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How Mortgage Crisis Happened: Good Intentions Paved Dire Path
By M. JAY WELLS | Posted Friday, October 31, 2008 4:20 PM PT

On the eve of what may be the most important election of our time, the financial catastrophe that many believe will most influence Tuesday's vote remains only partially covered by the major media. IBD has run many articles and editorials on the mortgage meltdown, including a 7,500-word history from Web magazine American Thinker on Thursday. This timeline is condensed from that article, written by M. Jay Wells. (Click here to read the full version.) It lays out the essential facts of the crisis, which at its heart is a tale of misguided government intervention rather than a failure of free-market capitalism, as argued by presidential candidate Barack Obama.
1933-38
President Franklin D. Roosevelt initiated "New Deal" reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.
1968
As part of President Johnson's Great Society reform plan, much of Fannie Mae became a privately owned yet government-chartered company, a government-sponsored enterprise, or GSE. Fannie Mae bought home loans to preserve liquidity in the mortgage market. Though private, it remained backed by the federal government.
1970
President Nixon chartered Freddie Mac, the Federal Home Loan Mortgage Corporation, as a GSE to compete with Fannie Mae.
1977
President Carter, pressed by grass-roots organizations (though opposed by the banking industry) signed the Community Reinvestment Act to boost lending in poorer communities, regardless of the borrowers' ability to repay their home loans.
August 1989
Amid the savings and loan fallout, Congress enacted the Financial Institutions Reform Recovery and Enforcement Act. It mandated public release of lender evaluations and performance ratings, boosting pressure on the banking industry. Such oversight enabled bullying abuses of community organization groups such as ACORN to further influence lending practices.
1990s
Community organizer Barack Obama worked closely with ACORN activists. Employing the intimidation tactics of radical activist Saul Alinsky that Obama had learned and was teaching, activists crowded bank lobbies, blocked drive-up teller lanes and demonstrated at the homes of bankers to browbeat them into risky lending in poor and minority communities. Those who resisted were accused of racism.
At first, the GSEs resisted purchasing risky mortgages. Eventually the Clinton administration instructed them to substantially increase the percentage of these mortgages in their portfolios.
February 1990
Madeline Talbott, a well-known radical ACORN leader and banking industry agitator, challenged the merger of a Chicago thrift, Bell Federal Savings and Loan Association, which responded that it was being bullied into irresponsible "affirmative-action lending policy."
1992
Enforcement of CRA was "sporadic," as the Washington Times notes, until a flawed Federal Reserve Bank of Boston study asserted that there were "substantially higher denial rates for black and Hispanic applicants than for white applicants."
October 1992
Rep. Jim Leach, R-Iowa, warned about the impending danger nonregulated GSEs posed. He worried that Fannie Mae and Freddie Mac were changing "from being agencies of the public at large to money machines for the stockholding few."
Rep. Barney Frank, D-Mass., countered that "the companies served a public purpose. They were in the business of lowering the price of mortgage loans."
November 1994
President Clinton addressed the housing issue: "I am committed to a new and unprecedented partnership between industry leaders and community leaders and government to recommit our nation to the idea of homeownership and to create more homeowners than ever before."
June 1995
Republicans won control of Congress and planned CRA reforms. The Clinton administration, allied with Frank, Sen. Ted Kennedy, D-Mass., and Rep. Maxine Waters, D-Calif., did an end-around by directing HUD Secretary Andrew Cuomo to inject GSEs into the subprime mortgage market.
1997
Cuomo said, "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities and families living in underserved areas."
1998
By falsifying signatures on Fannie Mae accounting transactions, $200 million in expenses was shifted from 1998 to later periods, thereby triggering $27.1 million in bonuses for top executives.
April 1998
HUD announced a $2.1 billion settlement with AccuBanc Mortgage Corp. for alleged discrimination against minority loan applicants. The funds would provide poor families with down payments and low-interest mortgages.
Fall 1999
Treasury Secretary Lawrence Summers issued a warning: "Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly."
September 1999
With pressure from the Clinton administration, Fannie Mae eased credit requirements on loans it would purchase from lenders, making it easier for banks to lend to borrowers unqualified for conventional loans.
2000
The Senate Banking Committee estimated that, as a result of CRA, $9.5 billion had gone to pay for services and salaries of ACORN and other organizers.
Winter 2000
The City Journal warned that the Clinton administration had turned CRA into "a vast extortion scheme against the nation's banks," committing $1 trillion for mortgages and development projects, most of it funneled through the community organizers.
March 2000
Rep. Richard Baker, R-La., proposed a bill to reform Fannie and Freddie's oversight in a House subcommittee on capital markets. Rep. Frank dismissed the idea, saying concerns about the two were "overblown" and there was "no federal liability there whatsoever."
