Fannie Mae and Freddie Mac are hurtling toward another possible taxpayer bailout, a development that could put an uncomfortable election light on the Clintons’ record of enabling the government-backed mortgage giants to engage in risky practices that led to the 2007 financial crisis.
There is growing consensus in financial circles that the seeds of the mortgage market collapse were sown during Bill Clinton’s presidency in the mid-1990s. That was when he helped push through changes that empowered Fannie and Freddie to give more mortgages to minorities and lower-income Americans, often at below-prime interest rates and with little down payments.
When the Federal Reserve and other respected voices began warning a decade ago that those changes were threatening the mortgage markets, Hillary Rodham Clinton joined fellow Democratic senators, including Barack Obama and John F. Kerry, in providing the votes to block Republican reforms designed to stave off a collapse.
The one-two punch could prove a political liability for Mrs. Clinton’s presidential bid, portraying her and her husband as facilitators for highly compensated mortgage brokers and undercutting her argument that she has been a longtime champion of the middle class.
“I certainly think we’re going down the path of another bailout of the mortgage market. If we keep on this path, it’s inevitable. It’s a concern people have,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “It’s going to be a tough needle for her to thread — people on the left still believe Fannie and Freddie was a good model and that the housing crisis was all about Wall Street greed. She’s got a tough road to walk on this.”
Complicating the picture, the Clintons were benefiting politically from Freddie and Fannie’s largesse. Mrs. Clinton was among the biggest recipients of donations from the mortgage giants in all of Congress, and Mr. Clinton’s charitable foundation received a sizable donation from Freddie Mac in the mid-2000s as the mortgage firm was teetering financially.
Homes for the poor
The Clintons’ mortgage policy saga began two decades ago during the booming early Internet era, when concern grew in Washington that minorities and the working poor weren’t reaping the benefits of an improving economy, especially in the housing market.
In a bid to create affordable housing for minorities and low-income residents, Mr. Clinton in 1995 ordered new bank regulations to encourage lending in poor neighborhoods. The Community Reinvestment Act gave banks higher ratings if they lent more in credit-deprived localities.
Maintaining a high CRA score was essential to the banks, pressuring them to give more loans to riskier clients, studies have shown. A lowered CRA rating would make it more difficult for a bank to become licensed to conduct business in other parts of the country, participate in other government lending programs, or complete mergers and acquisitions that needed the government’s approval.
The CRA was the channel through which “a U.S. Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans,” Raghuram Rajan, a former chief economist and director of research at the International Monetary Fund, wrote in the Financial Times in 2010.
The National Bureau of Economic Research, a nonprofit organization, examined the impact of the CRA on risky mortgage lending. In a 2012 study, it found “that adherence to the act leads to riskier lending by banks: in the six quarters surrounding the CRA exams, lending is elevated on average by about 5 percent and these loans default about 15 percent more often.”
Three years before Mr. Clinton altered the CRA to encourage investment in lower-income communities, Rep. Barney Frank, Massachusetts Democrat, pushed to impose an “affordable housing” requirement on Fannie Mae and Freddie Mac.
The thought was that minorities were being shut out of the housing market because Fannie Mae and Freddie Mac were underwriting loans only to banks that were issuing prime mortgages — 30-year fixed mortgages that required healthy down payments. Minorities and the working poor often didn’t have the cash or creditworthiness to qualify for such loans.
A 1992 affordable housing “mission” led by Mr. Frank allowed the government-sponsored enterprises to back riskier loans and make sure a quota of all loans from Fannie Mae and Freddie Mac were going to this pool, which was defined by the U.S. Department of Housing and Urban development.
“At first, this quota was 30 percent; that is, of all the loans they bought, 30 percent had to be made to people at or below the median income in their communities,” Peter Wallison, who served on the Financial Crisis Inquiry Commission in 2010, wrote in an article for The Atlantic. “HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30 percent to 50 percent under Clinton in 2000 and to 55 percent under [President George W.] Bush in 2007.”
