Gary is an author, trial lawyer, Mequon-area resident and town of Cedarburg supervisor. He is a columnist for the News Graphic and writes for several Wisconsin area magazines and is a national columnist with The American Thinker and PJ Media. He lives with his wife, Lisa, and has three sons ages 18 to 28. Gary won Ozaukee County in his bid for the Wisconsin Assembly's 60th District in 2011, but came up just 58 votes short.
Some Democrats Never Learn
Earlier this month Bloomberg Businessweek reported that community activists in St. Louis were once hard at work ensuring the availability of "affordable housing" and rooting out the supposed evils of "redlining" – a practice the activists describe as not offering enough home mortgages to the city's poor and African-American residents. The St. Louis Equal Housing and Community Reinvestment Alliance – an organizational name any common sense lender employing sound lending practices would run from – finally got the attention of liberal bureaucrats at the U.S. Justice Department, who have begun , once again, targeting local home mortgage lenders for failing to issue mortgages or open branches in disadvantaged areas. How quickly the bleeding hearts responsible for devastating the U.S. and world economies have forgotten history. As a result, we are doomed to repeat it.
This time, a small St. Louis bank, Midwest BankCentre, is having to negotiate a settlement with the Justice Department for redlining – a term which today is used to describe a business which is "risk averse", i.e., for being a good, profit-oriented business. Midwest is also being targed for failing to open branch offices in minority and low-income census tracts near their branches, even when they have never done business there before, i.e., where they won't be profitable and where their employees will be robbed and mugged and their property will be vandalized and damaged. Beam me up Scotty! Requiring poor credit risks to have larger down payments and higher rates of interest has been good lending practice since the days of Henry Potter in It's a Wonderful Life. Today, it's a crime. And fighting this particular brand of crime is what ruined the U.S. economy just a few short years ago.
Who and what brought the world’s strongest economy to its knees? The answer is liberalism. It was government’s meddling in the free market system and the unintended consequences of warm feelings and good intentions – once again - which sent us into a freefall two short years ago. More of the same will not save us. It makes for good populist speeches to rail against the Henry Potters of the world and so-called "predatory" lending practices. People cheer, hope for more bailouts and giveaways, and even camp out on the lawns of Wall Street CEO’s. But if we take both a deep breath and a step back, I think we’ll see that the blame for our current economic woes does not lie with the private sector, capitalism, a lack of sufficient financial regulation, or the free market system – the usual suspects, according to the American Left. Rather it becomes clear that all along, the culprit was liberals in Washington. Well, they're back, and we haven't even recovered from the devastation they caused the first time around.
To clearly understand the cause of our economic woes, one must travel back to the genesis of the sub-prime crisis. Sub-prime mortgages are mortgages given at a higher interest rate to people who, according to traditional banking models, will not be able to repay the loan. They are known also as B-paper, near-prime, non-prime, or second chance mortgages. They are usually given away to poorer and minority borrowers with bad credit and who would not otherwise qualify for such a mortgage. Enter liberalism. These loans are given with little or no down payment, little or no closing costs, and frequently with adjustable rates which, unless the homeowner is able to continually refinance in an era of inflated housing prices and a booming economy, will eventually result in default of the loan. It’s not rocket science. It involves giving loans to people everyone knows cannot repay the loan. Nearly one-fifth of U.S. mortgages were sub-prime between 2004 and 2006. In Canada, that figure remained below 5%.
Fannie Mae was created in 1938 as part of FDR’s Progressive New Deal. Fannie Mae (short for Federal National Mortgage Association) was established as a “government-sponsored enterprise” (GSE) in order to provide local banks with access to federal dollars in an attempt to provide “affordable housing” for those who couldn’t afford mortgages. This led to the secondary mortgage market, where Fannie Mae borrowed from foreign governments at low rates and used the money to provide these sub-prime mortgages. Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing.
Freddie Mac (short for Federal Home Loan Mortgage Corporation), a similar GSE created in 1970 to avoid monopolization of the market, and Fannie Mae control over 90% of the secondary mortgage market. Their assets are nearly 50% greater than the nation’s largest bank, which is why when they started to be used as a liberal tool for social engineering, things went awry.
