Clinton, Fannie, Freddie and the Subprime Mess

Clinton’s Revisions to The Community Reinvestment Act, Fannie and Freddie Led to this Subprime Mess

In the beginning of the Bill Clinton administration, Clinton had the Democratic-controlled Congress pass amendments to Pres. Carter’s 1977 Community Reinvestment Act (the “CRA”). These amendments increased the requirements on banks to make loans into low income neighborhoods and provided for the securitization of mortgages including those to low income persons (“Subprime Mortgages”). Clinton also raised the Fannie Mae and Freddie Mac requirements to buy moderate and low income mortgages and securitize them to the public. See, “How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable,” Investor’s Business Daily, 9/25/08, p. 1, www.ibdeditorials.com. With the Clinton amendments, the mortgage backed security (“MBS”) market was launched and it rapidly turned into a multi-billion dollar market. MBS, including Subprime Mortgages, were sold to the public, to mutual funds, pension funds, insurance companies, and hedge funds here and around the world.

Clinton’s idea of multicultural housing policy was to bring housing ownership to low income persons who could not afford to own a home (i.e. “were bad credit risks”) or in some cases they may have been discriminated against because of race or the poor neighborhood in which they lived. The mechanism was to require all Federally Chartered Banks to make loans into poor neighborhoods, and banks that did not meet the requirements of the CRA could be barred from opening branches or merging with other banks, thus limiting their growth prospects. Four government agencies audited the banks to determine their CRA Rating. Community groups, such as Acorn, could bring lawsuits to enjoin proposed mergers, if Acorn or another community group did not think that the banks involved had made enough loans into poor neighborhoods. It sounded like a noble idea, and anyone who opposed it was usually labeled a racist. Investors Daily Business (IBD) has written a series of articles on how the CRA, Fannie Mae and Freddie Mac led to the subprime mess, starting on September 23, 2008 on page 1 with an article entitled “’Crony’ Capitalism Is Root Cause of Fannie and Freddie Troubles,” search: www.ibdeditorials.com.

After the Republicans took over Congress in 1995, Clinton decided to increase the low and moderate income lending requirements of Fannie and Freddie though administrative agencies, rather than dealing with an uncooperative Republican Congress. In 1995 Clinton ordered his Treasury Secretary Robert Rubin to rewrite the CRA Rules. The rewritten rules increased the numerical quotas and added new measures for “diversity” in the banks’ loan portfolios. Id., “Clinton-Era Rewrite.” After Andrew Cuomo became Clinton’s Secretary of Housing and Urban Development (1997-2001), Clinton got Cuomo to raise the low and moderate income lending requirements of Fannie and Freddie again and to reduce the capital requirements to 2.5% vs. 10% for banks. See, e.g. Id.

The stage was set for Clinton’s appointments of Jim Johnson and Franklin D. Raines, sequentially, as the head of Fannie. There are strong indications that both men played fast and loose with Fannie’s books and took out millions of dollars in compensation. Raines stretched the debt-to-equity of Fannie and failed to write off non-performing mortgages to maximize the value of his bonus and stock options. The Fannie and Freddie total portfolio of mortgages exceeded $5.4 trillion. When the mortgages they insured are also considered, they wound up standing behind approximately 90% of the mortgage market. See, Id. “’Crony’ Capitalism.” After Raines finally left Fannie in 2005, multiple audits kept finding more and more financial problems in Fannie’s financial statements. Fannie was not able to file reasonably clean financial statements until early 2008. Both Jim Johnson and Franklin Raines have served as economic advisors to Obama. Id.