Sunday, October 12, 2008

Private-sector loans, not Fannie and Freddie, triggered the mortgage crisis, McClatchy reports

In the run-up to the Iraq War, one news organization more than any other employed the skepticism and watchdog reporting called for in such a situation: the Washington bureau of Knight-Ridder Newspapers. Knight-Ridder is no more, but the bureau lives on under the McClatchy Co., and it still has a hard-nosed approach, displayed this weekend in a story on what caused the mortgage meltdown and the financial crisis. We relay this story not only because it has a rural angle, but because McClatchy reporters' work often doesn't reach as large an audience as those at major national newspapers.

Rebutting "a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans," David Goldstein and Kevin G. Hall report, "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."

The charges focus on mortgage finance giants Fannie Mae and Freddie Mac. Hall and Goldstein write, "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, [which] represent a small portion of overall lending."

"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," the reporters write. "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."

The story also largely debunks the notion that the meltdown should be blamed on the Community Reinvestment Act, a 1977 law designed to stop discrimination against minorities and see that banks recycled money in their local markets. "Only commercial banks and thrifts must follow CRA rules," Goldstein and Hall note. "The investment banks don't, nor did the now-bankrupt non-bank lenders . . . 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." (Read more)

But when it comes to the broader, global financial crisis caused by the mortgage meltdown, the Clinton administration bears part of the blame, a man who headed the Securities and Exchange Commission in the last three years of the administration told ProPublica, an independent, non-profit newsroom. Arthur Levitt "acknowledges that he and his colleagues a decade ago 'beat back' regulatory efforts that could have prevented credit markets from becoming so precariously balanced they were 'milliseconds' from disaster," Sharona Coutts and Jake Bernstein report. (Read more)

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