The Policies of Clinton and Bush Accelerated the Foreclosure Crisis

March 9th, 2009

According to the scholarly researches of Peter Wallison, senior fellow of American Enterprise Institute, the policies of Clinton and Bush accelerated the foreclosure crisis. A decade ago he had given this warning which nobody took seriously.

An article was published in the New York Times in September 1999 giving details about Fannie Mae lowering the standards of its credit for house mortgages. Wallison gave out a warning, “This is another thrift industry growing up around us. If they fail, the government will have to step up and bail them out the way it stepped and bailed out the thrift industry.”

Wallison had bluntly hit the nail on the head. Fannie Mae was at that time being guided by the Clinton government. It was lowering its lending standards to encourage mortgage contracts being given to unsuitable borrowers. This step was largely responsible for the foreclosure crisis America is facing today. However the only mistake that Wallison made was to compare the foreclosure problem besetting USA today to the savings-and-loan collapses during the late 1980’s. The current catastrophe is many times bigger than the savings-loan crisis of yester years.

Many blame the government for two defective policies for the foreclosure rage of today. The first one relates to the Community Reinvestment Act that expects banks to see to the credit requirements of “their communities”. The second focus was on government putting pressure on Fannie Mae and Freddie Mac to deal with risky mortgages. The first point may be said to be an overstatement but the second one is apt and correct. The two government sponsored bodies, Fannie Mae and Freddie Mac have been mismanaging matters for long 40 years. This reached its height during the time of Clinton.

These two august bodies made heavy campaign contributions to both the parties. Fannie Mae debuted in 1938 when private markets had gone into the red. Fannie Mae made government guaranteed mortgages in packages and sold them to investors. Mostly there were funds from life insurance companies and pension remittances. The Johnson government privatized Fannie to give a good look to the federal budget otherwise coloured by the Vietnam War. Fannie always got special tax treatment and accounting rules. With such protection Fannie and its junior counterpart Freddie became quasi-monopoly bodies in the house mortgage field. The Clinton government made them special tools for promoting house mortgages. This policy continued under Bush to culminate in the Foreclosure tsunami of today.