Barney Frank's Bad Housing Loans

On October 8, the New York Times wrote a story on the Federal Housing Administration (F.H.A.) stating:

Many of the loans the F.H.A. insured in 2007 and last year are now turning delinquent, agency officials acknowledge. The loans made in those two years are performing “far worse” than newer loans, dragging down the whole portfolio, Mr. Stevens of the F.H.A. said in an interview.

The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.

Despite the agency’s attempt to outrun its fate by insuring ever-larger amounts of new loans to such borrowers as Ms. Shimon — the current rate is over a billion dollars a day — 7.77 percent of the portfolio is in default, up from 5.6 percent a year ago.

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

In other words, Frank approved of the policy of increasing the number of loans even to people who couldn't really afford to pay their mortgages.

In fact, this is nothing new. As the Boston Globe wrote last year (Note: I wholly disclaim and disagree with any racism in the Globe's reporting, and I do not necessarily agree with - and am not commenting on - its critique of liberal goals):

Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"...

The Globe goes on to show that Frank has been the main enabler of Fannie (FNM) and Freddie (FRE).

Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.

As I have repeatedly written, the financial crisis was not caused solely by idiots on the right or idiots on the left.

It was caused by both. Idiocy - like corruption - is bipartisan.

Comments

[fireball]

politicians blaming the private sector for their ever growing list of failure. government is never the answer unless it was a stupid question.
socialist security
medicare
medicaid
postal service
ad nauseum
they are pretty good at making war and wasting resources when it suits their agenda. i do believe the u.s. should weild the biggest stick but be reluctant to use it. when we do it should be hard fast and decisive.

2009 Oct 18 09:54 AM

[sethmcs]

Wait until banks go back to good old lending practices 20% down for mortgages. They will be accused of being zombie banks.

2009 Oct 18 05:30 PM

[Perry B]

I was reading the news for the past few years using the back's of my eyelids. Then i woke up. As are many Americans The French Revolution is a good place in history to start to draw a paralel line as to the current state of America. We have a corrupt congress. Gaining power with each bill they write. Protecting their lobbyists and cronie capitilists. A corrupt military, Central inteligence and police force. Preparing to step on disidents. Controlled media to spread party propaganda. Counterfeiters printing junk paper (The Fed). An angry population of folks of all economic backgrounds. Who are tired of getting stepped on, used and accused for political gain that profit and aide these corrupt powers, We call our Congressional lawmakers. Obama has been trying to tell the American voter since he began his race. We as Americans have to get involved and realize how corrupt our state congressional delegates and legislators are and get rid of them. The media does not want you to hear these words as they are a part of the cronie capitalism. So I hope we can through sites like these continue to write articles that may wake some folks up to read more unbiased net news, and watch less public media. Such as msnbc and fox and thier biased lies to the left and the right. Yet both groups are centered in thier driving fear bias, on one issue. Protect lobbyists and cronie capitalists. The media which is not competitive but have a dying readership due to credibility issues caused by this bias. Is in the fear of losing advertising dollars which truly drive the media not accurate reporting these days. We need accurate reporting. Things would begin to change.

2009 Oct 19 09:08 AM

[a. palmer jr.]

I don't see why the congress of the United States feels an obligation to take from people who've gotten up early in the morning, went to work sometimes when they didn't feel like it, and given it to people who sometimes sleep until 11:00, get up and do what they please all day. I'd like to see them actually one day realize that it's the workers that pay their bloated salaries and maybe just once, pass legislation that is of some benefit to the majority of Americans!

2009 Oct 19 10:07 AM

[TCK]

I am casting Obama in the role of a modern day Robespierre

en.wikipedia.org/wiki/...


On Oct 19 09:08 AM Perry B wrote:

> I was reading the news for the past few years using the back's of
> my eyelids. Then i woke up. As are many Americans The French Revolution
> is a good place in history to start to draw a paralel line as to
> the current state of America. We have a corrupt congress. Gaining
> power with each bill they write. Protecting their lobbyists and cronie
> capitilists. A corrupt military, Central inteligence and police
> force. Preparing to step on disidents. Controlled media to spread
> party propaganda. Counterfeiters printing junk paper (The Fed).
> An angry population of folks of all economic backgrounds. Who are
> tired of getting stepped on, used and accused for political gain
> that profit and aide these corrupt powers, We call our Congressional
> lawmakers. Obama has been trying to tell the American voter since
> he began his race. We as Americans have to get involved and realize
> how corrupt our state congressional delegates and legislators are
> and get rid of them. The media does not want you to hear these words
> as they are a part of the cronie capitalism. So I hope we can through
> sites like these continue to write articles that may wake some folks
> up to read more unbiased net news, and watch less public media. Such
> as msnbc and fox and thier biased lies to the left and the right.
> Yet both groups are centered in thier driving fear bias, on one
> issue. Protect lobbyists and cronie capitalists. The media which
> is not competitive but have a dying readership due to credibility
> issues caused by this bias. Is in the fear of losing advertising
> dollars which truly drive the media not accurate reporting these
> days. We need accurate reporting. Things would begin to change.

2009 Oct 19 11:24 AM

[20dollar]

'All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.'

I witnessed this crap first hand.

From about 2003 to 2006, I had tenants (low income, mostly black) that could not even pay their rent giving me notice to vacate. Mind you these people had credit scores in the 500's. Meaning they did not pay most of their bills. Yet they were being approved for 100 plus percent financing? Astounding!

What did they (the government, in their infinite wisdom) think would happen? That somehow, because these people were now "home owners", they would magically change their behavior and actually pay their bills on time? (or even at all??)

History has proven how foolish this policy was...

2009 Oct 19 08:34 PM

[Chancer]

The housing bubble which included many credit worthy buyers paying excessive prices over true market value was fueled by false demand by people who were poor credit risks and should not have bought homes. These mortgages (which should not have been made) also fueled the Wall Street sub-prime securitization.

Barney Frank was most responsible. Chris Dodd helped. Franklin Raines at Fannie Mae supported by Frank and Dodd got rich (bonuses) building up Fannie with these loans. These guys were the most responsible for the financial mess. If this were China, they would be executed- not a bad idea.

The economy, world, and all of us are paying for this. But Frank and Dodd are still there spouting their venomous drivel.

2009 Oct 20 02:56 PM

[Alessandro]

I think this article is selectively missing at least two key points.

Many potential home owners were goaded into first time home loans by banks that were able to demonstrate that they could own a home short term for virtually the same money as renting.

If in five years, they could not afford the accelerated ramping up of their monthly mortgage payment, they could sell the home for a tidy profit, in essence living rent free for those five years.

Who is going to turn down that kind of an offer?

It would have been much wiser if the home mortgage vice had been turned much more slowly on the sub prime mortgage 5 year price escalations. Instead of having the escalation occur overnight, in which the payment could suddenly double or triple, the mortgage payment should have been reset to increase in much more realistic increments.

This would have bought everybody time and not instantly jettisoned some many newer homeowners out of their homes so quickly.

2009 Dec 01 02:48 AM