How Democrats caused the financial crisis

David Hogberg:

Mortgage-backed securities loaded with "toxic" subprime loans fueled the housing bubble and crash.

Many blame Wall Street bankers for the MBS debacle. But actual data show that government policy was the main culprit.

Packages of mortgages sold to investors were a safe investment for decades. It wasn't the creation of mortgage securities that triggered the subprime boom. Rather, government policy unleashed subprime into the MBS market.

"The Department of Housing and Urban Development was pushing the National Homeownership Strategy since 1995 that basically said, 'Do away with down payments,'" said Ed Pinto, a resident fellow at the conservative American Enterprise Institute. "Doing away with down payments drove an increase in leverage throughout the market and the result was that everyone got on the bandwagon, including the market for MBSs. As a result, credit loosened tremendously."

HUD not only encouraged no down payments but also adopted affordable housing mandates for the government-sponsored en terprises that issue mortgage securities, Fannie Mae and Freddie Mac. Beginning in 1996, the GSEs had to make 40% of new loans they financed to borrowers with incomes below the national median.

With lower underwriting standards and a mandate to fulfill, Fannie and Freddie's MBS issuance began to take off. It surged more than 116%, from $342 billion in 1997 to $741 billion in 1998.

It was a recipe for disaster as Fannie and Freddie had an implicit guarantee (since made explicit) that the government would cover any losses that they suffered. With that backing, investors were all too willing to gobble up the GSEs' MBS offerings, even if they included subprime loans.

But this also pushed up housing prices, making it harder for new borrowers to afford a home.

"That became known as the 'affordability gap,'" said Pinto. "Housing prices are going up 15% a year and we have to loosen underwriting standards even more so that borrowers can afford the higher prices."

By 2000, Fannie and Freddie were financing loans with zero down payments. The private market soon followed. By 2006, 30% of all homebuyers made no down payment.

Also in 2000 HUD required Fannie and Freddie to increase to 50% of new loans they financed to borrowers with incomes below the national median. It also encouraged increasing the allowable debt ratio of borrowers and lowering credit score standards. This made far more potential borrowers eligible to buy a home.

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There is more.

This story is in Investor's Business Daily, one of the few publications that has been pursuing this aspect of the financial collapse in 2008.  While Democrats were eager to blame President Bush, Republicans have been reluctant to tag those who were really responsible.  It has been up to publications to expose what the Democrat game was and not many have been willing to tackle it.  I have been push thing this story in my blog for sometime.  I am glad that IBD is on the case now too.