Hidden Clinton “Success Story”: Fannie Mae subprime loans for minorities

by Kurt Schulzke on September 26, 2008

Today’s subprime mortgage meltdown began with a lofty, deliberate, fuzzy-headed effort by the Clinton administration to turn more latinos and blacks into homeowners, or so it appears from 1999 news reports — buttressed by hard data from a 2007 study of subprime lending. Yesterday’s soft and cuddly government program is today’s financial chainsaw massacre.

Far from an illustration of free-market dysfunction, today’s mortgage mess is a classic case of socialistic governmental intervention gone awry. Take, for example, the May 31, 1999 LA Times article* by Ronald Brownstein, excerpted below. In it, the author touts the proliferation of low-end mortgages as a signal accomplishment of Clinton’s time in office:

It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.

These numbers are dramatic enough to deserve more detail. When President Clinton took office in 1993, 42% of African Americans and 39% of Latinos owned their own home. By this spring, those figures had jumped to 46.9% of blacks and 46.2% of Latinos.

. . . Since 1994, when the numbers really took off, the number of black and Latino homeowners has increased by 2 million. In all, the minority homeownership rate is on track to increase more in the 1990s than in any decade this century except the 1940s . . .

What explains the surge? The answer starts with the economy. . .

But the economy isn’t the whole story. As HUD Secretary Andrew Cuomo says: “There have been points in the past when the economy has done well but minority homeownership has not increased proportionally.” . . .

All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

Note: These “securities” are instruments like the CDOs and CDSs that led directly to the collapse of AIG and other large finance institutions.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected. . .

But with discrimination in the banking system not yet eradicated, maintaining the momentum of the 1990s will also require a continuing nudge from Washington. One key is to defend the Community Reinvestment Act, which the Senate shortsightedly voted to retrench recently. Clinton has threatened a veto if the House concurs.

The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers. HUD says Fannie Mae is resisting more low-income loans because they are less profitable.

Barry Zigas, who heads Fannie Mae’s low-income efforts, is undoubtedly correct when he argues, “There is obviously a limit beyond which {we} can’t push {the banks} to produce.” But with the housing market still sizzling, minority unemployment down and Fannie Mae enjoying record profits (over $3.4 billion last year), it doesn’t appear that the limit has been reached.

All signs point toward a high-velocity collision this summer between two strong-willed protagonists: HUD’s Cuomo and Fannie Mae CEO Franklin D. Raines, the first African American to hold the post. Better they reach a reasonable agreement that provides more fuel for the extraordinary boom transforming millions of minority families from renters into owners.

To get a graphical perspective of the problem, take a close look at the picture below (excerpted from p. 21 of the 2007 study referenced at the top of this blog entry) showing loans made in 2005 by one subprime lender in New York City. Red dots represent subprime loans made. Cross hatching shows a part of the city populated > 50% by blacks and latinos.  The correlation is pretty hard to miss.

Subprime loans 2005

Subprime loans 2005

Yes, this is just one lender and one city. But the study indicates that the pattern is replicated across the country.

I absolutely believe that banks should make loans to the individuals they most trust to repay them. Those loans should be made on the basis of purely business considerations without regard to skin color or national origin. That would be the morally and economically wise thing to do.

What the Clinton administration did, in forcing loans into these communities, was an economic crime. It was immoral and stupid but it offered short term political advantage by helping Clinton sneak into his second term in office.

I suspect today’s Congress will be equally immoral in crafting yet another government solution to this government-originated economic nightmare. I can only imagine how much worse things will be, ten years from now, if we have another eight years of Clintonian socialism (or worse) in the White House.

*The article, “Minorities’ Home Ownership Booms Under Clinton but Still Lags Whites’,” appeared on page 5 of the LA Times Home Edition.

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{ 13 comments… read them below or add one }

Kleiglights 09.27.08 at 12:10 am

This whole scenario is classic Clinton. It was all about him and his ratings, how he looked– self-gratification in one form or another. Substance and responsibility be hanged. The public interest was irrelevant.
His personal immorality had an immensely destructive impact on American youth. His indifference to the terrorist acts in the 1990s likewise set the stage for 9-11.
In economic terms, this is a 9-11. The Clinton Administration, by bullying the banking industry into giving loans they knew were unlikely to be paid, severely damaged if not destroyed the American economy.
But he received material help 3 or 4 years ago from Obama, Dodd and Hillary Clinton, who blocked the passage of a bill -introduced by three Senators including John McCain– designed to reign in the abuses of Fannie Mae and Freddie Mac.
President Bush tried on twelve occasions to correct the problem, but our 9%-approval-rated Congress refused to act.