June 2000
Competitive Enterprise Institute President Fred L. Smith Jr. on the Treasury Department's $2 billion line of credit to Fannie and Freddie: "As long as the pipeline is there, it is like it is very expandable. . . . It is only $2 billion today. It could be $200 billion tomorrow." Because of Democrat obfuscation, Smith's "tomorrow" arrived in 2008, when Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship.
April 2001
The White House, releasing the 2002 budget, declared that the size of Fannie Mae and Freddie Mac is "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity."
February 2003
Fannie and Freddie's regulator warned that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.
June 2003
Freddie Mac reported it had understated its profit by $6.9 billion.
July 2003
Sens. Chuck Hagel, R-Neb., Elizabeth Dole, R-N.C., and John Sununu, R-N.H., introduced legislation to address regulation of Fannie Mae and Freddie Mac. The bill was blocked by Democrats.
September 2003
Treasury Secretary John Snow testified that Congress should enact "legislation to create a new federal agency to regulate and supervise the financial activities of our housing-related government-sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements. But Rep. Frank replied: "I do not think we are facing any kind of a crisis."
October 2003
Fannie Mae disclosed a $1.2 billion accounting error.
November 2003
Greg Mankiw, chairman of the president's Council of Economic Advisers, warned: "The enormous size of the mortgage-backed securities market means that any problems at the GSEs matter for the financial system as a whole. "
September 2004
Regulators reported that Fannie Mae and CEO Franklin Raines had manipulated the agency's accounting to overstate its profit. Fannie Mae ran radio and TV ads ahead of a key Senate committee meeting, depicting a Latino couple who fretted that if the bill passed, mortgage rates would go up. Again, GSE pressure prevailed.
October 2004
Rep. Baker again warned about the coming crisis: "Although their bonds bear the disclaimer 'not backed by the full faith and credit of the U.S. government,' the market does not believe it and looks right past the companies' risk strategies to the taxpayers' pockets."
Rep. Waters said: "Through nearly a dozen hearings . . . we were trying to fix something that wasn't broke. . . . We do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines."
Rep. Christopher Shays, R-Conn.: "And you have about 3% of your portfolio set aside. If a bank gets below 4%, they are in deep trouble. So I just want you to explain to me why I shouldn't be satisfied with 3%?"
Fannie Mae CEO Raines: "Because . . . there aren't any banks who only have multifamily and single-family loans. These assets are so riskless that their capital for holding them should be under 2%."
January 2005-July 2006
Sen. Hagel, with Sens. Sununu and Dole and later Sen. John McCain, R-Ariz., reintroduced legislation to address GSE regulation.
Fed Chairman Alan Greenspan testified that the size of GSE portfolios "poses a risk to the global financial system. It would be difficult, if not impossible, to bail out the lenders (GSEs) . . . should one get into financial trouble."
January 2006
Greenspan, in a letter to Sens. Sununu, Hagel and Dole, warned that the GSEs' practice of buying their own mortgage-based securities "creates substantial systemic risk while yielding negligible additional benefits for homeowners, renters or mortgage originators."
March 2006
Sens. Sununu and Hagel introduced an amendment to a Lobbying Reform Bill directing GAO to study GSE lobbying and requiring HUD to audit the GSEs annually.
May 2006
After years of Democrats blocking legislation, Sens. Hagel, Sununu, Dole and McCain wrote a letter to Majority Leader Bill Frist demanding that GSE regulatory reform be "enacted this year" to avoid "the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
John McCain addressed the Senate: "Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were 'illusions deliberately and systematically created' by the company's senior management.
"Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. . . . OFHEO's report solidifies my view that the GSEs need to be reformed without delay."
April 2007
Sens. Sununu, Hagel, Dole and Mel Martinez, R-Fla., reintroduced legislation to improve GSE oversight.
The New York Times wrote that the "democratization of credit" is "turning the American dream of homeownership into a nightmare for many borrowers." The "newfangled mortgage loans" — called affordability loans — "represent 60% of foreclosures."
September 2007
President Bush: "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs. . . . The United States Senate needs to pass this legislation soon."
2007-08
The housing bubble began to burst, bad mortgages began to default, and finally the Fannie Mae and Freddie Mac portfolios were revealed to be in collapse. And the testimony is evident as to why.
As Peter Wallison of the American Enterprise Institute put it, "Fannie and Freddie were . . . the poster children for corporate welfare."
September 2008
Rep. Arthur Davis, D-Ala., now admits Democrats were in error: "Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie: We were wrong."
Today 2008
The narrative is of another failed socialist experiment, this time a massive federal effort imperiling the whole U.S. banking industry.
Top recipients of contributions from Fannie Mae and Freddie Mac since 1989:
• Sen. Christopher Dodd, D-Conn.: $165,400.
• Sen. Barack Obama, D-Ill.: $126,349.
• Rep. Barney Frank, D-Mass.: $42,350.