Housing Bust Blame Game

Back in August of 2007, we looked at the The Ongoing Impact of the Housing Sector.

At the time, I had assigned blame for all of the problems in the credit market to a variety of institutions and people. The blame went as follows:

* Federal Reserve [FOMC]
* Borrowers
* Mortgage brokers
* Appraisers
* Federal Government
* Fannie Mae (FNM)
* Lending banks
* Wall Street firms
* CDO Managers
* Credit agencies
* Hedge funds
* Institutional Investors (pensions, insurance firms, banks, etc.)
* And back to the regulatory role of the Federal Reserve

Wednesday's WSJ has a front page article looking at the same issue: Housing Bust Fuels Blame Game. However, they assess blame somewhat differently, with a bit of a political slant:

Democrats are quick to blame Republicans, who were in power during the housing bubble and subprime lending frenzy. For years, America's leaders failed to restrain the markets, companies, investors and consumers from the missteps that led to the most pervasive financial crisis in decades.

But in hindsight, the failure stretches across government and across party lines. At bottom are two strong currents. From the Republican president to urban Democratic congressmen, homeownership was pushed as an overriding and unquestioned goal. And many significant attempts at regulation were obstructed by the prevailing belief that the economy did best when financial markets operated as freely as possible.

While the headline writer tries to call this a "Bipartisan Failure," the bulk of the actual article is less kind to the GOP. The Journal blamed:

* The Bush administration for cheerleading homeownership and pressuring government-sponsored mortgage lenders Fannie Mae and Freddie Mac (FRE) to provide funding for riskier mortgages.

* Congress for allowing Fannie and Freddie to invest heavily in securities backed by subprime loans.

* While Democratic congressmen pushed federal law to restrain sub-prime lending practices, Republicans (with some Democratic allies) blocked or countered with weaker versions;

* Federal Reserve Chairman Alan Greenspan, revered for not using the Fed's authority to more aggressively regulate lender behavior.

* California -- where the country's subprime lenders where -- saw Democratic state lawmakers refusing to impose tougher regulations on a prized local industry.

Perhaps it's bias on my part, but that list looks a little one sided to me...

graphic courtesy of the WSJ

Source:
Housing Bust Fuels Blame Game
Democrats Seize On Opponents' Role;
Bipartisan Failures
GREG IP, JAMES R. HAGERTY and JONATHAN KARP
WSJ, February 27, 2008; Page A1

Free version
http://online.wsj.com/public/article/SB120406115972594515.html?mod=blog

Formula for a Housing Bust

A White House push to encourage higher levels of home ownership and oversight failures at all levels of government appear in hindsight to have spawned the current housing crisis. (See related article.)

Comments

[CM in MA]

The President got involved long before Dec 2003. Back then it all sounded so easy. Just set a goal.

www.whitehouse.gov/new...

It's an interesting press release. So many potential problems identified. So little action taken to preclude them. Then again, with all the risk going to the private sector, who in Washington stayed engaged with the issue long enough to make sure the program(s) to solve all our problems were properly implemented? It's a rhetorical question. The answer is obvious...nobody.

[philly jim]

It worked positively in the sense it helped with getting the dollar and national debt down. Of course the taxpayer will get the bill but isn't it really just a drop in the bucket compared to our enormous economy? Everything else is seems to be psychological now.

[onecovert]

All is speculation, ask WHY Fannie Mae (Daniel Mudd) quickly completed a "settlement agreement" to prevent further investigations by NY Atty General Andrew Cuomo…look to DALLAS, TEXAS (National Property Disposition Center). OFHEO investigated Dallas (Operations) July, 2005...who knew?

Ironically, MUDD was Chief Operations Officer prior to Raines oust...go figure.

[brokerbila]

Published in American Banker ( a trade paper), Vernon Hill fromer CEO of Commerce Bank Corp Inc. blames the Community Reinvestment Act Congress passed in the 1900s and then the agressive enforcement of this law, forcing lenders to make loans to subprime borrowers. He claims that this law made the regulators force banks to make lenders lend regardless of credit. He says its just "Another flawed government program run amok."

[brokerbila]

oops! Correction to the date in the above from Brokerbila: The Community Reinvestment Act Congress was passed by congress in the 1990s.

[wunderhof]

Don't forget the home price appreciation PUT that the mortgage dealers and repackagers used to "insure" the MBS/CDO/CDS train of debt and securities.

[Arnold Layne]

Only the insane think the housing market problems can be fixed only by working the mortgage end. All the talking heads are breathless to stop the housing depreciation and get things going again. Doesn't anyone in the press or government think that the near parabolic housing price rises need to fully correct before I and others will/ can afford to 'get busy and buy another house'????????????????...

[sammyg123]

It's hard for populist politicians to promise material gains for the body politic when housing values are crashing, the Fed is inflating, and inflation rears its ugly head. It looks pretty good for whoever is in power, though, when the economy is doing well. I love it when people attribute strong economies to presidents or congresses. It's so far out of their control, from what I can see. They can only make things worse, or just stay out of it and let things take their natural course. Clinton was great though - he made doing nothing, or doing Lewinsky, into strong economic policy. Smart.

[DinOR]

No discussion of the Housing Blame Game is complete without addressing the tax code changes of 1997. Loose lending? No doubt a factor but without the 250k/500k Cap Gains Exemption much of this never would have happened. Had Joe 6Pack been getting a 1099 in late January for taxes owed on the sale of his "primary" residence most of this could've been avoided. Funny how getting stuck with a tax bill affects your behavior?

Whant change? Start here.

[nukldrager]

Agree with sammyg here. Assigning credit to a President for the economy is like describing an entire ice berg by it's tip. But is it fair to say that it is the Fed Gov responsibility to keep the economy from hitting an ice berg?

[Danial Magid]

Who to blame? Supply and Demand, Fear and Greed. Fundamentals were ripe and prices went up.

Barry, thanks for the links and your article. They are all good, but none are going to help change the current situation. What nature doesn't do, time will.

The real problem is that most americans can't afford to buy an average home in their respective communities and still afford necessities and possibly have some money left over for discretionary spending. I say, give it another 3-5 years, the dust will settle, and another greed and demand process will start. It's all cyclical.

[User 36911]

I've some dealings with home purchases in the last 2 years. There is one contributing group that never seems to be mentioned and is getting through all this innocently, realtor's.

The NAR continually puts misleading spins on their information.
Local realtor's had access to data they kept to themselves in respect to unsustainable home price increases and potential downsides. In may cases they led buyers to mortgage provides following poor practices.
Code of ethics?
When the shock is over and the lawsuits start they should include this group that was the middle man greasing the wheels.

[Steven R. Smith]

I think the lenders, of all kinds, and the Realtors will point the finger at the appraiser, who was supposed to be ethical and honest.

Yet, there is no requirment, not even now, that the appraiser be ethicl, or strong, or even really educated for that matter.

As long as they were not a felon before they got their license and could memorize test answers, many criminal minds entered the appraisal field.

Licensing ruined this field IMHO.

[User 36911]

This is true but many banks and lenders are using internet based appraisal programs. I don't believe these programs give a true value of properties anymore then the "on market and sold " comparisons realtor's use.