Hey, Barney Frank: The Government Did Cause the Housing Crisis

A member of the Financial Crisis Inquiry Commission responds to our interview with Barney Frank, arguing that without the government's intervention, there would be no housing crisis

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On December 9, The Atlantic published online an interview with Congressman Barney Frank. In it, he called me a "real extremist." This name-calling was not only false but also inappropriate to the seriousness of the issue -- which is whether government housing policy, and not the banks or the private sector, caused the 2008 financial crisis. I decided to respond to both Congressman Frank's statements and the questions he was asked about government housing policy and the financial crisis.

We're hearing Republicans in the presidential primary blame the housing crisis on the Clinton-era push to lend more to poor people. In your view, what caused the mortgage crisis and subsequently the financial crash?

Congressman Frank, of course, blamed the financial crisis on the failure adequately to regulate the banks. In this, he is following the traditional Washington practice of blaming others for his own mistakes. For most of his career, Barney Frank was the principal advocate in Congress for using the government's authority to force lower underwriting standards in the business of housing finance. Although he claims to have tried to reverse course as early as 2003, that was the year he made the oft-quoted remark, "I want to roll the dice a little bit more in this situation toward subsidized housing." Rather than reversing course, he was pressing on when others were beginning to have doubts.

His most successful effort was to impose what were called "affordable housing" requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy--in other words, prime mortgages--but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007. Despite Frank's effort to make this seem like a partisan issue, it isn't. The Bush administration was just as guilty of this error as the Clinton administration. And Frank is right to say that he eventually saw his error and corrected it when he got the power to do so in 2007, but by then it was too late.

It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies--all under congressional and HUD pressure--followed suit. This continued through the 1990s and 2000s until the housing bubble--created by all this government-backed spending--collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government. When these mortgages failed in unprecedented numbers in 2008, driving down housing prices throughout the U.S., they weakened all financial institutions and caused the financial crisis.

Congressman Frank makes assertions about who was responsible, but he, like all those who hold his position, have no data. He says that the banks were responsible, but cannot challenge the numbers I have outlined above. These numbers show, beyond question, that it was government housing policy that caused the financial crisis. Even he has admitted it. In an interview on Larry Kudlow's show in August 2010, he said "I hope by next year we'll have abolished Fannie and Freddie ... it was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it."

Have the Republicans "blame[d] the housing crisis on the Clinton-era push to lend more to poor people" as The Atlantic's question to Frank suggested? Of course not. Those who took advantage of the opportunity offered by the government's policies are not to blame for the crisis, just as those who make use of Medicare or other government programs are not responsible for the government's current debt problems. It is the government's fault for offering a housing finance program without making any effort to prevent the deterioration in mortgage underwriting standards.

Finally, Congressman Frank calls me an "extremist" and says that I blamed the housing crisis on the Community Reinvestment Act. That just shows he hasn't read anything I've written, but remains chained to his partisan prejudices. I was a member of the Financial Crisis Inquiry Commission, appointed by Congress to investigate the causes of the 2008 financial crisis. I dissented from the FCIC's majority report, and in my dissent, I used the data above to indict government's housing policy. The Community Reinvestment Act (CRA)--which required banks to make mortgage loans to borrowers that were riskier than their normal loans--was certainly a part of the same government-quota approach that underlay the affordable housing requirements and was strongly supported by Congressman Frank. However, as far as I can tell, CRA was a relatively small contributor to the crisis, when compared to the GSEs and the affordable housing requirements. In any event, the FCIC acquitted the CRA from any responsibility for the crisis before it even began its study, and resisted all my efforts to find out more about the effect of the Act.

You said Fannie Mae and Freddie Mac did have a role in pushing this along. How heavily do you think they contributed?

Congressman Frank's response was "They were not the major factor. Let's put it this way: I think you would have had a crisis without them." Once again, Frank makes assertions without numbers. Of the 19.2 million subprime and low quality loans that were on the books of government agencies in 2008, 12 million (about 62%) were held or guaranteed by Fannie and Freddie. No one who has grasped the significance of these numbers--and there is much more data in my dissent--could believe that Fannie and Freddie were "not a major factor." It was the unprecedented number of delinquencies and defaults among these mortgages, as I noted above, that drove down housing prices all over the country and caused the financial crisis. The data and my analysis led me to a conclusion that is exactly the opposite of Congressman Frank's: if it hadn't been for the government's housing policy, there would not have been a financial crisis.

In the presidential race, how would you grade Republicans' grasp of the history of the financial crisis, and would you say they're distorting it?

Congressman Frank's response was that Republicans have been distorting the history of the crisis. However, the real history of the deterioration of mortgage underwriting standards, and the reasons for it, are outlined above. For most of his career, Congressman Frank was one of the leaders of the effort in Congress to meet the demands of activists like ACORN for an easing of underwriting standards in order to make home ownership more accessible to more people. It was perhaps a worthwhile goal, but it caused the financial crisis when it was done by lowering mortgage underwriting standards. In the end, it was a colossal policy error by Congress and two presidential administrations. Frank admitted this in the Kudlow interview above. To his credit, Frank recognized his error by 2007, but by that time it was too late. Fannie and Freddie were nearing insolvency and the housing market was so engorged with subprime and other low quality mortgages that nothing could save it.