Naturally, it was Jimmy Carter and the Democrat Congress who put in place the Housing and Community Development Act of 1974. This populist legislation pressured private financial institutions to make risky loans to poor people – again for the purpose of providing “affordable housing” - loans which would not have been made using traditional banking and mortgage guidelines and practices. Well, those guidelines and practices were there for a reason – and it wasn't to discriminate against poor people. It was to make sure only people who could pay back their mortgages could own a home. But, of course, that is heartless and lacks compassion.
In 1995, Bill Clinton renewed efforts to force private mortgage companies and lender to create "affordable housing" for poor people and others who wouldn't qualify for traditional mortgages. Attorney General Janet Reno and Assistant Secretary for Fair Housing and Equal Opportunity Roberta Achtenberg implemented even more regulations focused on putting pressure on legitimate mortgage institutions to give more and more risky loans, and accused those who didn't of "redlining." Clinton directed HUD to work with leaders in the housing industry to implement something euphamistically referred to as the "National Homeownership Strategy," an unprecedented public-private partnership to increase home ownership beyond levels which were natural in a free market. This "strategy" contained 100 distinct action items, many of which were precisely causative of what later became the "Affordable Housing Depression of 2008." They include:
· Action 11: Remove barriers to mortgage financing for starter homes;
· Action 29: Alternative Approaches to Homebuying Transactions;
· Action 35: Home Mortgage Loan-to-Value Flexibility;
· Action 44: Flexible Mortgage Underwriting Criteria;
· Action 45: Public-Private Leveraging for Affordable Home Financing.
These were all liberal-speak for homebuyer welfare. And we now know the results.
Fannie and Freddie were government-backed buyers, able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans – as the liberals in Congress urged in order to achieve their “affordable housing” utopia - the mortgage markets would produce them. They had no choice. Wall Street and Madison Avenue were only doing what private markets do – following trends. In this case, the trend was set not by the free market, but by the long arm of the government intruding in a market it had no business in for the purpose of providing affordable housing welfare to people who could not afford them. It’s that simple.
In this way, the sub-prime market was forced onto private companies, as legitimate Wall Street mortgage lenders and brokers were compelled to buy the risky paper from Fannie Mae, who quickly became the leader in the market. Fannie Mae began buying subprime loans in 2001, and bundled them as securitized financial instruments. These securities were guaranteed by the government, so private mortgage companies – pressured by Washington to provide "affordable housing" or else – followed suit.
President George Bush was not fooled. In 2003 Bush proposed the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis, including a new agency to oversee Fannie and Freddie. The Democrats cried foul, and Democrats Barney Frank and Melvin Watt accused Bush of wanting this oversight committee so he could weaken the bargaining power of poorer families.
From 2001 to 2005, American homeowners took a ride on the world housing bubble. Home prices climbed and climbed, peaking in 2005. This rise in home prices masked the bad loans made by Fannie Mae and Freddie Mac, because even a foreclosure would leave the lender with property worth more than the loan amount taken out on it. Then the housing bubble burst. Values of residential property plummeted and more than 1.5 million people lost their homes and there were more than 8,000 new foreclosure filings every day. Suddenly the unintended consequences of the American Left’s good intentions were laid bare, and the Affordable Housing Depression of 2008 ensued.
Today, history is repeating itself. Legitimate lending institutions are once again being targeted and punished by an out-of-control federal government for following safe, common sense lending practices. Households with tarnished credit histories and/or difficult-to-document income sources have no business owning a home. Whether or not that sounds cruel or insensitive, it's just common sense. The quota industry may not like to hear it, but if a neighborhood is economically depressed, housing values are low, and property crimes are high, it is not good business to lend money in that neighborhood. It has nothing to do with black, brown, or white – only green. It's not racism or discrimination. It's good business. And forcing private companies to depart from good business practices is bad business for the United States. We know that now.
At the Justice Department, a new 20-person unit dedicated to "fair lending" received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, each of which threatens penalties that can reach into the millions of dollars. Despite what we know about recent history and the causes of the Affordable Housing Depression – the worst since the Great Depression – mindless bleeding hearts in Washington once again insist on heading toward a new economic mess, even before we've recovered from the old mess. They keep trying the same things over and over. What's that definition of insanity again?