When it comes to reporting on the 2008 financial crisis, many journalists are experts at ignoring the elephant in the room: the government's role in spawning the crisis through perverse mandates and incentives. Peter Wallison, who predicted years earlier that mortgage giants Fannie Mae and Freddie Mac would run into trouble, highlights this in The Wall Street Journal. As he observes, on "the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days." But "any discussion of the government's central role in the disaster is neatly avoided. This historical airbrushing is something of a feat, given the facts." As he points out, "At the time of Lehman's failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac." But the media barely mentions this, as if "the vast majority of the subprime mortgages that the" government-sponsored mortgage giants "bought didn't exist." For example, they ignore the key role of the federal Department of Housing and Urban Development in causing the mortgage crisis:
In 1992, Congress adopted the ironically named Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act, giving HUD the authority to administer the legislation's affordable housing goals. The law required Fannie Mae and Freddie Mac, when they acquired mortgages from lenders, to meet a quota of loans to borrowers who were at or below the median income where they lived. At first, the quota was 30%, but HUD was authorized to raise the quota and over time it did, eventually requiring a quota of 56%. In those heady days, HUD was pleased with its work. In 2000, for example, when then-HUD Secretary Andrew Cuomo was raising the quota to 50%, the agency actually sounded boastful about its role. Describing the gains in homeownership that had been made by low- and moderate-income families, HUD noted: "most industry observers believe that one factor behind these gains has been improved performance of Fannie Mae and Freddie Mac under HUD's affordable lending goals. HUD's recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable housing." Credit scores or down payments were not relevant; only income and minority status would satisfy the goals. HUD was still at it in 2004, stating that "Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create." That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie. But then Lehman folded, and suddenly the government [changed its tune]. Instead, in 2010, the new HUD secretary, Shawn Donovan, told the House Financial Services Committee: "Seeing their market share decline [between 2004 and 2006] as a result of a change of demand, the GSEs made the decision to widen their focus from safer prime loans and begin chasing the non-prime market, loosening longstanding underwriting and risk management standards along the way."In short, HUD falsely depicted itself as an innocent bystander, rather than accepting its pivotal role in plunging Fannie and Freddie "headlong into the subprime abyss." But as Wallison notes, the reality was completely different from HUD's disingenuous, self-serving claims:
There is no doubt what really happened. Between 1997 and 2007, HUD's affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis. When it became obvious that government policy was at fault, even Barney Frank—at the time the chairman of the House Financial Services Committee and a principal backer of the affordable-housing goals—confessed that the policy had been misguided. On Larry Kudlow's CNBC show in 2010, Mr. Frank said: "I hope by next year we'll have abolished Fannie and Freddie. It was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it."Back in August 2008, even the liberal Village Voice recognized that HUD -- and Clinton's HUD Secretary Andrew Cuomo in particular -- had played a key role in spawning the financial crisis: "Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments." Pressure on the mortgage giants to dabble in risky loans was not limited to HUD. Democratic lawmakers joined in as well, judging from a story in The New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.” (which in fact happened, at enormous expense to taxpayers). The Obama administration doesn't seem to have learned anything from the financial crisis. It is still seeking to expand the homeownership rate through risky mortgage loans to people who may never be able to repay them. As The Washington Post reported in April, “The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that. . . skeptics say could open the door to the risky lending that caused the housing crash in the first place. . . . administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.” Banks have also been under pressure from lawmakers and regulators to give loans to minorities with bad credit in order to avoid liability for “racially disparate impact,” and to provide “affordable housing” and promote racial “diversity.” The Obama administration has ratcheted up such pressure, demanding that targeted banks make preferential loans to minorities with bad credit, notes Investor’s Business Daily CEI recently urged the Supreme Court to reject the Obama administration's attempt to expand the Fair Housing Act and federal credit laws to include race-conscious "disparate impact" rules. Such rules could hold lenders liable for using traditional, prudent lending criteria that have the unintended side effect of excluding a higher percentage of black borrowers than white borrowers, even if the lender has no racist intent and does not treat similarly situated minority borrowers worse.