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We have all heard repeatedly from Obama these last few days, how the current home lending crisis is the fault of George Bush. While Bush has thrown his own logs onto this fire, Bush cannot be help responsible for the creation of this mess we are in today.

In November of 2003, Allen J. Fishbein, Director For Housing and Credit Policy, Consumer Federation of America, testified before a House subcommittee on the history and the exposure of subprime lending in America. In his testimony, he highlights several key areas :

From Credit Gatekeeper to Credit Peddler — Subprime lending specialists are subjected to less scrutiny than banks and other depository institutions, making this market a fertile ground for predatory lending practices;

Lending without regard to a borrower’s ability to repay. Instead of establishing the borrower’s ability to pay, predators underwrite the property and charge very high origination and other fees that are not related to the risk posed by the borrower.

From 1993-1999, the number of loans reported by subprime specialists increased tenfold from 104,000 subprime refinance loans in 1993 to 1 million in 2000. In 1994 , the $35 billion in subprime mortgages represented less than 5 percent of all mortgage originations. By 2002, subprime lending had increased to $213 billion to 8.6 percent of originations in a high volume refinance year (subprime originations in recent years have represented as much as 13 percent of the mortgage market).

The Fishbein Testimony

How did we get there ? We can begin by taking a look at the reform of the Community Redevelopment Act (CRA) of 1993, by President Bill Clinton. This reform was credited with increasing the number of loans to small businesses and to low and moderate income borrowers for home mortgages. Much of the increase in home loans was made possible by lenders such as Countrywide, who do not offset loan risk exposures with savings deposits as is the case with traditional lenders, such as your corner bank. This created a secondary market for for home loans, and allowed CRA sub-prime loans to flourish. The first securitization of CRA loans began in October 1997, by Bear Sterns.

The door was now open. In the period of 1993-1998, CRA loans grew by 39%, while traditional loans grew by 17%.

White House Press Briefing on CRA Reform

Bush’s contribution to this mess was a rush, early in his administration, to provide the “American Dream” of home ownership to anyone who wanted one, independent of financial qualifications. We know now that this policy has it’s price.

Fannie Mae also played heavily in the sub-prime lending arena, following Bear Sterns, and Lehman Brothers toward financial ruin. As the Washington Post recently reported :

In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.
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Since then, Fannie Mae’s exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

Read Story at Washington Post

This prediction missed by an Alaska mile : “that they would get better in 2007″.

Credit must be given to Bush for an attempt to fix this in 2003 :

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
Full Story

Much of Fannie Mae’s problems occurred on the watch of Franklin Raines, Fannie Mae’s CEO.

Mr. Raines, former Clinton Budget Director, currently serves as economic adviser to Barack Obama.

John McCain also discusses Mr. Raines Here

This entry was posted on Wednesday, September 17th, 2008 at 11:35 pm and is filed under Campaign 2008, Economics, Obama files. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.