Cosmo 09.27.08 at 2:39 am

Kleiglights wrote: “His personal immorality had an immensely destructive impact on American youth. His indifference to the terrorist acts in the 1990s likewise set the stage for 9-11.”

I’ve been wondering what impact Obama would have, as President, upon the smoking rate among teens. I’ve heard him say many times that our youth need a role model. They do, but one that smokes and admits to having used hard drugs? If you can use hard drugs and rise to become President of the U.S., why not use hard drugs?

Daphne 09.28.08 at 8:15 pm

Excellent post! I really admire your research and smart commentary .

I’m wondering if you’ve looked into a change of leadership happening at Fannie Mae around this time that coincides with their public disagreement to Clinton’s push for more low income (unsound) loans?

Ann Messina 09.29.08 at 1:06 pm

Most of Americans are too lazy to research the truth. They would rather believe the liberal lefties lies.The Clinton Adm. was responsible for this downward trend.

Al 09.29.08 at 1:24 pm

This is just more republican history rewriting! Blaming the economic downturn on democrats and minorities. Typical! The truth is that private banks wanted to push the more profitable subprime loans, but they didn’t want to take the long-term risk of holding loans that they knew would not be paid off in the long term, once the interest rates ballooned. So the republican friends of the bankers pushed through legislation that allowed Fannie Mae, Freddie Mac, and AIG to buy these loans from them so that they would actually inherit the risk in loans they did not realize the inherent risk of. When the borrowers defaulted, it was the people like Fannie Mae and AIG which had bought bundles of these loans that went bankrupt. And now the republicans want to rewrite history and blame the democrats? Nice try!

Robt 09.30.08 at 8:58 am

It’s hard to believe that “Al” doesn’t remember the Clinton plan of the 90’s era to bolster the home ownership of minorities. No one has to “rewrite history”. It’s a fact and a matter of public record and knowledge. This was bound to happen when legislation from the Clinton administration forced loans to be approved for borrowers who shouldn’t have and couldn’t have been approved any other way.

Chris 09.30.08 at 5:03 pm

Looking at this from another possible perspective (I haven’t made up my mind yet how to see this), Democrats attempted to allow minorities to begin owning their own future through real estate investments (which they are already paying for through rent but not owning), Republicans run the economy into the ground (but mysteriously not the oil companies) and then blame minorities while rich bankers lick their chops for the next bailout check. The irony here is that no one calls that a “handout” or “entitlement program”… Just maybe, the rich are getting richer and poor poorer, but we will take it out on the poor for being poor. Insert the term “minority” into this and it becomes another reason for those who were never sure why they disliked minorities to finally say “Ah hah!! I knew there was a good reason”…under the guise of simply being a conservative. Maybe, maybe not at all like that. Hard to tell just yet. Either way, this was a great piece of information I’ll use when deciding what exactly to make of all of this.

mdallinm 09.30.08 at 5:16 pm

Sorry Al! Democrat fingerprints are all over the mess. It’s not a matter of anyone on the Republican side fabricating anything. You can’t make up stuff like this. Denying the evidence in this case is like denying fingerprints at a crime scene! Dems are trying to point at the Republicans, but where are the Republican fingerprints?

The Truth 10.02.08 at 5:12 pm

get a grip, people: the explosion of subprime lending happened this decade, not during the clinton administration:

Total B&C originations
Year (billions)
1995 $65.0
1996 $96.8
1997 $124.5
1998 $150.0
1999 $160.0
2000 $138.0
2001 $173.3
2002 $213.0
2003 $332.0
SOURCE: Inside B&C Lending.

hand me a cigar bubba 10.05.08 at 12:06 am

The one who needs to get a grip is you “truth”. Your argumet is both uneducated and irrelevant.

It’s like the Governor of an oil state saying, “look at the growth of state revenue during my term.” It is an ignorant and disingenuous statement as it was not the governor that raised revenues. Rather it was an environment and dynamic (higher oil prices) in place (not the governor) that was responsible for higher revenues.

