Government’s Role in the Financial Crisis

Clementine

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The left still doesn't get it. They have no faith in people. They only believe that politicians are honest.

Truth is that companies and banks do what they are allowed to do. In the case of the financial meltdown, banks were ordered to offer subprime mortgage loans. That was the beginning of the mess that led to the meltdown. Many knew long before it happened. Republicans tried to investigate the practices of Freddie and Fannie and the Dems stood in their way and literally yelled at them for wanting more regulations and oversight. Experts knew that Clinton's resuscitation of Carter's Community Reinvestment Act was a disaster in the making. Dems refused to change the dangerous practices that led to toxic loans flooding the market. Dems, and especially senator Obama, were using F and F as their personal slush fund. Once the well ran dry, they immediately started pointing fingers at the other banks who were forced to make the loans. Fannie and Freddie, with the help of even more tax payer money, resumed the same practices that led to the mess.

It is the Dems fault. They wanted to appease their base and still manage to create a crisis that would lead to increased government control. They loved the meltdown because it gave them an excuse to transfer more power. In the past, we recovered much faster from depressions. Of course, the leaders and congress in the past actually wanted a recovery. Obama used the crisis to help his fundamental transformation.



"Wallison’s in-depth, data-driven analysis offers a very different story from the prevailing and oft-repeated narrative of corporate greed. His conclusion? The financial crisis could not have occurred if not for a series of fundamentally flawed government policies.

Wallison traces the roots of the crisis back to 1992, when the Housing and Community Development Act was signed into law. The bill enacted new "affordable housing goals" for two giant government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.

The Department of Housing and Urban Development (HUD) began requiring Fannie and Freddie to meet a certain quota of loans to low-income and moderate-income borrowers (LMI borrowers) when they purchased mortgages, which required them to devote a certain proportion of their mortgage purchases to lower-income borrowers. While at first this quota stood at 30 percent, HUD gradually raised the standards, such that by 2001, half of all the loans Fannie and Freddie acquired had to have been issued to LMI borrowers.

As HUD continued to raise the quota beyond 55 percent, it also increased certain base goals requiring the GSEs to hit a target number of borrowers qualifying as "underserved" (such as residents of minority areas). Finally, in 2004, HUD added "sub-goals" mandating that affordable housing goals credit be provided only for home purchase mortgages, as opposed to crediting both refinancings and purchases.

Collectively, the LMI quotas, expanded base goals, and additional sub-goals dramatically narrowed the scope of loans that the GSEs could purchase, making it exceedingly difficult for them to find creditworthy borrowers. As a result, Fannie and Freddie were forced to substantially reduce their underwriting standards.

Before 1992, Fannie and Freddie would buy only prime or traditional mortgages. These typically required at least a 10 percent down payment, a low debt-to-income ratio (DTI), and a solid credit history. Mortgages not meeting these standards were called "subprime" if the weakness in the loan was caused by the borrower’s credit standing, and were called "Alt-A" if the problem was the quality of the loan itself.

By 1995, they were accepting mortgages with 3 percent down payments, and by 2000 loans with no down payments. Since the GSEs’ size—by 2003 their market share was 46.3 percent—allowed them to dictate underwriting standards for lenders, loan quality deteriorated throughout the middle-class mortgage market. By 2008, half of all mortgages in the U.S.—31 million loans—were subprime or Alt-A. Of these, 76 percent were on the books of GSEs and other government-controlled institutions.

The abundance of easy credit brought in a huge influx of buyers, consequently sparking one of the largest housing bubbles in U.S. history. Home values appreciated, defaults declined, and the market appeared safe. Throughout, Fannie and Freddie downplayed their risk exposure by misrepresenting the actual number of subprime and Alt-A mortgages they’d purchased. Managers at the two GSEs have since been sued by the Securities and Exchange Commission for these actions.

The GSEs, then, not only prompted a proliferation of risky mortgages, but also knowingly instilled a false sense of security in the market.

The mistakes did not end with HUD or the GSEs; Wallison mentions how additional government action—including burdensome regulatory intervention, the bailout of Bear Stearns, and the preservation of mark-to-market accounting rules—exacerbated early problems. From start to finish, government policy was at the heart of the crisis.

Wallison’s findings sharply contradict the conventional narrative of reckless speculation, rampant greed, and government rescue. His story tells instead of a government whose actions lured the private sector into perdition and who then blamed the private sector for the collapse."



Government’s Role in the Financial Crisis

http://dailysignal.com/2015/02/27/governments-role-financial-crisis/?utm_source=facebook&utm_medium=social&utm_campaign=thf02272015FINANCIALCRISIS
 

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