last updated: October 12, 2008 10:13:10 PM
Commentators say that's what triggered the stock
market meltdown and the freeze on credit. They've specifically targeted the
mortgage finance giants Fannie Mae and Freddie Mac, which the federal
government seized on Sept. 6, contending that lending to poor and minority
Americans caused Fannie's and Freddie's financial problems.
Federal housing data reveal that the charges aren't
true, and that the private sector, not the government or government-backed
companies, was behind the soaring subprime lending at the core of the crisis.
Subprime lending offered high-cost loans to the
weakest borrowers during the housing boom that lasted from 2001 to 2007.
Subprime lending was at its height from 2004 to 2006.
Federal Reserve Board data show that:
The "turmoil in financial markets clearly was
triggered by a dramatic weakening of underwriting standards for U.S. subprime
mortgages, beginning in late 2004 and extending into 2007," the
President's Working Group on Financial Markets reported Friday.
Conservative critics claim that the
"I don't remember a clarion call that said
Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a
disaster," said Neil Cavuto of Fox News.
Fannie, the Federal National Mortgage Association,
and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to
minorities or anyone else, however. They purchase loans from the private
lenders who actually underwrite the loans.
It's a process called securitization, and by
passing on the loans, banks have more capital on hand so they can lend even
more.
This much is true. In an effort to promote
affordable home ownership for minorities and rural whites, the Department of
Housing and Urban Development set targets for Fannie and Freddie in 1992 to
purchase low-income loans for sale into the secondary market that eventually
reached this number: 52 percent of loans given to low-to moderate-income
families.
To be sure, encouraging lower-income Americans to
become homeowners gave unsophisticated borrowers and unscrupulous lenders and
mortgage brokers more chances to turn dreams of homeownership in nightmares.
But these loans, and those to low- and
moderate-income families represent a small portion of overall lending. And at
the height of the housing boom in 2005 and 2006, Republicans and their party's
standard bearer, President Bush, didn't criticize any sort of lending, frequently
boasting that they were presiding over the highest-ever rates of U.S.
homeownership.
Between 2004 and 2006, when subprime lending was
exploding, Fannie and Freddie went from holding a high of 48 percent of the
subprime loans that were sold into the secondary market to holding about 24
percent, according to data from Inside Mortgage Finance, a specialty
publication. One reason is that Fannie and Freddie were subject to tougher
standards than many of the unregulated players in the private sector who weakened
lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private
investment banks — not Fannie and Freddie — dominated the mortgage loans that
were packaged and sold into the secondary mortgage market. In 2005 and 2006,
the private sector securitized almost two thirds of all
In 1999, the year many critics charge that the
Fueled by low interest rates and cheap credit, home
prices between 2001 and 2007 galloped beyond anything ever seen, and that
fueled demand for mortgage-backed securities, the technical term for mortgages
that are sold to a company, usually an investment bank, which then pools and
sells them into the secondary mortgage market.
About 70 percent of all
Conservative critics also blame the subprime
lending mess on the Community Reinvestment Act, a 31-year-old law aimed at
freeing credit for underserved neighborhoods.
Congress created the CRA in 1977 to reverse years
of redlining and other restrictive banking practices that locked the poor, and
especially minorities, out of homeownership and the tax breaks and wealth
creation it affords. The CRA requires federally regulated and insured financial
institutions to show that they're lending and investing in their communities.
Conservative columnist Charles Krauthammer wrote
recently that while the goal of the CRA was admirable, "it led to
tremendous pressure on Fannie Mae and Freddie Mac — who in turn pressured banks
and other lenders — to extend mortgages to people who were borrowing over their
heads. That's called subprime lending. It lies at the root of our current
calamity."
Fannie and Freddie, however, didn't pressure
lenders to sell them more loans; they struggled to keep pace with their private
sector competitors. In fact, their regulator, the Office of Federal Housing
Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and
Freddie losing even more market share in the booming subprime market.
What's more, only commercial banks and thrifts must
follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank
lenders such as New Century Financial Corp. and Ameriquest that underwrote most
of the subprime loans.
These private non-bank lenders enjoyed a regulatory
gap, allowing them to be regulated by 50 different state banking supervisors
instead of the federal government. And mortgage brokers, who also weren't
subject to federal regulation or the CRA, originated most of the subprime
loans.
In a speech last March, Janet Yellen, the president
of the Federal Reserve Bank of
"Most of the loans made by depository institutions
examined under the CRA have not been higher-priced loans," she said.
"The CRA has increased the volume of responsible lending to low- and
moderate-income households."
In a book on the sub-prime lending collapse
published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote
that only one-third of all CRA loans had interest rates high enough to be
considered sub-prime and that to the pleasant surprise of commercial banks
there were low default rates. Banks that participated in CRA lending had found,
he wrote, "that this new lending is good business."