Editorial: Roots of financial crisis lie in Clinton Administration policy

Barack Obama held the Bush administration responsible yesterday for what he calls “the most serious financial crisis since the Great Depression.” Obama is hopelessly wrong on the facts. The roots of this crisis sprouted during the Clinton administration’s politically motivated effort in the 1990s to use Fannie Mae and Freddie Mac to expand home ownership. Fannie and Freddie are Government-Sponsored Entities that dominate the U.S. mortgage market. Fannie was created during the New Deal, while Freddie came into being in 1970. According to the Washington Post, Fannie and Freddie have “enjoyed the nearest thing to a license to print money” because they are private companies that offer investors government-backed (i.e., taxpayer) guarantees against loss. Fannie and Freddie increase the amount of money available for mortgages by buying mortgages on the secondary market, pooling them, then selling them as mortgage-backed securities to investors on the open market.

In an op-ed article published on these pages last February, former Wall Streeter Robert Cox noted that “in response to political pressure at the time, the GSEs took steps to make homeownership more affordable for lower-income Americans and those with a poor credit history.” Those steps encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions, loosening required debt-to-equity ratios to allow  borrowers to make small or even no down payments at all, and encouraging lenders the use of floating or adjustable interest-rate mortgages, including those with low “teasers.”

Homeownership rates soared to historic highs and all was well as long as home prices increased and lenders could comfortably convert floating-rate mortgages to fixed-rate obligations. Then home values declined. Lenders foreclosed when buyers missed payments as adjustable mortgage rates increased. When the mortgage-backed securities plunged in value as a result, Fannie and Freddie turned to Congress to cover the losses.

This result was entirely predictable. Toward the end of the Clinton administration, some officials worried about letting Fannie Mae and Freddie Mac continue their loose lending policies. Since then, Bush officials have occasionally but only meekly advocated reforms. When the current crisis presented an opportunity to force needed reforms, Bush caved to demands of the Democratic Congress to bail out Fannie and Freddie with tax dollars. Thus, Fannie and Freddie illustrate a familiar truth: Government regulation too frequently ends up simply adding to the already excessive burdens heaped on federal taxpayers.

editorialsNational EditorialOpinion

If you find our journalism valuable and relevant, please consider joining our Examiner membership program.
Find out more at www.sfexaminer.com/join/

Just Posted

Harlan Kelly, head of the SFPUC and husband to City Administrator Naomi Kelly (right), faces federal charges for allegedly trading inside information on a city contract in return for a paid family vacation. (Courtesy photo)
Harlan Kelly, head of SFPUC, charged with fraud in widening Nuru scandal

Kelly accused of engaging in corrupt partnership with permit expediter

Jeff Tumlin, director of transportation for the San Francisco Municipal Transportation Agency, said the agency’s fiscal situation is “far worse” than the worse case scenarios projected back in April. (Kevin N. Hume/S.F. Examiner)
SFMTA prepares for massive potential layoffs as budget crisis continues to build

More than 1,200 full-time jobs on the line as agency struggles to close deficit

Nicole Canedo looks at her City-issued Medical Reimbursement Account page on her computer outside her Berkeley apartment on Tuesday, Nov. 24, 2020. Canedo has worked numerous retail jobs in The City and the MRA has helped her with health costs. (Kevin N. Hume/S.F. Examiner)
Millions left sitting in medical reimbursement accounts by city workers

Health officials looking at how to improve access, outreach as untapped funds reach $409M

Andrew Faulk wrote "My Epidemic." (Courtesy photo)
Doctor’s memoir a fitting remembrance for World AIDS Day

‘My Epidemic’ tells personal stories of men who died

(Shutterstock)
49ers to play next two home games in Arizona after county order

The San Francisco 49ers will play their next two games in Arizona… Continue reading

Most Read