FreedomWorks has done an excellent, well-documented analysis of the roots of the current economic crisis. Their analysis begins in 1913 with the passage of the income tax law and the ability to deduct mortgage interest to encourage the assumption of debt by Americans in the purchase of a home, and continues through October of 2008 when the crisis was fully upon us. Anyone interested in how we got here should read this analysis.

Excerpts:

1965 – The Department of Housing and Urban Development (HUD) is created.

HUD and FHA insure loans for borrowers with insufficient credit, thereby driving down interest rates for low-income borrowers and artificially increasing the amount of housing produced and sold.

1977 – The Community Reinvestment Act (CRA) becomes law

and requires banks to loan to the areas where the banks are located, regardless of the eligibility of potential borrowers. To enforce the statute, government agencies take the information they gather on the banks into consideration when deciding to approve applications for new bank branches or for mergers or acquisitions.

1992 The Clinton Presidency Begins

Government weakens bank lending standards. A now-discredited study published by the Boston Federal Reserve enables Government Sponsored Enterprises Fannie Mae and Freddie Mac to accept lower underwriting standards for mortgages they are seeking to purchase, so they may expand their portfolios, enable private banks to make more loans and influence the housing sector.78

At the same time, Congress weakens Fannie and Freddie standards. The Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) is passed into law. This act mandates that the GSEs increase their acquisition of bank loans made to risky and lower income borrowers. GSE Fannie Mae announces a trillion dollar commitment. Banks know they can meet CRA requirements by giving these loans, and that they will be able to pass the risk of such loans on to the implicitly taxpayer-backed Government Sponsored Enterprises, so they make lower quality loans.

Also in 1992, Countrywide, Wachovia, and others pushed by Federal Reserve publications and other regulations begin loaning to clients with no or bad credit. Lenders are able to pass on the added risk of these loans by selling them to the GSEs, who guarantee, repackage, and sell them as securities with the implicit backing of the government in the case of default.

2003 Corruption at Fannie and Freddie

In 2003, the Federal Reserve lowers interest rates to 1% – the lowest since the 1960s. The rate allows borrowers to borrow at an interest rate lower than the rate of inflation, effectively subsidizing borrowers, encouraging banks and individuals to borrow as much as possible.

President Bush calls for reforming Fannie Mae and Freddie Mac by increasing their capital-reserve requirements, the percentage of liquid assets lending institutions must keep on hand incase of financial trouble.17 Third-party groups call for the two Government Sponsored Enterprises to be fully privatized, rather than the current status which privatizes profits but socializes risk. Congress, heavily lobbied by Fannie Mae and Freddie Mac to oppose the reform, opposes reform.

Frank: “I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis… . I do not think at this point there is a problem with a threat to the Treasury.
— Rep. Barney Frank (D-Mass.), at a hearing in 2003

Read the whole article.

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