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."
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."
"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."
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
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
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.
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
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