The Subprime Lending Bias

IBD
Investor's Business Daily

Dec 19, 2008 10:46 EST

Media: If, as they say, it's journalists who write history's first draft, then future texts will be riddled with errors about the origins of the subprime disaster, teaching future leaders the wrong lessons.

Just how did Americans come to lose $10 trillion in real estate and stock wealth? And why are our children and grandchildren on the hook for as much as $8 trillion in federal bailout money? These are some of the most important questions of our time. Yet the mainstream media, plagued by monopartisan bias, are not providing the public honest answers.

Take, for instance, a recent front-page article in the Washington Post, under the headline, "How HUD Mortgage Policy Fed the Crisis." The piece correctly fingers HUD for helping fuel risky lending at Fannie Mae and Freddie Mac. But the newspaper starts its analysis in 2004 (in fact, the first sentence begins, "In 2004 ... "), making it seem as if the Bush administration crafted "affordable housing" policy and created the subprime market.

The Post knows better. The Bush HUD merely continued a politically correct policy launched by the Clinton administration. For the first time, President Clinton ordered HUD to set quotas for Fannie and Freddie to buy huge portions of Community Reinvestment Act loans and other low-income mortgages made to borrowers with poor credit. The Post failed to mention this key fact.

By 2000, fully half of the mortgage giants' portfolios consisted of these risky loans, most of them subprime mortgages. In effect, the Clinton HUD set a time bomb that would explode years later with the collapse of home prices, which happened to occur on Bush's watch.

At the same time, HUD pressured the federally subsidized giants to lower their loan-to-value ratios and other underwriting requirements to accommodate minority borrowers. HUD Secretary Andrew Cuomo even admitted that the administration was mandating a policy of "affirmative action" lending (his words, not ours).

And it was Clinton who initially spread the subprime rot to Wall Street. To help Fannie and Freddie reach their "affirmative action" lending quotas, HUD in 1995 let them get affordable-housing credit for buying subprime securities that included loans to low-income borrowers.

Less than two years later, Freddie partnered with Wall Street investment banker Bear Stearns to issue the first securitizations of low-income CRA loans.

There's even a press release still available on the Web that memorializes the historic deal, which dumped hundreds of millions of dollars in the risky loans on the market -- a down payment on the hundreds of billions that were to follow.

The Post left all of that out of its story, even though the deal marked the beginning of the boom in subprime securities.

Of course, providing such background to readers would ruin the impression that Bush and Republicans were responsible for the crisis, an impression the Post and other liberal media elites hope will stick in the public's mind and become conventional wisdom. And conventional wisdom, once galvanized, is a powerful thing in Washington. Whole agendas and coalitions are built around it.

The Post also provided just one side of the data in its story. The paper said that Bush "ratcheted up" the affordable-housing goal for Fannie and Freddie, from 50% to 56%. But it left out the fact that the previous president, the liberal Democrat, institutionalized the quota and ballooned it up to 50%. Which move do you think had a greater impact on the subprime market?

A recent story in the Associated Press was equally tendentious. It blamed Bush for not cracking down on loose lending standards that had become the norm in the mortgage industry, while completely ignoring the systematic dismantling of those standards during the previous decade under Clinton.

"The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy," wrote AP Washington correspondent Matt Apuzzo.

Reality check: "Government intervention" is what planted the seed to this whole crisis. As we've noted, Clinton in 1995 revised CRA regulations to pressure banks into adopting "flexible" lending standards to increase minority homeownership. In a 1,389-word story, AP cited that easily verifiable fact not a single time.

Make no mistake: It was Clinton who forced banks -- most importantly, Fannie and Freddie -- to go into the subprime market to serve the targeted populations that HUD and other Clinton banking regulators wanted them to serve.

In effect, the media are blaming Bush for Clinton policies. Whoever controls the debate in Washington controls the truth. Right now, it's Democrats and their press courtiers. And so far, they've managed to shade the truth about the root causes of this epochal financial crisis.

Source: Investor's Business Daily