Government policies and the subprime mortgage crisis

Only 1 of the 10 FCIC commissioners argued housing policies were a primary cause of the crisis, mainly in the context of steps Fannie Mae and Freddie Mac took to compete with aggressive private sector competition.

[9] As early as February 2004, in testimony before the U.S. Senate Banking Committee, Alan Greenspan (chairman of the Federal Reserve) raised serious concerns regarding the systemic financial risk that Fannie Mae and Freddie Mac represented.

"[1] In a working paper released in late 2012 to the National Bureau of Economic Research (NBER) (the arbiters of the Business Cycle), 4 economists presented their thesis "Did the Community Reinvestment Act Lead to Risky Lending?"

"[1] Similarly, a detailed report by the independent not-for-profit consumer watchdog organizations Essential Information and the Consumer Education Foundation identifies a dozen steps of deregulation that set the stage for the 2007-2008 meltdown, including: To achieve these deregulatory aims, the financial industry, including commercial and investment banks, hedge funds, real estate companies and insurance companies, made $1.725 billion in political campaign contributions and spent $3.4 billion on industry lobbyists during the years 1998–2008.

[20] "Alice M. Rivlin, who served as a deputy director of the Office of Management and Budget under Bill Clinton, said that GLB was a necessary piece of legislation because the separation of investment and commercial banking 'wasn't working very well.'"

The vast majority of failures were either due to poorly performing mortgage loans, permissible under Glass-Steagall, or losses by institutions who did not engage in commercial banking and thus were never covered by the act.

He described the significance of these entities: "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion.

[38] The Economist reported in March 2010: "Bear Stearns and Lehman Brothers were non-banks that were crippled by a silent run among panicky overnight "repo" lenders, many of them money market funds uncertain about the quality of securitized collateral they were holding.

[46] Wallsion publicized his dissent and responded to critics in a number of articles and op-ed pieces, and New York Times Columnist Joe Nocera accuses him of "almost single-handedly" creating "the myth that Fannie Mae and Freddie Mac caused the financial crisis".

"[59] Economist Russell Roberts[60] cited a June 2008 Washington Post article which stated that "[f]rom 2004 to 2006, the two [GSEs] purchased $434 billion in securities backed by subprime loans, creating a market for more such lending.

[81] According to economists Jeff Madrick and Frank Partnoy, unlike Wall Street, the GSEs "never bought the far riskier collateralized debt obligations (CDOs) that were also rated triple-A and were the main source of the financial crisis.

Nocera's contention notwithstanding, at least one executive at Fannie Mae had an entirely different viewpoint, stating in an interview: Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little, but our mandate was to stay relevant and to serve low-income borrowers.

[94] When concerns arose regarding the ability of the GSE to make good on their nearly $5 trillion in guarantee and other obligations in September 2008, the U.S. government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers expense.

[97] Announcing the conservatorship on 7 September 2008, GSE regulator Jim Lockhart stated: "To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009.

Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

[108][109] In the view of some critics, the weakened lending standards of CRA and other affordable housing programs, coupled with the Federal Reserve's low interest-rate policies after 2001, was a major cause of the financial crisis of 2007/08.

Edward Pinto, former Chief Credit Officer of Fannie Mae (1987–89) and Fellow at the American Enterprise Institute, estimated that, at June 30, 2008, there were $1.56 trillion of outstanding CRA loans (or the equivalent).

"[119] According to American Enterprise Institute fellow Edward Pinto, Bank of America reported in 2008 that its CRA portfolio, which constituted 7% of its owned residential mortgages, was responsible for 29 percent of its losses.

This new agency would have been tasked specifically with setting capital reserve requirements, (removing that authority from Congress), approving new lines business for the GSE's, and most importantly, evaluating the risk in their ballooning portfolios.

It was in specific response to this regulatory effort that Barney Frank made his now infamous statement "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.

According to Bethany McLean and Joe Nocera, Federal Reserve chairman Alan Greenspan's ideologically opposition to government regulation was unmoved either by complaints by grassroots "housing advocates" about the damage to low income communities by predatory mortgage lending in the early 1990s, by the failure of market forces to prevent an early, smaller subprime bubble and bust in the late 1990s, or by appeals by Reserve board governor Edward Gramlich to take a more active role in policing the subprime business.

[1] The oligarchy of top financial firms had substantial clout in Washington and promoted an ideology of deregulation and a culture of "industry self-regulation" and the idea that rational business actors avoid taking undue risks.

[172][173][174] These warning signs were ignored as financial deregulating continued, as career SEC investigators were removed, and as finance industry employees were installed in key posts in regulatory agencies.

[1] Journalist Gretchen Morgenson cites the Financial Crisis Inquiry Commission as noting with disapproval that during the course of the housing boom from 2000 to 2006, the Federal Reserve "referred a grand total of three institutions to prosecutors for possible fair-lending violations in mortgages."

In an April 9, 2009 speech, Erik Sirri, then Director of the SEC's Division of Trading and Markets, stated "[t]he Commission did not undo any leverage restrictions in 2004," nor did it intend to make a substantial reduction.

"[184] Erik Sirri, then Director of the SEC's Division of Trading and Markets, concluded: "Since August 2008, commenters in the press and elsewhere have suggested that the 2004 amendments … allowed these firms to increase their debt-to-capital ratios to unsafe levels well-above 12-to1, indeed to 33-to-1….

Insurance companies such as American International Group (AIG), MBIA, and Ambac faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses.

[202] During March 1995 congressional hearings William A. Niskanen, chair of the Cato Institute, criticized the proposals for political favoritism in allocating credit and micromanagement by regulators, and that there was no assurance that banks would not be expected to operate at a loss.

In June 2008 Conde Nast Portfolio reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates at Countrywide Financial because the corporation considered the officeholders under a program called "FOA's"—"Friends of Angelo".

[205] On 18 June 2008, a Congressional ethics panel started examining allegations that chairman of the Senate Banking Committee, Christopher Dodd (D-CT), and the chairman of the Senate Budget Committee, Kent Conrad (D-ND) received preferential loans by troubled mortgage lender Countrywide Financial Corp.[206] Two former CEOs of Fannie Mae Franklin Raines and James A. Johnson also received preferential loans from the troubled mortgage lender.