Truth In Lending

http://www.ibdeditorials.com/IBDArticles.aspx?id=332121062189506
By INVESTOR'S BUSINESS DAILY | Posted Friday, July 10, 2009 4:20 PM PT

Behind The Meltdown: Many Americans are unaware of the causes of the greatest economic calamity of our lifetime. A new congressional report details how government politicized housing, wrecking the economy.

Rep. Darrell Issa of California, ranking Republican on the House Oversight and Government Reform Committee, has released a report that every American should read.

The analysis details how powerful Democrats in Congress insisted that government-subsidized housing be geared to serve the purposes of social justice at the expense of sound lending.

Here are some highlights of Issa's blow-by-blow account:

• With an implicit subsidy to American homeowners in the form of reduced mortgage rates, Fannie Mae and its sister government sponsored enterprise, Freddie Mac, squeezed out their competition and cornered the secondary mortgage market. They took advantage of a $2.25 billion line of credit from the U.S. Treasury.

• Congress, by statute, allowed them to operate with much lower capital requirements than private-sector competitors. They "used their congressionally-granted advantages to leverage themselves in excess of 70-to-1."

• The two GSEs were the only publicly traded corporations exempt from SEC oversight. All their securities carried an implicit AAA rating regardless of the quality of the mortgages.

• The Department of Housing and Urban Development set quotas for GSE investment in affordable housing.

• Encouraged by an inaccurate 1992 Boston Federal Reserve Bank study charging racial discrimination in mortgage lending, the two GSEs were strongly pressured to "lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers."

• In 1992, Congress directed HUD to establish multiple quotas requiring mortgage quotes for low-income families.

• In 1995, the Clinton administration issued a National Homeownership Strategy, loosening Fannie and Freddie's lending standards and insisting that lenders "work collaboratively to reduce homebuyer downpayment requirements."

• The administration complained that in 1989 only 7% of mortgages had less than a 10% downpayment. By 1994, it wanted that raised to 29%.

• Reduced underwriting standards spread into the entire U.S. mortgage market to those at all income levels.

• A complete decoupling of home prices from Americans' income fed the growth of the housing bubble as borrowers made smaller down payments and took on higher debt.

• Wall Street firms specializing "in packaging and investing in the lowest-quality tranches of mortgage-backed securities, profited hugely from the increased volume that government affordable lending policies sparked."

• Wall Street firms, homebuilders and the GSEs used money, power and influence to block attempts at reform. Between 1998 and 2008, Fannie and Freddie spent over $176 million on lobbyists.

• In 2006, Freddie paid the largest fine in Federal Election Commission history for improperly using corporate resources to hold 85 fundraisers for congressmen, raising a total of $1.7 million.

As the Issa report points out, "the real tragedy of the government's affordable housing policy is the impact on average Americans, particularly those of modest means.

"Millions of these borrowers, who were supposed to have been helped by federal affordable housing policy, have now been forced into delinquency and foreclosure, destroying their asset base, their credit, and in some cases their families."