docweb200809AffirmativeMeltdown.doc
Arthur Hu / Hu’s on First Asian Week September 26, 2008
I thought I’d never live to see my bank go bust. Wamu? Boo Hoo! Back in 1999, Fannie Mae first introduced rules for sub-prime loans to increase minority homeownership and boost profits. The government subsidized corporation was founded as part of the New Deal in 1938 before it was spun off in the 1960s. Once a monopoly, it still has about half the market of reselling mortgages backed with guarantees of payment. At the time, economists warned that relaxed lending rules might lead to a giant failure that would have to be bailed out by the government if the real estate market cooled like it did in the 1980s. [1]
As we all know, that just happened as Uncle Sam took Fannie Mae back. Talk about obscene executive pay, over $100 million was spent on the paychecks of just three Democrats. James Johnson, who was briefly on Obama’s VP committee, earned $21 million in just one year of being CEO for 7 years. Obama’s housing policy advisor Franklin Raines earned $90 million in his five years as CEO, and Jamie Gorelick earned $26 million as vice chairman, even as Raines and other top executives were caught using accounting tricks to trigger massive bonuses and understate their pay.
It was left wing meddling inspired by affirmative action that led to politically correct credit decisions. As Ann Coulter put it, “They gave your mortgage to a less qualified minority”. The Clinton administration investigated Fannie Mae for discrimination. Ending “redlining” of minority neighborhoods became the new crusade, even if factors such as credit histories, job stability, loan-to-value ratios and income levels were completely different between communities. It was urged that half of Fannie Mae and Freddie Mac’s portfolio be made up of low / moderate income borrowers by 2001.
Discriminatory criteria such as credit history and down payment ability would become less important, as welfare and unemployment payments would be counted, and “stated income” allowed borrowers to make up their own income, whether it was backed up by a cash business or nothing but thin air. People were rewarded for signing up loans, not for making sure they would be repaid when they were resold. When G.W. Bush entered office, his economist warned that loans to under-qualified borrowers created a risk for the entire financial system. In 2003, Treasury Secretary John Snow proposed oversight with strict controls over risk and capital reserves.
When Senator John McCain joined the fight for reform of corruption, the effort was stopped by Democrats such as Barney Frank who stated there was no financial crisis at Fannie Mae / Freddie Mac, and such pressure would reduce affordable housing. As McCain observed that Obama collected the 2nd highest amount of Fannie and Freddie contributions in his short career, “Senator Obama may be taking their advice and he may be taking their money but I want to tell you in a McCain/Palin administration, there will be no seat for these people at the policy making table.”
Whatever the proper role government has in cleaning up this mess, one thing must be clear. A diverse nation cannot commit to spend whatever it takes to put everybody in a solar house and hybrid car, all-you-can-eat medical coverage, college, preschool, and high test scores for all. Yet this is precisely what Obama promised to do at the debate. Only John McCain committed to fight to control spending which threatens the entire American economy with imploding so badly that no one will be able to will bail out Uncle Sam.
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