Mixing politics and mortgage policy is like mixing oil and water.
While corruption and undue influence are not entirely the province of Democrats, the overwhelming control of this area of the economy was due to the machinations of Democratic politicians.
“Social justice” aspirations of politicians resulted in the meltdown, which, it is well documented, was clearly warned against. Private business followed the lead of government policy, both due to pressure…and due to greed.
From the Village Voice analysis of Fannie and Freddie:
Andrew Cuomo and Fannie and Freddie - Page 1 - News - New York - Village Voice
1. There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.
2. 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. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans.
3. Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth….the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK's footsteps.
4. [Democratic Housing and Urban Development Secretary] Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice. Cuomo's predecessor, Henry Cisneros, did that [set new goals for HUD] for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income."
5. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory….Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals….Moody's…senior analyst, Stanislas Rouyer, said the expansion into subprime loans and the lower level of documentation that came with them could mean that Fannie 's loss levels would increase in the future. Steven Holmes, a reporter from the Times's Washington bureau, wrote at the time: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk,…
6. Fannie also developed a "flexible" product line, providing up to 100 percent financing and requiring borrowers to make as little as a $500 contribution, and bought $13.7 billion of those loans in 2003. In addition to subprime loans and securities, both banks burst into the "alt-a" market, making alternative products easily available to borrowers who had slightly better credit histories than subprime borrowers, but were unwilling to provide full documentation of their financial histories. (It was the "alt-a" investments that recently brought down the private bank IndyMac.) These risky adventures…”created tension in its business practices between meeting the goals and conducting responsible lending practices…"
7. The Washington Post noted this June that the GSEs' aggressive acquisitions "created a market for more such lending" by others, feeding the fire. That June Post story focused its critical reassessment of HUD's affordable-housing goals on the department's 2004 decision—during the Bush re-election campaign—to juice them up again, pushing the target to 56 percent by 2007,… [Cuomo’s increases] exceeded Bush's more gradual six-point increase.
8. [Cuomo’s HUD] rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were….when Cuomo issued his rules barely a week before the 2000 election, he failed to put any data demands in place that would have alerted the next administration, regardless of who it was, to any risks in the new GSE portfolio. In fact, Bush's HUD did institute some reporting requirements in 2004, but then never revealed much of what was learned….Cuomo decided without explanation to adopt rules that prohibited nothing.
9. But Cuomo was closer to the GSEs' most formidable opponents—namely, the Mortgage Bankers Association (MBA), regarded as the most influential private real-estate finance lobby in Washington, and the upstart FM Watch, a new coalition of heavyweights from Chase to AIG. Both of these groups wanted Cuomo to put as much affordable-housing pressure on the GSEs as he could, and they said so in their releases and newsletters…. he was also being pushed to commit the GSEs to more affordable and, in some cases, riskier loans by consumer organizations—groups like ACORN, which has considerable clout in New York elections.
10. [Cuomo’s] MBA alliance went well beyond the GSEs—in particular, the steps he took to reshape the Federal Housing Administration, which guarantees millions of mortgages. These actions, too, sought to maximize homeownership—this time by opening the FHA's door to borrowers unable to qualify in the past, a lofty goal that has also helped spur an FHA delinquency rate that exceeds its subprime competitors. The MBA cheered each of these Cuomo decisions—dramatically raising the limits on the size of FHA loans, slicing the down-payment requirement to 3 percent, and cutting the agency's insurance-premium costs virtually in half. Cuomo even supported down-payment and closing-cost assistance programs that allowed FHA borrowers to buy a home without spending a cent of their own money up front.
11. To the MBA, bigger FHA guarantees on the loans that MBA members granted, combined with easier terms, was a recipe for greater profits. That's why Cuomo announced the insurance cut at their convention shortly before he left office….he raised the [FHA] loan limits, eventually nearly doubling them to $235,000.
12. [Yield-spread premiums are] outrageous payments to brokers—which are based on the "spread" between the high interest rate that brokers persuade unwary borrowers to accept and the par or going rate they would ordinarily have to pay….it was Cuomo who issued a rule in 1999 that dozens of federal courts have since found legalized the yield-spread premiums. He was the first HUD secretary to say they were "not illegal per se,"… There are certainly those who believe that YSPs are at the heart of the crisis…. prodded by the fact that up to 90 percent of subprime mortgages quietly triggered these lucrative payments…a Times editorial charged …”the practice whereby brokers maximize their commissions by signing up borrowers for the most expensive loan possible, even when the borrower qualifies for a cheaper."
13. The sad fact is that Cuomo's surrender on YSPs can't be excused as an unfortunate consequence of well-motivated policy, as his defenders have argued regarding his FHA and GSE actions. He has no cover for this one; it exposes him as an agent of special interests. And looking at his GSE and FHA policies through the lens of his retreat on these payoffs (which even Glaser, in a marked change from his MBA days, now condemns) suggests a pattern of compromised judgments.
