Once and for all, let’s get the facts straight about the 2008 recession, aka the Great Recession. We continue to see liberals claim that Bush’s economic policies caused the recession, which is ludicrous. There were several causes of the 2008 recession, but the main cause was disastrous federal intervention in the housing market, followed closely by Federal Reserve monetary policy and the unrealistic mark-to-market accounting requirements established by the Sarbanes-Oxley bill. Some facts:
* No one denies that toxic assets triggered the financial meltdown. But where did those toxic assets come from? No one denies that most of those assets were bad home loans (many of them subprime and alt-A loans). So how did we end up with so many bad home loans?
* In the 1995, the Department of Housing and Urban Development (HUD) established a target goal relating to the home ownership rate among low-income groups, which was eventually set at 70 percent. Then in 1999, HUD directed Fannie Mae and Freddie Mac to relax their requirement standards on mortgage loans, including a move toward sub- and non-prime loan approval, yet maintained their inability to make moves in the non-conforming market. During the 1990s, the GSE share of mortgage loans with high loan-to-value ratios rose from around 6 percent of purchases in 1992 to 19 percent in 1995.
* From 2001 to 2006, sub-prime loans increased from $120 billion (5.5 percent of U.S. mortgage originations) to $600 billion (20 percent of the U.S. mortgage market originations. The level of borrowing against equity in home mortgages increased from $130 billion (6 percent of the U.S. mortgage market) in 2001 to $430 billion (about 15 percent of the U.S. mortgage market) in 2006. Thus, the total level of non-prime home loans reached 48 percent of the mortgage market in 2006.
* The federal Credit Relief Act (CRA), which pressured lenders to make unwise home loans to low-income people, played a major role:
Let’s repeat some of these facts:
-- By 2005 HUD required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.”
-- From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in subprime and Alt-A loans. This amounted to about 40 percent of their mortgage purchases during that period. Moreover, Freddie purchased an ever-increasing percentage of Alt-A and subprime loans for each year between 2004 and 2007.
-- Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.
* Starting in 2004, Bush and Congressional Republicans realized that Freddie and Fannie’s intervention was becoming dangerous and problematic, and they sought legislation to restrain Freddie and Fannie, but the Democrats blocked all such legislation.
Bush and McCain Warned Democrats of Housing Crisis and Financial Meltdown
Democrats Covering Up Fannie and Freddie Scandal
Democrats Blocked Reform of Freddie and Fannie
* The fatally misguided mark-to-market standards imposed by Sarbanes-Oxley greatly contributed to the financial crisis:
Sources for further reading:
The Great Recession, 10 Years Later | Richard M. Ebeling
How Government Housing Policy Led to the Financial Crisis
Sarbanes-Oxley in the Light of the Financial Crisis
Congress Should Repeal or Fix Section 404 of the Sarbanes–Oxley Act to Help Create Jobs
The Government Did It
Did Deregulated Derivatives Cause the Financial Crisis? | Robert P. Murphy
Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery | Seeking Alpha
Five bad Clinton and Bush-era policies that caused the Great Recession
Fed study says Bush and the banks didn't cause the Great Recession. The Fed did - AEI
* No one denies that toxic assets triggered the financial meltdown. But where did those toxic assets come from? No one denies that most of those assets were bad home loans (many of them subprime and alt-A loans). So how did we end up with so many bad home loans?
* In the 1995, the Department of Housing and Urban Development (HUD) established a target goal relating to the home ownership rate among low-income groups, which was eventually set at 70 percent. Then in 1999, HUD directed Fannie Mae and Freddie Mac to relax their requirement standards on mortgage loans, including a move toward sub- and non-prime loan approval, yet maintained their inability to make moves in the non-conforming market. During the 1990s, the GSE share of mortgage loans with high loan-to-value ratios rose from around 6 percent of purchases in 1992 to 19 percent in 1995.
* From 2001 to 2006, sub-prime loans increased from $120 billion (5.5 percent of U.S. mortgage originations) to $600 billion (20 percent of the U.S. mortgage market originations. The level of borrowing against equity in home mortgages increased from $130 billion (6 percent of the U.S. mortgage market) in 2001 to $430 billion (about 15 percent of the U.S. mortgage market) in 2006. Thus, the total level of non-prime home loans reached 48 percent of the mortgage market in 2006.
* The federal Credit Relief Act (CRA), which pressured lenders to make unwise home loans to low-income people, played a major role:
Sizable pools of capital came to be allocated in an entirely new way. Bank examiners began using federal home-loan data—broken down by neighborhood, income, and race—to rate banks on their CRA performance, standing traditional lending on its head. In sharp contrast to the old regulatory emphasis on safety and soundness, regulators now judged banks not on how their loans performed, but on how many loans they made and to whom. As one former vice president of Chicago’s Harris Bank once told me: “You just have to make sure you don’t turn anyone down. If anyone applies for a loan, it’s better for you just to give them the money. A high denial rate is what gets you in trouble.” It’s no surprise, then, that as early as 1999, the Federal Reserve Board found that only 29 percent of loans in bank lending programs established especially for CRA compliance purposes could be classified as profitable. . . .
