[ExI] Sudden outbreak of democracy baffles US pundits

[Damien Broderick]

At 03:35 PM 10/4/2008 -0700, Spike wrote:

>My notion is that without knowing what caused the problem, it is
>impossible to know the right solution.
>
>I suspect this bailout solution will solve nothing, for it leaves in place
>the root cause: government requirements on banks to give out what they
>already know are bad loans.  I find plenty of good explanations in the
>internet commentary, but almost nothing in the mainstream press.

Here's another bite at that topic:

<http://www.mcclatchydc.com/251/story/53802.html>Private Sector 
Loans, Not Fannie or Freddie, Triggered Crisis
DAVID GOLDSTEIN and KEVIN G. HALL - McClatchy Newspapers


WASHINGTON -- 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.

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 vrom 2004 to 2006.

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.

The "turmoil in financial markets clearly was triggered by a dramatic 
weakening of underwriting standards for U.S. subprime mortgages, 
beginning in late 2004 and extending into 2007," the President's 
Working Group on Financial Markets reported Friday.

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.

"I don't remember a clarion call that said Fannie and Freddie are a 
disaster. Loaning to minorities and risky folks is a disaster," said 
Neil Cavuto of Fox News.

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.

This much is true. In an effort to promote affordable home ownership 
for minorities and rural whites, the Department of Housing and Urban 
Development set targets for Fannie and Freddie in 1992 to purchase 
low-income loans for sale into the secondary market that eventually 
reached this number: 52 percent of loans given to low-to 
moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners 
gave unsophisticated borrowers and unscrupulous lenders and mortgage 
brokers more chances to turn dreams of homeownership in nightmares.

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. 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.

During those same explosive three years, private investment banks - 
not Fannie and Freddie - dominated the mortgage loans that were 
packaged and sold into the secondary mortgage market. In 2005 and 
2006, the private sector securitized almost two thirds of all U.S. 
mortgages, supplanting Fannie and Freddie, according to a number of 
specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration 
pressured Fannie and Freddie, the private sector sold into the 
secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between 
2001 and 2007 galloped beyond anything ever seen, and that fueled 
demand for mortgage-backed securities, the technical term for 
mortgages that are sold to a company, usually an investment bank, 
which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage 
market, according to the Federal Reserve.

Conservative critics also blame the subprime lending mess on the 
Community Reinvestment Act, a 31-year-old law aimed at freeing credit 
for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and 
other restrictive banking practices that locked the poor, and 
especially minorities, out of homeownership and the tax breaks and 
wealth creation it affords. The CRA requires federally regulated and 
insured financial institutions to show that they're lending and 
investing in their communities.

Conservative columnist Charles Krauthammer wrote recently that while 
the goal of the CRA was admirable, "it led to tremendous pressure on 
Fannie Mae and Freddie Mac - who in turn pressured banks and other 
lenders - to extend mortgages to people who were borrowing over their 
heads. That's called subprime lending. It lies at the root of our 
current calamity."

Fannie and Freddie, however, didn't pressure lenders to sell them 
more loans; they struggled to keep pace with their private sector 
competitors. In fact, their regulator, the Office of Federal Housing 
Enterprise Oversight, imposed new restrictions in 2006 that led to 
Fannie and Freddie losing even more market share in the booming 
subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. 
The investment banks don't, nor did the now-bankrupt non-bank lenders 
such as New Century Financial Corp. and Ameriquest that underwrote 
most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing 
them to be regulated by 50 different state banking supervisors 
instead of the federal government. And mortgage brokers, who also 
weren't subject to federal regulation or the CRA, originated most of 
the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal 
Reserve Bank of San Francisco, debunked the notion that the push for 
affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the 
CRA have not been higher-priced loans," she said. "The CRA has 
increased the volume of responsible lending to low- and 
moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, 
the late Federal Reserve Governor Ed Gramlich wrote that only 
one-third of all CRA loans had interest rates high enough to be 
considered sub-prime and that to the pleasant surprise of commercial 
banks there were low default rates. Banks that participated in CRA 
lending had found, he wrote, "that this new lending is good business."