While corruption and undue influence are not entirely the province of Democrats, the overwhelming control of this area of the economy was due to the machinations of Democratic politicians.
“Social justice” aspirations of politicians resulted in the meltdown, which, it is well documented, was clearly warned against. Private business followed the lead of government policy, both due to pressure…and due to greed.
From the Village Voice analysis of Fannie and Freddie:
Andrew Cuomo and Fannie and Freddie - Page 1 - News - New York - Village Voice
1. There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.
2. 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. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans.
3. Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth….the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK's footsteps.
4. [Democratic Housing and Urban Development Secretary] Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice. Cuomo's predecessor, Henry Cisneros, did that [set new goals for HUD] for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income."
5. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory….Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals….Moody's…senior analyst, Stanislas Rouyer, said the expansion into subprime loans and the lower level of documentation that came with them could mean that Fannie 's loss levels would increase in the future. Steven Holmes, a reporter from the Times's Washington bureau, wrote at the time: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk,…
6. Fannie also developed a "flexible" product line, providing up to 100 percent financing and requiring borrowers to make as little as a $500 contribution, and bought $13.7 billion of those loans in 2003. In addition to subprime loans and securities, both banks burst into the "alt-a" market, making alternative products easily available to borrowers who had slightly better credit histories than subprime borrowers, but were unwilling to provide full documentation of their financial histories. (It was the "alt-a" investments that recently brought down the private bank IndyMac.) These risky adventures…”created tension in its business practices between meeting the goals and conducting responsible lending practices…"
7. The Washington Post noted this June that the GSEs' aggressive acquisitions "created a market for more such lending" by others, feeding the fire. That June Post story focused its critical reassessment of HUD's affordable-housing goals on the department's 2004 decision—during the Bush re-election campaign—to juice them up again, pushing the target to 56 percent by 2007,… [Cuomo’s increases] exceeded Bush's more gradual six-point increase.
8. [Cuomo’s HUD] rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were….when Cuomo issued his rules barely a week before the 2000 election, he failed to put any data demands in place that would have alerted the next administration, regardless of who it was, to any risks in the new GSE portfolio. In fact, Bush's HUD did institute some reporting requirements in 2004, but then never revealed much of what was learned….Cuomo decided without explanation to adopt rules that prohibited nothing.
9. But Cuomo was closer to the GSEs' most formidable opponents—namely, the Mortgage Bankers Association (MBA), regarded as the most influential private real-estate finance lobby in Washington, and the upstart FM Watch, a new coalition of heavyweights from Chase to AIG. Both of these groups wanted Cuomo to put as much affordable-housing pressure on the GSEs as he could, and they said so in their releases and newsletters…. he was also being pushed to commit the GSEs to more affordable and, in some cases, riskier loans by consumer organizations—groups like ACORN, which has considerable clout in New York elections.
10. [Cuomo’s] MBA alliance went well beyond the GSEs—in particular, the steps he took to reshape the Federal Housing Administration, which guarantees millions of mortgages. These actions, too, sought to maximize homeownership—this time by opening the FHA's door to borrowers unable to qualify in the past, a lofty goal that has also helped spur an FHA delinquency rate that exceeds its subprime competitors. The MBA cheered each of these Cuomo decisions—dramatically raising the limits on the size of FHA loans, slicing the down-payment requirement to 3 percent, and cutting the agency's insurance-premium costs virtually in half. Cuomo even supported down-payment and closing-cost assistance programs that allowed FHA borrowers to buy a home without spending a cent of their own money up front.
11. To the MBA, bigger FHA guarantees on the loans that MBA members granted, combined with easier terms, was a recipe for greater profits. That's why Cuomo announced the insurance cut at their convention shortly before he left office….he raised the [FHA] loan limits, eventually nearly doubling them to $235,000.
12. [Yield-spread premiums are] outrageous payments to brokers—which are based on the "spread" between the high interest rate that brokers persuade unwary borrowers to accept and the par or going rate they would ordinarily have to pay….it was Cuomo who issued a rule in 1999 that dozens of federal courts have since found legalized the yield-spread premiums. He was the first HUD secretary to say they were "not illegal per se,"… There are certainly those who believe that YSPs are at the heart of the crisis…. prodded by the fact that up to 90 percent of subprime mortgages quietly triggered these lucrative payments…a Times editorial charged …”the practice whereby brokers maximize their commissions by signing up borrowers for the most expensive loan possible, even when the borrower qualifies for a cheaper."
13. The sad fact is that Cuomo's surrender on YSPs can't be excused as an unfortunate consequence of well-motivated policy, as his defenders have argued regarding his FHA and GSE actions. He has no cover for this one; it exposes him as an agent of special interests. And looking at his GSE and FHA policies through the lens of his retreat on these payoffs (which even Glaser, in a marked change from his MBA days, now condemns) suggests a pattern of compromised judgments.
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