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HOUSING: Here’s what really caused the bubble

Letter by Randall Hiner, Vashon on Sep. 21, 2010 at 10:11 am with 14 Comments »
September 21, 2010 10:12 am

Re: “Tea party, now for some facts” (letter, 9-17).

The writer states that the elections of 2006 and subsequent committee chairmanships of Barney Frank and Chris Dodd (Financial Services/Banking) led to the economic collapse 15 months later and that President Bush requested that Fannie Mae and Freddie Mac “stop” because “it’s” too risky.

On Jan. 20, 2004, President Bush, at a speech at the Home Builders Convention in Las Vegas, asked Congress to eliminate the down payment requirement for FHA loans. That same day, Bush’s Federal Housing Committee Chairman John Weicher said that “these proposed changes will extend the loans to people with blemished credit.”

Three years later, all 50 states’ attorneys general, led by Eliot Spitzer, penned an editorial to the Washington Post demanding that the federal government police these predatory lenders. The Bush administration’s response was to involve an obscure agency in the Department of the Treasury: the comptroller of the currency. This agency invoked a law from the 1863 National Bank Act, to preempt state predatory lending laws and prevented the states from protecting their citizens from these practices.

When Spitzer opened an investigation into these practices in New York, the OCC filed a federal lawsuit to stop the investigation.

The policies of the Bush administration in conjunction with the largest banks created the housing bubble, then worked tirelessly to ensure the states could do nothing about it or even investigate these practices.

Frank and Dodd could do little about this in the face of a committed administration.

Leave a comment Comments → 14
  1. FreeAmerica says:

    What does the lack of a down payment have to do with credit score or debt to income ratio?

  2. aislander says:

    In other words, the bubble was a government-created monster, bipartisan, but still a creature of government. That’s all I’m sayin’…

    Question: Were the lenders “predatory” if government (as the letter writer said) caused them to make risky loans, and then provided a market for the bad paper so there was no risk to the lenders?

  3. Roncella says:

    Randle, Its you thats living in a Bubble.

  4. Banks don”t do risky loans unless coerced and rewarded by the guvment.

    You can thank your federal guvment for this colossal banking disaster.

    And you want to trust your health care to this den of thieves?

  5. Yes, the accurate but the full version goes back to the Reagan Administration when subprime loans became legal,then the Clinton Administration and the repeal of Glass-Steagal.

  6. Sumner401 says:

    The Govt. didn’t and can’t “make” or “force” a bank or lender to make bad loans, period.
    The incentive for doing that came with the repeal of Glass-steagal, which allowed the lenders to ‘sell’ their debt on wall street with a new ‘product’ the credit default swap.

    That is what caused the bubble., deregulation.

  7. Sumner401 you nailed it right on the head. If banks, and other lending institutions, were forced to go back to the days when they had to keep loans they made on their books then you can bet they’d be a lot more careful about who they lent their money to. Once a lender sells their debt why should they care if it ever gets paid back or not?

  8. This can not be. All these government programs and regulations passed by Congresses and Administrations of both parties caused the bubble?

    I guess all those folks who insisted that it was caused by laissez faire economics were wrong – again.

  9. Great letter Randall. The following was published in 2008. It goes to show you how urban legends persist among those who cannot face the truth.
    A conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.
    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 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:
    • More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
    • Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

  10. It is laughable to believe that any one thing caused the bubble. Just as the Great Depression was not caused by any one thing, but by a whole stew of flawed government policies and people’s “unexpected” responses to them, this bubble was no different. Federal and state fiscal, tax, and regulatory policies as well as Federal Reserve policies all contributed to releasing the chickens that finally came home to roost.

    It is time for both the right and the left to step back and really think about the consequences of having the government in charge of providing housing lending (directly or indirectly) or …you name it. If you think the housing bubble was bad, just wait until the health care, “green” car, debt, or [insert economic segment here] bubble bursts in the future.

  11. bugme…..ummmmm. it was the REPEAL of the Glass-Steagal REGULATIONS rather than the creation of more regulations that created the environment of speculatory finance.

  12. So you are one of those who believes that the largest economy in the world was brought down by one thing and one thing only: the repeal of a 78 year old law, and that there were no other possible contributory causes for such a dramatic drop in economic activity? What an amazingly powerful law it must have been. Powerful but sneaky since it took years after its repeal before repeal’s baleful effects were seen.

    Glass-Steagall was passed ostensibily to cure what Congress and Hoover saw as problems with the banking system during the Depression. Glass-Stegall’s absence never resulted in anything close to the downturns like our current one or the one in the 30’s – until the founding of the Federal Reserve system.

  13. The worst loan I ever saw made by a private lender was to a husband and wife with four children, coming out of chapter 13 bankruptcy, with stated income of $42,000 per year (no verification) and no money down on a $475,000 home. I never saw a federally insured VA, FHA, HUD loan without documentation of income. Of course, it wasn’t until January 2008 that the State of Washington had any rules and regulations prohibiting felons from working as a loan originator/officer. Oversight was a joke or non-existent. Many of the loan originators I interviewed were told by the supervisors to “make it work.” It was inevitable for the House of Cards to tumble.

  14. Your favorite lefty, Robert Scherer, just wrote a book on the subject of the banking and finance debacle. Get a copy of “The Great American Stickup.” Your favorite emperor is naked as a jaybird.

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