“By 2000, Fannie was offering no-down-payment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans,” Mr. Wallison wrote. “Fannie and Freddie were by far the largest part of this effort, but the [Federal Housing Administration], Federal Home Loan Banks, [the Department of Veterans Affairs] and other agencies — all under congressional and HUD pressure — followed suit.”
This was no accident. The Clinton administration made affordable housing a priority and appointed people in top positions to make it happen.
Mr. Clinton named Andrew Cuomo, now New York’s governor, as HUD secretary. Mr. Cuomo pushed to keep homeownership numbers rising under Mr. Clinton’s watch by increasing the quota of affordable housing loans to 50 percent of the government-sponsored enterprise business.
Under Mr. Cuomo, HUD commissioned a report that showed Fannie’s automated underwriting system disproportionately screened out minority borrowers — and urged the agency to correct the disparity.
Mr. Cuomo also refused to impose safeguards that would have prevented Fannie and Freddie from rushing into buying subprime mortgages, such as requiring lenders to provide details about these types of mortgages. In October 2000, Mr. Cuomo sided with the government-sponsored enterprises, arguing that this sort of transparency would impose an “undue additional burden” on the agencies.
Incentives for Fannie Mae
The Clinton administration also replaced many of Fannie Mae’s top executives, including its chief executive officer with Mr. Clinton’s former White House budget director Franklin Raines. It replaced Fannie’s No. 2 in charge and nearly half of the board of directors.
Fannie Mae then restructured its executives’ salary structures to give incentives to buy more mortgages.
“This was a clear case of the Clinton administration embarking on a massive folly,” said Norbert Michel, a research fellow in financial regulations at The Heritage Foundation. “Fannie and Freddie were relatively unimportant until [Mr. Clinton] blew it up. It was all in the goal of getting homeownership numbers up from 65 percent — where they had been holding stable for years — to somewhere around 75 percent. They made no bones about it — they wanted cheaper loans. To think you can increase homeownership rates with a flip of a switch with nothing to go wrong is completely insane. This is when it started — there’s no doubt.”
A 2002 HUD report says, “From 1993 to 1998, the number of subprime refinance increased tenfold.”
In 1999, Mr. Raines boasted to The New York Times: “Fannie Mae has expanded homeownership for millions of families in the 1990s by reducing down payment requirements.”
That same year, it began its pilot program to encourage banks to extend home mortgages to people whose credit wasn’t high enough to qualify for prime 30-year, fixed-rate loans. Fannie Mae officials told The New York Times that “the move is intended in part to increase the number of minority and low income homeowners who tend to have worse credit ratings than non-Hispanic whites.”
Of the 19.2 million subprime and low-quality loans on the books of government agencies in 2008, 12 million were held or guaranteed by Fannie and Freddie, said Mr. Wallison, who now serves as a scholar at the American Enterprise Institute.
The Bush administration — although partly culpable for the housing crisis in that it raised the government-sponsored enterprises’ affordable housing goals to 55 percent — also called 17 times for reform of the agencies.
“We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the government-sponsored enterprises, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks,” Alan Greenspan, chairman of the Federal Reserve, testified at an April 2005 hearing. “To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.”
From 1998 to 2004, Fannie executives improperly reported $10.6 billion in earnings. Executives such as Mr. Raines were raking in huge paychecks because of the rising number of mortgages they were issuing.
During the six-year period, Mr. Raines received $52.8 million in bonuses, according to a 2006 report of an investigation by regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight.
Republican reforms rebuffed
By 2006, a bill to reform Fannie Mae and Freddie Mac had passed through the full House of Representatives and out of committee in the Senate, along party-line votes (all Republicans voting for it, all Democrats against).
The bill proposed the creation of a regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The legislation would give the regulator the authority to shut down either Fannie or Freddie if they encountered a severe financial crisis, and would give it the power to regulate any new activities. The bill required an annual audit of the mortgage giants’ books and a provision that all directors be elected — not appointed by the president.
Five Senate Democrats needed to step forward and offer their support to end a filibuster and allow a vote.
None did, so the bill never even came to a vote on the Senate floor.