Was there a high enough level of CRA-related lending to spark our current crisis? Not on its own, of course. The crucial link was the extension of CRA-type thinking and regulation to the secondary mortgage markets through the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which buy loans from banks in order to provide liquidity. Beginning in 1992, the Department of Housing and Urban Development pushed Fannie and Freddie to buy loans based on criteria other than creditworthiness. These “affordable housing goals and subgoals”—authorized, ironically, by the Federal Housing Enterprises Financial Safety and Soundness Act—became more demanding over time and, by 2005, required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.” As one former Fannie Mae official puts it: “Both HUD and many advocates in the early 2000s were anxious for the GSEs to extend credit to borrowers with blemished credit in ways that were responsible”. . . .
But the CRA advocates, including the New York Times, continue to claim that CRA-qualified loans made by regulated financial institutions performed well and shouldn’t be implicated in our current troubles. They point to the results of an evaluation of CRA loans by North Carolina’s Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall. What they don’t mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act. There has been no systematic study, by either the Government Accountability Office or the Federal Reserve, of the performance of loans cited by banks in their CRA filings. Many such loans weren’t even underwritten by the banks themselves, which often purchased CRA-eligible loans (advertised in such publications as American Banker) and then resold them. Again, the emphasis was on showing regulators that loans were being made—not how they were performing. How could such a system not lead to problem loans and high delinquency and foreclosure rates? (The Financial Crisis and the CRA; see also The CRA Scam and its Defenders)
Was there a high enough level of CRA-related lending to spark our current crisis? Not on its own, of course. The crucial link was the extension of CRA-type thinking and regulation to the secondary mortgage markets through the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which buy loans from banks in order to provide liquidity. Beginning in 1992, the Department of Housing and Urban Development pushed Fannie and Freddie to buy loans based on criteria other than creditworthiness. These “affordable housing goals and subgoals”—authorized, ironically, by the Federal Housing Enterprises Financial Safety and Soundness Act—became more demanding over time and, by 2005, required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.” As one former Fannie Mae official puts it: “Both HUD and many advocates in the early 2000s were anxious for the GSEs to extend credit to borrowers with blemished credit in ways that were responsible”. . . .
But the CRA advocates, including the New York Times, continue to claim that CRA-qualified loans made by regulated financial institutions performed well and shouldn’t be implicated in our current troubles. They point to the results of an evaluation of CRA loans by North Carolina’s Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall. What they don’t mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act. There has been no systematic study, by either the Government Accountability Office or the Federal Reserve, of the performance of loans cited by banks in their CRA filings. Many such loans weren’t even underwritten by the banks themselves, which often purchased CRA-eligible loans (advertised in such publications as American Banker) and then resold them. Again, the emphasis was on showing regulators that loans were being made—not how they were performing. How could such a system not lead to problem loans and high delinquency and foreclosure rates? (The Financial Crisis and the CRA; see also The CRA Scam and its Defenders)
Let’s repeat some of these facts:
-- By 2005 HUD required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.”
-- From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in subprime and Alt-A loans. This amounted to about 40 percent of their mortgage purchases during that period. Moreover, Freddie purchased an ever-increasing percentage of Alt-A and subprime loans for each year between 2004 and 2007.
-- Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.
* Starting in 2004, Bush and Congressional Republicans realized that Freddie and Fannie’s intervention was becoming dangerous and problematic, and they sought legislation to restrain Freddie and Fannie, but the Democrats blocked all such legislation.
Bush and McCain Warned Democrats of Housing Crisis and Financial Meltdown
Democrats Covering Up Fannie and Freddie Scandal
Democrats Blocked Reform of Freddie and Fannie
* The fatally misguided mark-to-market standards imposed by Sarbanes-Oxley greatly contributed to the financial crisis:
Chief economist Brian S. Wesbury and his colleague Bob Stein at First Trust Portfolios of Chicago estimate the impact of the "mark-to-market" accounting rule on the current crisis as follows:
"It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What's most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality." (Suspend Mark-To-Market Now!)
"It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What's most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality." (Suspend Mark-To-Market Now!)
Sources for further reading:
The Great Recession, 10 Years Later | Richard M. Ebeling
How Government Housing Policy Led to the Financial Crisis
Sarbanes-Oxley in the Light of the Financial Crisis
Congress Should Repeal or Fix Section 404 of the Sarbanes–Oxley Act to Help Create Jobs
The Government Did It
Did Deregulated Derivatives Cause the Financial Crisis? | Robert P. Murphy
Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery | Seeking Alpha
Five bad Clinton and Bush-era policies that caused the Great Recession
Fed study says Bush and the banks didn't cause the Great Recession. The Fed did - AEI