Organizations and Markets

Political Origins of the Financial Crisis

| Dick Langlois |

Okay, so maybe I’ll write about the financial crisis after all.

Stan Liebowitz has been pointing for a long time to the political origins of lowered lending standards — pressure on Fannie Mae to increase “affordable housing” — and to the role of those lowered standards in the mortgage bubble. “[I]n an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble.”

Today the AEI has posted a nice piece by Peter Wallison and Charles Calomiris saying much the same thing. Even more interesting, however, is a long article in Saturday’s New York Times that chronicles the process in great detail.

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.” (more…)

6 October 2008 at 11:47 am Dick Langlois 6 comments