Are we forgetting the lessons of the mortgage crises and setting up a new one?

July 7, 12:06 PMLaw and Politics ExaminerD. Christian Moore

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Financial Services Committee Chairman Rep. Barney Frank, D-Mass (AP)

Representative Barney Frank, D-MA, has contacted mortgage backers Fannie Mae and Freddie Mac asking them to relax some lending standards. Standards tightened in response to the mortgage and financial crises. Forgive me, but this seems surprisingly familiar to how we originally got into this mess. Putting aside silly arguments about whether “democrat” or “republican” economics caused the crises, failure to adhere to sound financial and economic principles surely did.

Fannie and Freddie are Government Sponsored Entities; this means they are essentially private corporations set up by the government. They were chartered, as part of the New Deal and Great Society era of policies, with facilitating mortgage lending by buying mortgages from banks and lenders, thereby freeing up capital so banks could continue lending. The effect of this was an implied government backing of all mortgages. The flaw in the system of course was that, as a private company, acting with the implied backing of the government, Fannie and Freddie always served two masters. Should they follow sound financial practices and strict underwriting guidelines or should they pursue political objectives such as increased homeownership or help for specific groups and special interests? I think it may be useful to review how we got here, before we head down the same path again.

As this editorial from Investors Business Daily explains, beginning in the 60s and 70s, and accelerating after the Community Reinvestment Act (CRA) was passed in the late 70s, Fannie and Freddie pursued a political mission. The intent was to make it easier for marginal borrowers to buy homes. The only way to do this was to relax lending standards. Fannie and Freddie can have this effect on the entire industry by signaling what types of loans they will buy from lenders. After the CRA was revised in the 90s, Fannie and Freddie, along with the industry in general, were under increased pressure from congress to find ways to make more loans to marginal borrowers who would not otherwise qualify. To be sure, executives at Fannie and Freddie were highly compensated, even as they elevated political considerations above sound financing.

At this point in the story ACORN becomes a prominent player. The Association of Community Organizers for Reform Now, ACORN is an umbrella organization which has been under fire repeatedly. ACORN employees have been indicted for voter fraud and were notorious for “direct action” in bank lobbies, and outside bank employees’ homes, agitating for more lending to marginal borrowers. For their part, ACORN claims they do good work giving voice to the voiceless, and like any large organizations, they cannot be held accountable for the actions of a few associates.

Whether their activity was nefarious or not, ACORN organized, agitated and pushed for easy credit, subprime loans, and loans to marginal borrowers; borrowers otherwise denied because they did not meet underwriting guidelines. Imagine what would happen if banks were making loans wholesale to borrowers who may not be able to make their mortgage payments. Actually, we do not have to imagine.

Many commentators have pointed to the actions of certain politicians, Rep. Barney Frank among them, as a systemic cause of the mortgage crises. Many have also pointed to greedy bankers. While I see the point with the banks, I must be fair; if Fannie and Freddie are signaling they will buy marginal loans, and politicians are calling my bank to the carpet if I do not make marginal loans, and organizing groups like ACORN are harassing my employees and customers if I refuse to make marginal loans, I believe I am going to make marginal loans. A bank is a business like any other. Given the environment they were dealing with, what choice did they really have?

I would more fault big investment houses and hedge funds for devising new and creative ways to spread risk by packaging bad loans with good ones for sale as investment vehicles. Clearly it was not a good idea, whatever they thought at the time, but again, given the amount of enabling from Congress, Fannie, Freddie and groups like ACORN, there seems to be plenty of blame to go around. This is why I was shocked to read Rep. Frank was again pushing for relaxed lending standards, especially given his alleged role as an enabler the last time. Have we not learned our lesson? Perhaps politicians and community groups should stop looking at banks as tools for the advancement of policy.

Homeownership is the American dream, I get that! Clearly some borrowers are not up to the responsibility, perhaps through no fault of their own but this matters little. Banks have an interest, and a responsibility to shareholders, to make loans they can be reasonably certain will be repaid. Financing a home is not a right, and it brings with it certain responsibilities. Perhaps bankers should not have pursued the subprime market so vigorously, and for that they bear some fault. However, it seems to me this would be the natural reaction of any lending institution, whose primary purpose is to make a profit, to the environment created by politicians and community organizers. It is totally irresponsible for Rep. Frank to again be pushing for relaxed lending standards; instead we should be tightening standards and laying the foundation for a stronger, sounder banking industry, free from political pressure and influence.