The Mortgage meltdown that led to this Economy

September 30, 2008
By Bill Colias ©¬†2008¬†Free Market Now!

While both Mccain and Obama are pointing to corporate greed and a lack of government regulation that led to the American mortgage crises, the real reason is too much government intervention. This government intervention came in the form of "politically correct" social engineering through pressuring Freddie Mac and Fannie Mae into unsound lending practices.

In the last 20 years the federal government pushed the mortgage industry hard to get minority homeownership up at the expense of good business practices. Since the 1990's virtually every branch of the government attacked the mortgage underwriting standards in an attempt to increase homeownership by minorities and the less affluent. This was universally praised as 'innovation' in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists. Although this path endangered the entire mortgage enterprise, the community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership.

An article in the Los Angeles Times from the late '90s praised the sudden surge in homeownership among minorities, calling it "one of the hidden success stories of the Clinton era."

According to John Lott (a senior research scientist at the University of Maryland), the Federal Reserve Bank of Boston produced a manual in the early '90s that warned mortgage lenders to no longer deny urban and lower-income applicants on such "outdated" criteria as credit history, down payment or employment income. He also claims that Mae and Freddie Mac encouraged and praised lenders - like Countrywide and Bear Stearns - for adopting the slackened policies toward minority and less affluent applicants. Given these Federal mandated lending practices, its not surprising that it resulted in financial problems for institutions like Countrywide and Bear Stearns.

Heroes and Villains in our Mortgage crises

  • Greg Mankiw, chairman of President Bush's Council of Economic Advisers, voiced a warning about weakened underwriting standards.
  • Barney Frank, Chair of the House Financial Services Committee, rejected a Bush administration and Congressional Republican plan for regulating the mortgage industry in 2003, saying, "These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis."
  • John McCain urged swift action reform legislation in 2006, saying that Fannie Mae's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management. The Democrats in congress killed this legislation by preventing a full vote by the senate, and Obama voted against this reform.

My Conclusion

By subverting the mortgage industry through government mandates that have nothing to do with supporting the free market, government helped create the mortgage crises. More regulations or handouts by the government won't fix this problem. As Reagan said "government is not the solution, government IS the problem".

- Bill
A Free Market Evangelist