How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

by Terry Jones - September 24th, 2008 - Investor's Business Daily

While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie's and Freddie's rules.

In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse.

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Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.

With incentives in place, banks poured billions of dollars of loans into poor communities, often "no doc" and "no income" loans that required no money down and no verification of income.

With these changes Bill Clinton turned our home mortgage industry into a socialism based system of corruption and cronyism. It was set up for failure the first time there was a serious down turn in the home market that sustained long enough to result in significant foreclosures. This was because the people who had loans they could not afford could not get out from under them by simply selling the home in a rising home market.

Another Democrat regulation of capitalism, the ridiculous Fair Value accounting rules, provided the spark to set off this tender box. It forced lending institutions to write down loans that were not in danger of foreclosure based on fire sale prices of the problem loans. This wiped out the apparent financial integrity of the institution. The result is the crisis we face today.