rules, then the federal government said, we won't let you merge; we won't let you grow. There's a real problem: It began with the federal government, and it began with Feddie and -- Freddie and Fannie." [GOP Debate, 10/11/11, via CFR.org]
Facts Show Private Lenders Who Were Not Subject To CRA, Not Government-Backed Ones Who Were, Drove The Subprime Mortgage Market
Private Firms, Not Fannie And Freddie, Dominated The Subprime Mortgage Market
2007: The Collapse Of The Housing Bubble And Widespread Defaults On Subprime Loans Triggered A Banking Crisis That Led To A Massive Recession. From Slate: "The only near consensus is on the question of what triggered the not-quite-a-depression. In 2007, the housing bubble burst, leading to a high rate of defaults on subprime mortgages. Exposure to bad mortgages doomed Bear Stearns in March 2008, then led to a banking crisis that fall. A global recession became inevitable once the government decided not to rescue Lehman Bros. from default in September 2008. Lehman's was the biggest bankruptcy in history, and it led promptly to a powerful economic contraction. Somewhere around here, agreement ends." [Slate, 1/9/10, emphasis added]
The Subprime Market Surged From 2004 To 2006. As reported by McClatchy: "Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006." [McClatchy, 10/12/08]
From 2004 To 2006, Fannie And Freddie's Share Of Subprime Market Fell From Almost Half To Just Under One-Quarter. As reported by McClatchy: "But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership. Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication." [McClatchy, 10/12/08, emphasis added]
Fannie And Freddie Faced Tougher Regulatory Standards Than The Private Firms. As reported by McClatchy: "One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble." [McClatchy, 10/12/08]
2006: Private Firms Issued About Six Out Of Every Seven Subprime Mortgages. As reported by McClatchy:
Federal Reserve Board data show that:
More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics. [McClatchy, 10/12/08, emphasis added]
2008: The 15 Largest Subprime Servicers Were All Private Companies, Despite Large Drops In The Volume Of Their Subprime Business Compared To 2007. McClatchy prepared a graphic based on Inside Mortgage Finance data showing the 15 largest subprime service companies in 2008:
[McClatchy, 10/12/08]
"Conservative Campaign That Blames The Global Financial Crisis On A Government Push To Make House More Affordable" Is Disproved By The Data. As reported by McClatchy: "As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail. Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems. Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis." [McClatchy, 10/12/08, emphasis added]
Fannie And Freddie Don't Issue Loans, But Buy Them From Private Banks So Banks Can Continue Lending. As reported by McClatchy: "Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages. [...] Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans. It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more." [McClatchy, 10/12/08, emphasis added]
The CRA Didn't Apply To The Private Firms That Inflated The Subprime Bubble
Conservatives Blame The Community Reinvestment Act Of 1977 (CRA) For The Subprime Boom Of The Early 2000s. From former Director of the U.S. Treasury's Office of Thrift Supervision Ellen Seidman:
It has lately become fashionable for conservative pundits (Larry Kudlow, George Will) and disgruntled ex-bankers (Vernon Hill, for example, in his March 7 American Banker editorial) to blame the current credit crisis on the Community Reinvestment Act. This is patent nonsense. The sub-prime debacle has many causes, including greed, lack of and ineffective regulation, failures of risk assessment and management, and misplaced optimism. But CRA is not to blame.
First, the timing is all wrong. CRA was enacted in 1977, its companion disclosure statute, the Home Mortgage Disclosure Act (HMDA) in 1975. While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah. [...]
Second, CRA does not either encourage or condone bad lending. Bank regulators were decrying bad subprime lending before the turn of the millennium (see Interagency Guidance on Subprime Lending), and warning the CRA-covered institutions we regulated that badly underwritten subprime products that ignored consumer protections were not acceptable. Lenders not subject to CRA did not receive similar warnings. [New America Foundation, 9/22/08, emphasis added]
The CRA Did Not Affect The Vast Majority Of Subprime Loans. From Businessweek: "The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly.
