The real culprits of the housing crisis go unpunished

Economically illiterate policymaking in Washington set the stage for the subprime mortgage meltdown

October 20, 2013|Robert L. Ehrlich Jr

Those of you who read my first book ("Turn This Car Around") will recall my indictment of the many contributors to our historic mortgage industry meltdown and worldwide recession, AKA "The greatest financial crisis since the Great Depression," per President Barack Obama.

The guilty (and greedy) included Wall Street rating houses that regularly awarded sub-prime or otherwise risky mortgage backed products their coveted AAA rating; the (formerly) powerful government sponsored enterprises, most notably Fannie Mae and Freddie Mac, that lowered their underwriting standards in order to purchase ever more low quality mortgages; brokers and other middle men who helped to steer marginal credit clients into obviously unaffordable mortgages; naive (or worse) consumers who freely secured unaffordable mortgages; and, of course, the big Wall Street investment banks that put together and sold toxic mortgage products to the world.

That these key players were instrumental in America's economic downturn is without question. Also without question is the significant damage (public and private, monetary and reputational) inflicted on so many of the industry's key players. Seems as though every week includes a new Securities Exchange Commission investigation, Justice Department probe, or multi-billion dollar settlement relating to a major Wall Street player.

But there is one group of miscreants who beat the rap. Not one of their ilk has been targeted for investigation. Neither has the media attempted to explore the depths of their culpability in significant detail. In fact, with precious few exceptions, these conspirators have been rewarded for their nefarious deeds.

I speak of government regulators and politicians. On the regulatory side, there was the 1990s era Department of Housing and Urban Development (HUD), the federal agency tasked with attaining so-called affordable housing goals. This they did, far too well in fact. An original portfolio goal of 30 percent sub-prime mortgages had increased to 56 percent prior to the economic collapse of 2008. And there was no more powerful Washington player than Fannie Mae. Their well compensated lobbyists were always around the House and Senate banking committees. Members of all stripes paid attention to their concerns. Their clout was unmatched where housing policy issues were at stake.

But the most influential promoters of affordable housing/sub-prime mortgages were the members of Congress who sold a willing public on what everyone seemingly wanted to hear – home ownership was within reach, necessities such as annual income, assets, and credit worthiness notwithstanding. In fact, three-quarters of all sub-prime/low quality loans were on the books of federal government agencies during the summer of 2008.

The brave few (mostly Republicans, and most notably Rep. Mike Oxley and Sen. John McCain) who sought to raise objections to the indulgent shenanigans of the political crowd were dismissed as obstructionists, racists, or both. I should know. I was a member of the House Banking Committee with a front row seat to the daily indictments (primarily race and class based) that were lodged against members of Congress who questioned the endless leveraging of dollars into mortgage finance. Accordingly, few dared trek down that path.

Indeed, the champions of this crusade were progressive Democrats, most notably the outspoken chairman of the House Banking Committee, Rep. Barney Frank of Massachusetts. Witness this beauty from a 2003 committee hearing:

"…[in] my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in crisis. ... I do not think at this point there is a problem with a threat to the Treasury. … I believe that we, as the federal government, have probably done too little [my emphasis] rather than too much to push them to meet the goals of affordable housing and to set reasonable goals. … I think we see entities [Fannie Mae and Freddie Mac] that are fundamentally sound financially and [could] withstand some of the disastrous scenarios. … The more pressure there is [on these companies], then the less I think we see in terms of affordable housing."

A few years later, Fannie and Freddie were belly up.

History will record many recriminations from the great financial crisis of the new millennium. Missing will be the long list of public officials who pedaled an economically illiterate version of the "American Dream" to millions of gullible consumers.

Yet a re-elected Obama administration has the usual suspects at it again. Fannie and Freddie are alive and looking to make new friends. The big bad investment banks continue to be regularly demonized by their former co-conspirators on the Hill. And new administration housing finance proposals have emerged that are eerily similar to the problematic "bad credit, no problem" programs of yesteryear.

Washington is pretty good at revisionist history. But the primary contributors to our housing bubble and subsequent sub-prime meltdown are obvious to all who care to look.

We ignore the lessons of the recent past at our own (considerable) peril.

Robert L. Ehrlich Jr.'s column appears Sundays. The former Maryland governor and member of Congress is a partner at the law firm King & Spalding. His new book, "Hope for Change," is due out later this year. His email is ehrlichcolumn@gmail.com.

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