Tuesday, September 23, 2008

Who's Your Landlord?

IBD, in the first of a multi-part series of front page articles, begins to lay out the roots of the current crisis.


It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.
Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.
Subprime's Mentors
Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.
With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.
This created the problem we are having today.
As we noted a week ago, subprime lending surged from around $35 billion in 1994 to nearly $1 trillion last year — for total growth of 2,757% as of last year.
No real market grows that fast for that long without being fixed.

Imagine President Obama's Treasury Secretary working out the spending of the $1 Trillion honey pot in conjunction with Barney Frank and Chris Dodd with Biden, Reid and Pelosi looking on. If that doesn't cause you to shudder you aren't paying attention.