High hopes?

Clarence Page:

It is fashionable in some circles to fume and fuss that the current financial crisis was born out of greed. It wasn't. Quite the opposite, this mess was born out of the best of intentions, which is dangerous enough in Washington. The greed came later.

The mess began as a neat idea, the well-intentioned goal of helping more working-class renters to become homeowners.

Many did. The numbers of minority and other first-time homeowners climbed. The housing market prospered. Congress, the lending industry, the Clinton administration and the Bush administration each took credit for the boom. Almost everyone tried to ignore the growing bubble beneath the housing boom.

As more and more money chased fewer and fewer qualified home buyers, the needy were elbowed aside by the greedy. Thousands of buyers were lured by loan officers into no-money-down, interest-only and other tantalizing loans, often for higher amounts than the applicants could afford.

Housing prices soared. The bubble now has burst. With mortgage foreclosures mounting and big banks and thrifts going bust, like the record-breaking Washington Mutual last week, the finger pointing begins as to who let it happen.

The answer: Just about everybody who could have put the brakes on failed to do it, often with the best of intentions.

In 1999, for example, Fannie Mae Corp., the nation's biggest underwriter of home mortgages, announced it was easing the credit requirements on loans that it would purchase from banks and other lenders. The purpose was to help increase homeownership among minorities and others whose incomes, credit ratings and savings were too low for them to qualify for conventional loans.

Their alternative was "subprime" loans, that could charge 3 or 4 percentage points higher than conventional rates. Faced with those whopper rates, many prospective buyers figured they might as well keep renting.

Fannie Mae's pilot program, announced by its chairman, Franklin D. Raines, allowed qualified buyers to pay as little as 1 additional percentage point for a conventional 30-year fixed rate mortgage. After two years, that extra point would be dropped if the borrower had kept up his or her monthly payments.

Of course, Fannie Mae was taking on more risk. But Fannie Mae also was being pressured by the Clinton administration to help working-class homebuyers, by its stockholders to grow more profits, and by banks, thrifts and mortgage companies who wanted to make more subprime loans possible. Soon the entire lending industry was being pressured to ease up on considerations of income, credit history, down payment and closing costs in determining the creditworthiness of customers.

Everybody knew how disastrous that could be in an economic downturn. Memories of the government's savings and loan bailout in the 1980s were still fresh. "If they fail," Peter Wallison, a resident fellow at the American Enterprise Institute, was quoted as saying in a 1999 New York Times story about Fannie Mae's move, "the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry." That's what has happened.

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What we are rediscovering is that the rationale behind the old requirements that the total monthly payments should not exceed 25 percent of your take home pay were more valid than the folks pushing lenders into these bad loans ever realized. Something was also at work during the time that the bad loans were made. The credit decision was no longer being made by the people who were going to be receiving the payments.

By securitizing the mortgage business the lender became some unseen buyer who had no control over the loan process that was increasingly turned over to loan brokers who had little to lose if the loan went into default. In many cases the loan brokers were the real estate agent trying to close the deal or someone associated with him. Their interest was in getting the loan to close the deal so they would get their commission.

Page correctly points out that people from both parties were pushing the "ownership" society, but he fails to mention that it was the Republicans who tried to enforce regulation of these practices adn it ws Democrats to thwarted those efforts.