Sen. Christopher J. Dodd of Connecticut, then the ranking Democrat on the Banking, Housing and Urban Affairs Committee and No. 1 recipient of government-sponsored enterprise lobbying funds, opposed the bill. When Barack Obama entered the Senate in 2005, he was among the people supporting the filibuster.
That same year, Mrs. Clinton was actively promoting broader lending to lower-income Americans — along the same philosophical policy lines as her husband did when he was president.
She introduced legislation to strengthen the Federal Housing Administration, specifically proposing to raise the ceiling on loan amounts that could be insured by the government in high-cost areas, and for the entity to be able to offer loans requiring no down payment.
Mrs. Clinton met with credit union leaders across New York in 2006 to congratulate them for making more than $180 million worth of first mortgage loans in underserved areas, exceeding their goal of $150 million. Encouraged, the credit union leaders committed to another $180 million the following year.
During this same period, Freddie Mac and Fannie Mae’s political action committee and individuals linked to the companies donated $75,500 to Mrs. Clinton’s senatorial campaign — making her the fourth-largest recipient in Congress of the mortgage firms’ total donations in the years 1989 to 2008 behind Mr. Obama, Mr. Kerry, now secretary of state, and Mr. Dodd, according to the Center for Responsive Politics, a nonpartisan group that studies campaign finance and political influence in Washington.
Freddie Mac also gave the Clinton Foundation a $50,000 to $100,000 donation.
By mid-2006, the Senate Republican sponsors of the regulatory bill became frustrated and wrote an open letter pleading for action from Senate leaders in both parties.
“We are concerned that if effective regulatory legislation for the housing-finance government sponsored enterprises (GSEs) is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole,” they wrote.
The risky lending escalated. Fannie acquired $135 billion in what was dubbed as Alt-A mortgages — that is subprime or other risky lending — in 2006 and 2007, more than double the sum in all years before 2005, according to its annual reports.
The proposed 2006 reform was never passed, and the market collapsed a year later — with American taxpayers on the hook for $187.5 billion in defaulted loans guaranteed by the two mortgage giants.
Blaming the banks
In her 2008 presidential run, Mrs. Clinton spun the reason for the financial crisis into predatory lending by commercial banks that unfairly targeted unsuspecting and oftentimes minority communities — the same communities her husband said he was trying to target with more affordable mortgages during his administration.
“If I were president, I would address abuses across the mortgage industry with a plan to curb unfair lending practices and hold brokers and lenders accountable, give families the support they need to avoid foreclosure and increase the supply of affordable housing,” Mrs. Clinton said in a campaign appearance in August 2007 in Derry, New Hampshire.
Mrs. Clinton outlined a commitment of $1 billion in federal money to help local governments build and renovate more affordable housing, reforms aimed at “cracking down on unscrupulous brokers who lure unsuspecting families into unfair mortgages,” and those aimed at helping homeowners in foreclosure. She never proposed reforming the two entities that many believe led to the mortgage crisis: Fannie Mae and Freddie Mac.
Those within the industry, however, say reforms need to be made.
Fannie Mae and Freddie Mac may need another taxpayer bailout in the next few years because they have been undercapitalized by the Treasury Department as they stall out in conservatorship — where 100 percent of their profits has to go to the Treasury, William Isaac, a former chairman of the Federal Deposit Insurance Corp., warned in a March op-ed in The Wall Street Journal.
On an earnings call in February, Fannie Mae CEO Tim Mayopoulos warned that the company’s lack of capital “increases the likelihood that Fannie Mae will need additional capital from Treasury at some point.”
As for the government’s role in affordable housing — it’s only expanding. This month, HUD introduced rules that allow the government to withhold money from communities that fail to address historical segregation. Communities will be required to submit data analysis of segregation within their borders, set goals on how to reduce it and then track the results.
For many conservatives, this represents — again — an overstep of the government into the private market.
“For whatever good HUD does, it clearly has not won the war on poverty,” Rep. Jeb Hensarling, Texas Republican and chairman of the House Financial Services Committee, said in a June hearing. “Only economic growth and equal opportunity can do that. In other words, the greatest housing program in America remains a good career path in a growing economy, not a HUD program.”
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