With the debates now in full swing, and the tarring and feathering of mortgage bankers at fever pitch, I thought it would be good to let you know that a book that finally captured what really happened to create the mortgage crisis has been published. I've attached the review from Barron's magazine (I encourage any financial professional to subscribe for economic review alone but also for personal finance). It took a clear headed view from the UK parliament to see our reality and write about it.
In his 2012 State of the Union Address, President Obama declared that the financial crisis of 2008, triggered by the collapse of the subprime mortgage market, was caused by "banks [that] had made huge bets…with other people's money," abuses that were allowed because "regulators had looked the other way, or didn't have the authority to stop the bad behavior."
The president's version of what happened reflects conventional myths: The private sector initiated the bad behavior, and government culpability was limited to the sin of omission, not of commission. Now along comes the work of another official who has held elected office—from across the pond in this case—to explode those myths for anyone who cares to listen.
Author Oonagh McDonald served for 11 years as a member of the U.K. Parliament from the Labour Party, and for four years as the Opposition Spokesman for Labour on Treasury and Economic Affairs. With those credentials, she can hardly be dismissed as an antigovernment ideologue. She is also a rare combination, at least for the U.S., of politician and academician, having held professorships and written previous books on business and finance. In this thoroughly researched, practically definitive tome, her story of the American dream turned nightmare could hardly be more different from Obama's version.
A "large slice of the blame," she writes, must go to Fannie Mae and Freddie Mac, the government-sponsored enterprises in the book's title. "But above all," McDonald declares, "it was the distortion of the banking sector to achieve political ends that ultimately caused the crisis."
She elaborates: "Politicians, with their unthinking political stances, must…take the lion's share of the responsibility. The vast subprime market…was the child of the affordable-housing ideology."
As the book recounts, the politics and ideology were clearly articulated, and aggressively implemented, by Obama's two predecessors. When President Clinton announced his National Homeownership Strategy in June 1995, he spoke of the need to "make it easy for people to own their own homes." And, when President Bush introduced his American Dream Down Payment Initiative in 2002, he deplored the "home-ownership gap" and spoke of "dismantling the barriers that prevent minorities from owning a piece of the American dream."
In 1996, the Department of Housing and Urban Development began setting annual goals for the proportion of mortgages of low- and moderate-income families that Fannie Mae and Freddie Mac were required to buy. The goal was increased each year, rising from 40% in 1996 to 57% by 2008. While Fannie and Freddie were the "dominant players in the market," other government agencies, including the Federal Housing Administration, participated in the unfolding tragedy. Over a 16-year period, the U.S. government promoted subprime and other nontraditional mortgages, degraded mortgage-underwriting standards, and caused both the mortgage meltdown and the global financial crisis that resulted from it.
McDonald takes on the major issues without flinching. For example, there is the commonly held view that Fannie and Freddie followed Wall Street's lead into subprime lending for competitive reasons. The author calls this "simply not true," citing evidence that both became major participants early, in response to ever-increasing affordable-housing goals set by HUD.
"When it all went wrong," the author writes, "politicians both in the U.S. and elsewhere sought to deflect attention from their own actions by...attacking and blaming the banks. Of course, many of the banks played their part as well, but the prime responsibility is a political one of seeking to increase homeownership at any price."
Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare
by Oonagh McDonald
475 pages, $85