http://www.cato.org/pubs/pas/pa655.pdf
A key weapon in the Cisneros arsenal wasthe Clinton administrations changes to theCommunity Reinvestment Act.
The CRA was passed in 1977 and updated in 1995 to pres-sure lenders into making more loans to mod-erate-income borrowers by allowing regula-tors to deny merger approvals for banks with low CRA ratings. Even complaints brough tby activists, such as the leftist group ACORN,were counted in a banks CRA rating.Under political pressure, banks began issu-ing more loans to otherwise uncreditworthyborrowers while purchasing more CRA mort-gage-backed securities.29
As housing financee xpert Peter Wallison noted, The most important fact associated with the CRA is the effort to reduce underwriting standards. . . .Once those standards were relaxed . . . they spread rapidly to the prime market and to subprime markets where loans were made bylenders other than insured banks.30
Business Week columnist Peter Coy noted that the Clinton administration went to ri-diculous lengths to increase the nationa lhomeownership rate. It promoted paper-thin down payments and pushed for ways to get lenders to give mortgage loans to first-timebuyers with shaky financing and incomes.31
The Clinton administrations approach was encapsulated by the 1994 National Home-ownership Strategy, prepared under Cisner-oss direction. Here is an excerpt from theplan:For many potential homebuyers, thelack of cash available to accumulate therequired downpayment and closingcosts is the major impediment to pur-chasing a home. Other households donot have sufficient available income tomake the monthly payments on mort-gages financed at market interest ratesfor standard loan terms. Financingstrategies, fueled by the creativity andresources of the private and public sec-tors, should address both of these finan-cial barriers to homeownership.32
The thrust is clear: if people dont have cashor income, the government will help them get a house anyway. In the political drive to increase the home ownership rate, old-fash-ioned ideas such as individual responsibilityand the riskiness of real estate investmentwhere thrown by the wayside. Apparently embarrassed by this 1994 strategy document,HUD removed it from its website after thehousing bubble burst in recent years.Coy notes that the George W. Bush admin-istration continued the practices becausethey dovetailed with his Ownership Societygoals, and of course Congress was stronglybehind the push.33
But it was the Clinton administration that launched the all-out driveto put people into homes that they could not afford. That helped plant the seeds for thehousing boom and bust in the followingdecade, as financial expert Joseph R. Masonnoted:The Strategy certainly helped somerenters achieve the dream of home-ownership. But the Strategy was alsofundamentally misused to extendmore credit to prime borrowers, fuel-ing home price inflation. That homeprice inflation led builders to buildever more developments, using creativefinancing to leverage their bets onhome price appreciation in the bubbleenvironment, ultimately resulting inrecord foreclosures in the present mar-ketplace.34
Cisneros planted another seed for the housing bubble and its subsequent burst byputting Fannie Mae and Freddie Mac underconstant pressure to facilitate more lending tounderserved markets.35
While Cisnerossown HUD administration acknowledged that mortgages financed by Fannie and Freddie inunderserved areas have a higher risk of default, it did not see that there need be anys afety and soundness impediment to the pol-6The thrust is clear: if people dont have cashor income, thegovernment will help them get ahouse anyway. --------------------------------------------------------------------------------
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icy.36
It was under the direction of Cisneros that HUD agreed to allow Fannie and Freddiecredit toward its affordable housing targets by buying subprime mortgages.37
After four years of introducing economic distortions into housing markets, Henry Cisneros spent most of his post-HUD careermaking money in those markets, as many ex-HUD officials do.
In 2000, Cisneros formed a housing development company in partner-ship with KB Homes and became a KB direc-tor. The KB board also included the formerCEO of Fannie Mae, James Johnson. The NewYork Times noted that it made for a cozy net-work.38 Indeed, Fannie Mae bought orbacked many of the mortgages that were inKB development projects.
In 2001, Cisneros joined the board ofFannie Maes biggest client, the now notori-ous Countrywide Financial, the companythat was center stage in the subprime lendingscandals of recent years. When the housingbubble was inflating, Countrywide and KBtook full advantage of the liberalized lendingstandards fueled by HUD under Cisneros. Inaddition to the money he received as a KBdirector, Cisneros company, in which heheld a 65 percent stake, received $1.24 mil-lion in consulting fees from KB in 2002.39When Cisneros stepped down from Coun-trywides board in 2007, he called it a well-managed company and said that he hadenormous confidence in its leadership.40
Yetone wonders whether Cinsneros was just try-ing to escape before the crash. Just days beforehis resignation, Countrywide announced a$1.2 billion loss, and reported that a third of itsborrowers were late on mortgage payments.41According to SEC records, Cisneros earned a$360,000 salary at Countrywide in 2006, andhe has gained $5 million from stock sales since2001.42
The Cuomo Years,19972001Andrew Cuomo joined the Clinton admin-istration as an assistant secretary of HUD in1993. He replaced Cisneros as secretary in1997, where he remained until the end ofClintons second term.
Cuomos housing poli-cies followed the same approach as his prede-cessorseeking personal publicity, panderingto special interest groups, and encouragingthose who were not financially suited for homeownership to nonetheless move into homes.Cuomo began cultivating his image atHUD as assistant secretary. In 1993, he orga-nized a lavish conference costing taxpayers$235,360 to announce a new anti-povertyprogram, and he flooded attendees with slo-ganeered shopping bags, HUD buttons, andglossy brochures. One observer called it arah-rah rally for Andrew Cuomo.43 Cuomodoubled the number of top-level staff mem-bers under him, and in one of his years asassistant secretary, he spent almost $1 mil-lion on travel. According to the Wall StreetJournal, the lavish spending on image-mak-ing . . . strained HUD budgets so much thatofficials have devised plans to pay some billsby diverting money from projects intendedto help people.44Being assistant secretary was a good job,but Cuomo wanted the top spot. He got hischance when Cisneros announced his inten-tion to resign after
Clinton was reelected in 1996. Seattle Mayor Norm Rice was thoughtto be Clintons first choice to replace Cisneros,but he was knocked out when HUD launchedan investigation into his possible misuse of afederal loan. The investigation, which waslaunched a week after the 1996 election, hadbeen approved by Cuomos office. The resultwas that Clinton went with Cuomo as secre-tary. Rice was later cleared, but the timing ofthe investigation and a leak to the press sug-gested involvement by Cuomo.
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