In the 1990s, convinced that the US mortgage market was racist, the Clinton administration launched a massive campaign of social engineering.
Through government entities Fannie Mae and Freddie Mac, officials encouraged extending mortgages to people with little or no credit. They targeted private banks with discrimination lawsuits if they didn’t lend to enough minorities or people with low incomes. Housing prices skyrocketed as people with no down payment or shaky salaries suddenly were able to buy homes.
Then the bubble burst.
Millions were unable to pay their subprime loans, and they took the banks down with them. The housing market — and the economy — is still recovering from the folly.
Now the Obama administration wants to do it all over again.
Blithely ignoring the lessons of the housing bubble, Obama has rehired many of the Clinton hands who inflated it in the first place, pursuing the same misguided policies that try to force people into homes they can’t afford in the name of “fairness.”
“The administration is launching subprime 2.0,” warns former chief Fannie Mae credit officer Edward Pinto.
There are “affordable housing” mandates aimed at getting Fannie and Freddie to take on even higher-risk borrowers. Through the Federal Housing Administration, houses are being offered to some low-income subprime buyers with minimal down payment and heavy subsidies.
The administration also is making it easier to sue a bank for not giving a loan, using a legal strategy called “disparate impact.” Officials don’t have to prove that the bank is being racist in its actions. If minorities are getting fewer loans than whites, even if there are good financial reasons for doing so, then the impact is unfair — and illegal.
“It’s particularly galling that the people who are using the crisis to extend regulation are the same ones who sponsored the government policies that created the crisis,” said Peter Wallison, former member of the Financial Crisis Inquiry Commission, a government group created to look into the causes of the 2008 crash.
One banking official, ex-BB&T CEO John Allison, predicts that because of these policies, “There will be another incredibly destructive crisis in our financial system in the next 10 to 15 years.”
Here are some of the usual suspects Obama has brought back and how they’re re-inflating the bubble that ravaged our economy:
SARA PRATT: She headed enforcement at Housing and Urban Development from 1993 to 1999, during which she helped develop an interagency “Policy Statement on Fair Lending” that set “flexible” standards for qualifying low-income minorities with spotty credit.
“Applying different lending standards to applicants who are members of a protected (minority) class is permissible,” it said. “Providing different treatment to applicants to address past discrimination would be permissible.”
The policy planted the seeds of the subprime mortgage crisis. Now Pratt has resumed her role as deputy assistant HUD secretary for enforcement, and has readopted her old policy. In fact, it¹s now in force throughout the federal bank regulatory complex.
Pratt also recently formalized the use of “disparate impact” doctrine to police discrimination in housing and lending, fearing the administration would lose the powerful weapon in the Supreme Court because there wasn’t an official regulation to protect it from constitutional challenge.
HUD, Justice and the new Consumer Financial Protection Bureau are all using this lower standard of proof as a major enforcement tool to pry open lending windows for low-income minority borrowers with weak credit at not just private mortgage originators but also Fannie and Freddie.
While Pratt concedes lenders no longer overtly discriminate against minorities, she thinks they do it in other unspecified ways. She’s so obsessed with the issue that in a book she once advised alleged victims of discrimination to sue for damages from related distress resulting from “reduction in gratification for biological activities such as eating or sexual experience.”
JOHN TRASVINA: He worked under Attorney General Janet Reno at Justice before running the Mexican American Legal Defense and Educational Fund. Now Trasvina is trying to end what he calls “the scourge” of lending discrimination, as HUD’s assistant secretary of fair housing.
In that role, he’s squeezed banks for millions in mortgages for alleged victims of racism, while boasting of ordering underwriting “policy changes that opened lending opportunities to thousands” more minority borrowers. He’s also referred several bank bias cases to Justice for prosecution.
SHAUN DONOVAN: As a high-level HUD aide under Clinton, Donovan contributed to the fateful decision in 2000 of requiring Fannie and Freddie to make fully half their loans to people who posed a high risk of not paying them back. He served as special assistant to HUD official William Apgar. In 2000, his boss stated: “We believe there are lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible (in their lending standards).”