To say nothing of the fact that you should probably learn math. Under Clinton’s reign and subsequent holdovers… lendng virtually tripled. In the the time after that period it less than doubled(accoring to your data). Even of you take out the appointee holdover period the rate of growth under Clinton was 25% compounding, and 34% compounding thereafter. Wow….some “explosion” as you say…a 9% increase from one period to another.

Get a grip - even Clinton has ackowledged that perhaps some of his appointees and fellow democrats may have had something to do with this nightmare. Grow up and get off the partisan bangwagon. Democrats and Republicans alike have sold out this country and its people for their own personal gains.

hand me a cigar bubba 10.05.08 at 12:22 am

Al, thats really ignorant - you say…”The truth is that private banks wanted to push the more profitable subprime loans, but they didn’t want to take the long-term risk of holding loans that they knew would not be paid off in the long term, once the interest rates ballooned. So the republican friends of the bankers pushed through legislation that allowed Fannie Mae, Freddie Mac, and AIG to buy these loans from them so that they would actually inherit the risk in loans they did not realize the inherent risk of. ”

First of all, it would probably be best if you knew the subject you were taking about before spouting off. If the brokerage firms and FDIC banks had sold all this stuff to Fannie and Freddie as you say….. they wouldn’t be collapsing…now would they? If they had sold all this garbage to fannie and freddie they would be sitting pretty. Next, it is not the subprime default rate that has driven the banking system, wall street or fannie and freddie to the brink of utter collapse. Your post says that… and that is utterly false. Default rates are still actually pretty low. What has cuased most if not all of the banking, brokerage and fannie and freddie failures has been a lack of funding from investors. Fannie, and Freddie as well as many other insitutions are dependent on investors lending them money for the short term at lower rates and tehn lending that money for teh long term at highe rrates. Thats how they make/made their money. If all of a sudden teh shortr term investors providing the money for Freddie or Fannie or wall stret or an FDIC bank…if all of a sudden those short term investors don’t want to laon that institution shor tterm mone hythen the institution has to sell off chucks of its portfolio. And as we all know….if everyone knows you are being forced to sell off your stuff…. you don’t get a very good price for it…and you wind up selling thinsg at fire sale prices and …chances are…. you take a honkin losss.

Specifically, with fannie and freddie… the chinese and a bunch of other foreign governments who are some of teh main financers of fnma and fhlmc….said one day, “thats enough …we aren’t going to lend to you gusy anymore…its too risky.” That is what forced the gvot to steo in and take over. It had nothing to do with subprime losses being so large that they could not handle it. FHLMCand FNMA were siting on tons of cash to cover obligations the day the govt decided it was best to take over.

Henry 10.11.08 at 3:44 pm

Does “Al” have a clue? These same banks do not hold prime loans any more so than subprime loans.

It was the responsibility of the GSEs (i.e. Fannie Mae) to make sure the loans were solid. Why? Because of the implicit government guarantee to support the GSEs.

We the taxpayers are now on the hook.

Had Fannie/Freddie standards been solid enough, including sufficient down payments to prevent the moral hazard which has unfolded, the GSEs would never have purchased these mortgages in the first place.

And within about 60 milliseconds, the primary lending institutions would have stopped making subprime loans, knowing that they would have to keep them on their books. All of which would have prevented the problem in the first place.

The moral hazard of borrowers and GSEs with nothing to lose, have created the largest financial problem since the 1930s.

Greed has always existed and always will. Focusing on it is a gigantic waste of time and effort. Greed, fear, sloth and stupidity can not be legislated or litigated against.

Instead, it found a willing partner in GSEs and loosened lending standards pushed by government.

This mess is not the fault of capitalism. It is completely the fault of government.

Now I understand what “Community Organizing” really means: “lifting up the poor by tearing down the middle class”.

Someone who made little or no down payment and now walks away from their responsibility, has not lost anything. They got to live in a house at a cost less than the equivalent rent. On the flip side, the middle class has lost greatly.

For the first time in my adult lifetime, I am really disappointed in my country.

God help us.

Chuck 11.30.08 at 11:55 am

This sounds so much like a different form of affirmative action. “You don’t have to work hard and get a good GPA…..we will put you in college anyway. “You don’t have to make enough to own a home or pay us back…….we will get you into one anyway”. We have become soft, there is no incintive to strive to improve. We can have what everyone else does and do nothing on our part to help……just sit back and get the handouts. It’s so depressing

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