Sunday, October 19, 2008

Bill Clinton a prime suspect for starting housing meltdown

He "had good intentions." Lower the standards, so people now unqualified will be able to get loans and buy homes. Who will get the blame? The Australian: We are now sitting in the wreckage of the biggest lending bust the world has ever seen. And there's some merit in trying to pinpoint where it all began. And among the prime suspects is former president Bill Clinton's decision in 1999 to put pressure on lenders to widen the pool of home borrowers in the US. An article in The New York Times on September 30, 1999, laid it all out in what now looks like crystal detail. "In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae corporation is easing the credit requirements on loans that it will purchase from banks and other lenders," the article, by Steven Holmes, began. "The action, which will begin as a pilot program involving 24 banks in 15 markets, including the New York metropolitan region, will encourage those banks to exchange home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits." It's like listening to a cockpit voice recorder extracted from the tail of some aircraft wreck. The next paragraph notes that banks and mortgage companies had been pressing Fannie Mae to help them make more loans to so-called sub-prime borrowers. Why? Because such people "can only get loans from finance companies that charge much higher interest rates". Don't they say that the road to Hell is paved with good intentions? That story, whose first three paragraphs were reproduced verbatim, was all about the US government trying to help. On top of that, the banks and mortgage companies thought they were doing the borrowers a favour because otherwise they would have been hit with higher rates. What has happened now, with a million empty houses in the US and no sign of prices bottoming out, is the logical consequence of ill-considered positive discrimination on one side of the ledger. Latinos and African Americans are the biggest minorities who were talked about in the article, as it later made clear, and as we know they now make up a disproportionate number of mortgage defaulters in the US housing market. There have been instances of people who don't like minorities saying "I told you so" about what's happened, but there's a very strong argument that it would have happened to any supposed beneficiary of rule bending. If the lenders had focused on helping Southern good ol' boys, by some quirk, we'd probably be looking at an army of confused and unhappy Southern ex-home owners having to park their rocking chairs on other people's verandas. The iron rule of commerce that was ignored was that money should always be lent to people who are going to be able to pay it back, regardless of any other consideration.

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