It was also their bright idea to have Fannie and Freddie earn credits toward that 50% affordable-housing goal by buying or issuing subprime securities on Wall Street. (Another architect of that policy was Allen Fishbein, a longtime leftwing activist who’s now a Federal Reserve regulator.) Apgar recently left the Obama administration as HUD’s senior adviser for mortgage finance to head an “affordable housing” studies program at Harvard.
Donovan now serves as secretary of housing, where media reports say he’s pushing hardest to preserve Fannie and Freddie and its “affordable housing mission.” He believes the mortgage giants facilitate “an important democratization of credit” benefiting “underserved groups.”
ELLEN SEIDMAN: Another architect of the disastrous housing policies that caused the crisis, Seidman actually encouraged subprime lending in “underserved” communities as a top Clinton bank regulator enforcing the Community Reinvestment Act. “Growth in the subprime credit market indicates that credit needs in many low- and moderate-income areas are being met,” she said in 1999.
She also cheered the relaxation of credit standards and the development of the subprime securities market.
“Without CRA as an impetus,” Seidman said, “this market would likely not have developed.”
More recently, she argued it’s “absolutely critical” Fannie and Freddie continue their support for “low-income and minority communities,” despite the mortgage giants’ central role in the crisis. Seidman serves as a director on CFPB’s Consumer Advisory Board, where she’s helping rewrite the rules for home lending. CFPB recently released new mortgage rules that, despite claims of tightening standards, require no minimum credit scores or down payments and even count payments from “government assistance programs” as qualifying income.
ERIC HOLDER: As Reno’s deputy, Holder accused banks of racism for failing to market mortgages to poor minorities with weak credit. Fear of prosecution set off a stampede of risky inner-city lending that led, in part, to today’s record subprime foreclosures.
Now as Obama’s attorney general, Holder has sued the nation’s largest home lenders — including Bank of America, Wells Fargo and SunTrust Banks — to “reinvest” in minority communities devastated by those foreclosures. They’ve been told by the government they cannot reject loans to applicants on “public assistance,” and must set aside millions in “special financing programs” for African-American and Latino homebuyers.
In some cases, Justice has actually ordered banks to open new branches in depressed areas of Detroit and other cities. It also encouraged a Detroit bank to “apply more flexible underwriting standards” for minorities, while ordering a St. Louis bank to originate low-rate home loans for black borrowers who, according to a court document, “would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment.”
THOMAS PEREZ: Perez served as deputy assistant attorney general in the Clinton Justice Department. Now he heads the department’s civil-rights unit, where he’s investigated no fewer than 60 banks on what the banking industry complains are trumped-up charges of lending discrimination. Perez has likened bank defendants to cross-burning Klansmen and said he’s using them to “repair” and “rebuild” entire “minority communities” hurt by foreclosures.
“We will require lenders to invest in the community they’ve harmed,” Perez promised the leftist National Community Reinvestment Coalition in 2011. Added Perez: “We encourage a more holistic approach to lending that looks beyond merely credit score when determining a borrower’s ability to pay.”
Scores of risky mortgages are already being inked, restarting another cycle of risky financing. Obama is so impressed with Perez’s results, he’s promoting him to his Cabinet. Perez is up for Labor Secretary.
ERIC HALPERIN: Halperin prosecuted banks for lending discrimination as a Clinton civil-rights attorney before joining the leftist Center for Responsible Lending in the run-up to the crisis. He helped the center lobby Fannie and private lenders to relax standards for low-income urban borrowers. Now he’s back at the Justice Department prosecuting banks as Obama’s special counsel for fair lending, working under Perez.
Using his nonprofit center’s discredited statistical models for determining racial bias in lending, Halperin has accused dozens of banks of cheating minority borrowers — without controlling for credit scores and other risk factors that explain lending decisions.
GARY GENSLER: One of Obama’s top financial regulators, Gensler once bragged that thanks to subprime mortgages, banks made home loans to minorities at “twice the rate” they made to other borrowers. “A subprime loan is a good option when the alternative is no access to credit,” he said in 2000 as Clinton’s undersecretary of Treasury.
The original cast of the financial disaster are back starring in a bad sequel. So here we go again. Thanks to a failure of accountability, the same social engineers who caused the crisis have wormed their way back into power. And they’re doubling down on their monstrous mistakes, inviting another housing calamity.
Paul Sperry is a Hoover media fellow and author of “The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Great Recession” (Thomas Nelson).