From the Sunday, 12/21/08 New York Times:
White House Philosophy Stoked Mortgage Bonfire
â€?We can put light where thereâ€™s darkness, and hope where thereâ€™s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.â€? â€” President Bush, Oct. 15, 2002
That, of course, as my readers (but practically nobody else's) know, was at the White House Conference on Minority Homeownership
... â€?How,â€? [Bush] wondered aloud, â€?did we get here?â€?
Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, â€?faced with the prospect of a global meltdownâ€? with roots in the housing sector he so ardently championed.
There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.
But the story of how we got here is partly one of Mr. Bushâ€™s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.
From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.
He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent â€” and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.
Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them â€” an old prep school buddy â€” pronounced the companies sound even as they headed toward insolvency.
... â€?The Bush administration took a lot of pride that homeownership had reached historic highs,â€? Mr. Snow said in an interview. â€?But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.â€?For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.
Lawrence B. Lindsay, Mr. Bushâ€™s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.
â€?No one wanted to stop that bubble,â€? Mr. Lindsay said. â€?It would have conflicted with the presidentâ€™s own policies.â€?
Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions. ...
But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.
â€?We absolutely wanted to increase homeownership,â€? Tony Fratto, his deputy press secretary, recalled him saying. â€?But we never wanted lenders to make bad decisions.â€?
Darrin West could not believe it. The president of the United States was standing in his living room.
It was June 17, 2002, a day Mr. West recalls as â€?the highlight of my life.â€? Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.
Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment â€” just the sort of creative public-private financing Mr. Bush was promoting.
â€?Part of economic security,â€? Mr. Bush declared that day, â€?is owning your own home.â€?
A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bushâ€™s tour.
â€?I just donâ€™t think what he envisioned was actually carried out,â€? she said.
Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an â€?ownership society,â€? in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.
As I explained in detail back in October in "Karl Rove — Architect of the Minority Mortgage Meltdown."
But for much of Mr. Bushâ€™s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.
So Mr. Bush had to, in his words, â€?use the mighty muscle of the federal governmentâ€? to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.
Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.
And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.
The president also leaned on mortgage brokers and lenders to devise their own innovations. â€?Corporate America,â€? he said, â€?has a responsibility to work to make America a compassionate place.â€?
And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.
â€?This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,â€? said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. â€?To make the market work well, you have to have a lot of rules.â€?
But Mr. Bush populated the financial systemâ€™s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.
The presidentâ€™s first chairman of the Securities and Exchange Commission promised a â€?kinder, gentlerâ€? agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector generalâ€™s report.
As for Mr. Bushâ€™s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.
The administration won that fight at the Supreme Court. But Roy Cooper, North Carolinaâ€™s attorney general, said, â€?They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.â€?
The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.
In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bushâ€™s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.
Among the Republican Partyâ€™s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nationâ€™s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.
Andrew H. Card Jr., Mr. Bushâ€™s former chief of staff, said White House aides discussed Ameriquestâ€™s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.
â€?Maybe I was asleep at the switch,â€? Mr. Card said in an interview.
Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the â€?foolâ€™s goldâ€? of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.
In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. â€?I donâ€™t think this is what the president had in mind here,â€? he recalled telling Ryan Streeter, then the presidentâ€™s chief housing policy analyst.
It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bushâ€™s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided â€?a valuable service to people who could not otherwise get credit.â€? While he had some concerns about the industryâ€™s practices, he said, â€?it did provide an opportunity for people, a lot of whom are still in their houses today.â€?
The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sectorâ€™s risky practices â€” a view Mr. Rove said he shared.
Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would â€?go to my grave believingâ€? that at least some homeowners might have been spared foreclosure.
Today, administration officials say it is fair to ask whether Mr. Bushâ€™s ownership push backfired. Mr. Paulson said the administration, like others before it, â€?over-incented housing.â€? Mr. Hennessey put it this way: â€?I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.â€?
â€?We Told You Soâ€™
Armando Falcon Jr. was preparing to take on a couple of giants.
A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.
Created by Congress, Fannie and Freddie â€” called G.S.E.â€™s, for government-sponsored entities â€” bought trillions of dollarsâ€™ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakersâ€™ campaign coffers and hiring bare-knuckled lobbyists.
Mr. Falconâ€™s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off â€?contagious illiquidity in the marketâ€? â€” in other words, a financial meltdown. He also raised red flags about the companiesâ€™ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.
Today, the White House cites that report â€” and its subsequent effort to better regulate Fannie and Freddie â€” as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined â€?G.S.E.â€™s â€” We Told You So.â€?
But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.
At the time, Fannie and Freddie were allies in the presidentâ€™s quest to drive up homeownership rates; Franklin D. Raines, then Fannieâ€™s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. â€?They loved us,â€? he said.
So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. â€?Iâ€™m going to do what I need to do to defend my company and my position,â€? Mr. Raines told Mr. Falcon.
Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.
His warnings were buried in the next dayâ€™s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falconâ€™s report had flagged.
It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companiesâ€™ boards â€” â€?political plums,â€? in Mr. Roveâ€™s words. He also withdrew Mr. Brickellâ€™s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.
There's lots more, much of it making Bailout Czar Henry Paulson look like a prime fool.