Obama Administration Mandates More of the Risky Loans That Spawned the Mortgage Crisis

by Hans Bader on September 10, 2010 · 5 comments

in Bailout Watch, Economy, Employment, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

The federal government is now expanding the affordable-housing mandates that helped spawn the mortgage crisis by goading mortgage giants Fannie Mae and Freddie Mac to buy up (and create a market for) risky mortgage loans.  Edward Pinto explains in an article at Bloomberg News entitled “Subprime 2.0 Is Coming Soon to a Suburb Near You.”

Affordable-housing mandates adopted under the Clinton administration led to the mortgage meltdown, by encouraging lenders to lend money to people with poor credit even without any substantial down payment, and giving Fannie Mae and Freddie Mac a powerful incentive to buy up the resulting risky loans.  But the Obama Administration has learned nothing from this.  As Pinto notes, “in early September 2010,” it “finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout. . . these new goals almost exclusively relate to very low- and low- income borrowers. Meeting these goals will necessitate a return to dangerous minimal down-payment lending, along with other imprudent lending standards.”  Moreover, over Republican objections, the Dodd-Frank financial “reform” bill, “signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage.”

(Dodd-Frank does nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” As Government-Sponsored Enterprises, Fannie and Freddie were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their risky mortgages started defaulting.)

In the long run, we will all pay a price for this foolish policy of getting rid of prudent lending standards. As Pinto notes, “Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble – surprise! — but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.”

Getting rid of prudent lending standards was partly the result of politically-correct claims that requiring a down payment or decent credit history was racially discriminatory.  As economics professor Stan Liebowitz notes, in the 1990s, there was an “intentional loosening of underwriting standards—done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.”  This preoccupation with race continues in the Obama administration today, where the Obama Administration’s HAMP program “requires lenders to guess the races of clients who refuse to classify themselves.  Mortgage servicers are now expected to record the race of all their clients — including those expressly unwilling to provide one.” The federal government recently also took the position that it is racially discriminatory for employers to refuse to hire felons — even if the employer evenhandedly excludes all felons regardless of race.

Me September 10, 2010 at 6:38 am

Obama also is ramping up enforcement of another law that mandates risky lending, the Community Reinvestment Act. The Dodd-Frank law creates a new "consumer protection" agency to enforce it without regard to banks' safety and soundness.

See here: http://www.openmarket.org/2009/06/17/obama-seeks-

Reader September 19, 2010 at 10:58 am

Ed Pinto's depressing article seems incontrovertibly true — no one has even attempted to rebut it since it came out.

Reader September 19, 2010 at 10:59 am

The new Bureau of Consumer Financial Protection contained in the Dodd-Frank law will make things even worse.

Plain Truth September 21, 2010 at 1:35 pm

And, of course, we the taxpayers will ultimately pay for those risky loans, by bailing out the people who receive them.

Like right now, when the government is bailing out certain favored irresponsible underwater borrowers who didn't save their money:

http://www.openmarket.org/2010/09/07/you-were-a-s

Transylvanian October 2, 2010 at 9:57 am

The Dodd-Frank law is proving to be a political loser.

The law's sponsor, Barney Frank (D-MA) is in a tight race despite being in a strongly democratic district — weighed down by his law's failure to reform Fannie Mae and Freddie Mac, and the fact that he was heavily responsible for letting those publicly-chartered mortgage giants spawn the financial crisis.

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