Federal Government Was Culprit in Housing and Economic Crisis, Says Congressional Report

According to a Congressional Report, the federal government was a culprit in the Housing and Economic Crises.

Fannie Mae and Freddie Mac were the chief culprits in the housing crises because they encouraged people who could not afford payments on a house to take out mortgages anyway, says a congressional report released Tuesday.

The report says that the Community Reinvestment Act and other federal programs fed the housing bubble that burst in 2007 and led to the economic downfall in 2008.

The report explains in detail how FannieMae and Freddie Mac - government sponsored enterprises (GSE) that were not subject to the same oversight as other publicly traded firms - "privatized their profits but socialized their risks."

In the short run, the government was successful in its goal to raise the national homeownership rate. However, the ultimate effect created a mortgage tsunami that wrought devastation on the U.S. economy and American people.

"While government intervention was not the sole cause of the financial crises, its role was significant and has received too little attention," says the report.

The report mentions the Clinton Administration's National Homeownership Strategy, citing President Bill Clinton's directive to "lift America's homeownership rate to an all-time high by the end of the century."

The Clinton directive further suggested Freddie and Fannie reduce down-payment requirements and, "called for increased use of "flexible underwriting criteria," which it said could be achieved in concert with "liberalized affordable housing underwriting criteria." according to the report.

Fannie Mae and Freddie Mac made 54 percent of the "subprime" mortgage loans from 2002 to 2007, or about $1.9 trillion in mortgage loans to borrowers with credit scores lower than 660.

The report argues that lowered lending standards were the cause of the housing crises and did not exempt the Republicans or the Bush administration from blame. It said placing certain lending quotas for under-served populations allowed "both Democrat and Republican administrations to consistently make campaign promises to boost homeownership through government intervention in the market.

"Consequently, under both the Clinton and Bush administrations, Housing and Urban Development (HUD) dramatically increased these quotas, which reached their zenith when the Bush administration raised them to 56 percent, 27 percent and 39 percent, respectively," the report says.

"As home prices continued their dizzying rise, many people decided to cash in by buying a house with an adjustable rate mortgage featuring a low introductory teaser rate set to increase after a few years," the report continues.

"These borrowers, confident in the oft-cited assertion that U.S. home valueshad never before fallen in the aggregate, planned to sell or refinance their investment before the mortgage rate adjusted upward, pocketing the difference between the initial purchase price and the subsequent appreciation in value," says the report. "However, buyers failed to grasp the effect of a government policy that had quietly eroded the prudential limits on mortgage leverage, creating a danderous speculative bubble."

The report also talks about how Fannie Mae and Freddie Mac became a powerful lobby. Fannie Mae CEO Jim Johnson opened up "partnership offices" in congressional districts, hired relatives of members of Congress, and GSE employees contributed $15 million to federal political campaigns from 1998 to 2008. Throughout that time, all attempted reforms in Congress were blocked.

Also, in 1995, "Johnson seeded the Fannie Mae Foundation with $350 million of Fannie Mae stock. The company used this foundation to spread millions of dollars around to politically connected organizations like the Congressional Hispanic Caucas Institute," according to the report.

Fannie and Freddie were not subject to regulations, while executives were paid very well.

Former Fannie CEO Franklin Raines earned over $50 million in compensation during his six-years at the helm, the report says. Fannie and Freddie paid billions more to shareholders. "Thus, the government subsidizations of GSE operations amounted to little more than corporate welfare," the report says.

The report cited Raines accusations that to blame Fannie and Freddie is to blame only the lender and not the borrower.

"Responsibility for the erosion of mortgage lending standards, which began with government affordable housing policy, rests squarely on the policy makers who advocated these ill-conceived policies in the first place," the report says. Borrowers quite naturally responded to the incentives they were given, irrespective of their socioeconomic status, and risky lending spread to the wider mortgage market."

Here We Go Again

The report comes after Rep. Barney Frank (D-Mass.) - who fought against regulation of the two quasi-public (government and private) mortgage giants - and Rep. Anthony Weiner (D-NY) wrote a letter in June to Fannie and Freddie calling on the GSE's to lower lending standards on condo buyers.

Read the congressional report

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