Governmental regulation is when government tells you what to do. So our problem did not start with them not regulating the mortgages.

Boy, are we headed plum off the cliff. Wait and see. 

Democrats Behind CRA Cover-Up

by Ernest Istook (more by this author)

Posted 10/15/2008 ET

As always, it’s the cover-up that sinks people. Liberals are working overtime to cover up their role in the mortgage meltdown. Not only did they block attempts to reform Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac before they could drag down our economy, but liberals also abused the Community Reinvestment Act (CRA), turning it into a vehicle for directing loans to unqualified homebuyers.

The left knows that whoever shapes public understanding of what caused today’s economic crisis can shape America’s politics -- and its future -- for a great many years to come. Thus, they’re pushing the notion that too little government regulation was at fault.

If the country buys this idea, liberals can enact a carbon-copy of FDR’s response to the Great Depression, building a larger, more activist and ever-more-controlling federal government. They can exploit the mess by establishing a conventional wisdom that more government is the solution, rather than understanding how big government is a root cause of the current financial meltdown.

Claiming it all sprung from a lack of regulation is a half-truth, and a Yiddish proverb says a half truth is a whole lie. Over-regulation opened the money spigot by requiring lenders to make poorly underwritten loans. Under-regulation then allowed politicians to exploit that.

Although greed and dishonesty among both borrowers and lenders had major roles, the CRA and the GSEs were at the heart of what happened, setting up the now-toppled dominoes of Bear Stearns, Lehman Brothers, and others.

Over-regulation through CRA, aided by HUD, became a huge problem and, alas, wasn’t even addressed in the multi-billion dollar bailout. The Clinton Treasury Department’s tough new regulations in 1995 compelled the banks to engage in far-riskier lending practices or receive a failing CRA grade. To avoid an “F” from the CRA, which could jeopardize their viability, the banks were pressured to direct hundreds of billions of dollars in high-risk mortgages to inner-city and low-income neighborhoods. Moreover, under CRA pressure, banks would “hire” radical, non-profit groups like ACORN to find them customers. Once trillions of dollars began to flow, politicians and lobbyists tapped into this stream, and so did left-wing activist groups.

According to George Mason University’s Russell Roberts, the CRA was buttressed by other new regulations during the Clinton Administration. As Roberts writes, “For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42 percent of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50 percent in 2000 and 52 percent in 2005.

For 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be “special affordable” loans, typically to borrowers with income less than 60 percent of their area’s median income. That number was increased to 20 percent in 2000 and 22 percent in 2005. The 2008 goal was to be 28 percent.”

The banks were kept from rebelling by using Fannie Mae and Freddie Mac’s deep pockets to buy these poor-quality loans and take them off the banks’ books.

Under-regulation of the GSEs -- Fannie Mae and Freddie Mac -- allowed the money stream to widen and keep flowing. There has always been an implicit understanding that taxpayers would cover GSE losses and this enabled them to attract money and pour it into the CRA-induced sub-prime market. The Bush Administration had warned about this for years. Fannie and Freddie, however, could skim enough to pay for political protection, plus pay sky-high executive salaries and bonuses to well-connected political figures.

Over the past decade, Fannie and Freddie combined to spend a reported $200 million on lobbying and campaign contributions. Now bailing them out may cost taxpayers $200 billion directly, and far more indirectly.

The circle of political back-scratching centered around the theme of affordable housing, which the GSEs marketed heavily. Politicians wanted housing for low-income and poor credit risks, so they used Fannie and Freddie to further that objective, and the GSEs responded with campaign help for those politicians.

In return, politicians resisted reforms. This was demonstrated at a 2004 House hearing, where Rep. Maxine Waters (D.-Calif.) denounced attempts to stiffen oversight and regulation of this duo “so as not to impede their affordable housing mission, a mission that has seen innovation flourish, from desktop underwriting to 100 percent loans.”

“Desktop underwriting” meant undocumented loans. No proof of income or credit history required. And zero down payment.

Members of both parties were involved in protecting the system. But liberal Democrats were the dominant force.

Recently, House Financial Services Chairman Barney Frank (D-Mass.) told The Boston Globe, “[Republicans’] failure to regulate sensibly … endangered the economy and … burdened it with bad stuff.… Their own philosophy blew up in their face. They were so extreme in their insistence that there be no government intervention that they have wound up provoking far more government intervention than the Democrats ever would have.”

But Frank is covering up his own role because he sang a far different tune in 2003, when the Bush Administration and many Republicans (including Sen. John McCain) tried to require Fannie and Freddie to comply with Securities and Exchange Commission regulations and other additional oversight requirements. Treasury Secretary John Snow, in fact, had specifically warned Congress that Fannie and Freddie needed a new supervisory structure so that both institutions would “maintain capital and reserves sufficient to support the risks that arise or exist in its business.”

Rep. Frank was unconcerned. He told a hearing, “Fannie Mae and Freddie Mac are not in a crisis.” Rather, he said, they were “fundamentally sound,” and criticisms of them were unjustified exaggerations and “disaster scenarios.” Then he confirmed why: “The more pressure there is [to regulate] then the less I think we see in terms of affordable housing”

He wanted to continue both the giveaway train supplying mortgages to those who couldn’t afford them and the gravy train for politicians.

This appealed to liberals and in particular to the Congressional Black Caucus, which received six-figure support from both Fannie and Freddie in 2007.

The GSEs’ major campaign largesse went to well-placed friends in key positions. The top six from 1998 thru 2008, according to the Center for Responsive Politics:

Sen. Chris Dodd (D.-Conn.)     $165,400
Sen. Barack Obama (D.-Ill.)     $126,349
Sen. John Kerry (D.-Mass.)      $111,000
Sen. Robert Bennett (R.-Utah)  $107,999
Rep. Spencer Bachus (R.-Ala.) $103,300
Rep. Roy Blunt (R.-Mo.)          $ 96,950

And almost everyone in Congress got something.

The GSEs lobbied hard, too. Their combined lobbying budget averaged $17 million a year. As described by Rep. Chris Shays (R.-Conn.), “They hire every lobbyist they can possibly hire. They hire some people to lobby and they hire other people not to lobby so the opposition cannot hire them.”

But friends at the top were not enough. They needed them in every community, too. The Community Reinvestment Act guaranteed a steady stream of low-quality, but highly political, loans.

Congress passed the CRA in 1977 to combat “redlining,” a lending practice that prevented loans to minority communities.

Clinton Administration regulations in the ‘90s added teeth to CRA, requiring banks to show compliance with meeting low-income loan targets or face civil actions that could assess a $500,000 penalty for each violation. Banks were “encouraged” to comply by hiring community groups (including ACORN) who contracted with financiers to steer low-income applicants to their institutions.

As the Manhattan Institute’s Howard Husock wrote in 2000: “The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved.” The left created the system that paid its community organizers very handsomely, thanks to the regulations on the financial community.

As The Heritage Foundation’s J.D. Foster recently noted, “While a worthy cause, the net effect [of CRA] is often to encourage loans at lower credit standards and to encourage people to buy houses they really cannot afford.”

The net effect has also brought the economy to the brink of disaster. But unless the American public is told, re-told, and educated about how we got here, there won’t be reform of the bailed-out-but-still-alive GSEs nor of the CRA. Then we would witness more big government, giving us far more help than we can afford.