Crisis Could Happen Again? Book: We’ve Doubled down on the Bad Housing Policies That Caused 2008 Meltdown
January 13, 2015
The conventional narrative on the 2008 financial crisis holds that Wall Street greed and insufficient regulation of the financial system were to blame—a narrative that yielded the Dodd-Frank Act, the largest, most expensive government intrusion into financial markets since the New Deal.
But in his new book Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis—and Why It Could Happen Again (Encounter Books, January 13th, 2015), AEI’s Peter J. Wallison, a dissenter from the majority report of the Financial Crisis Inquiry Commission, uncovers startling new data and documentary evidence that reveals how government housing policy—not deregulation—fueled the subprime housing bubble that sunk the financial system.
In this compelling counter-narrative, Wallison shows how federal lending quotas and reduction of mortgage underwriting standards created a flood of toxic loans from 1997 to 2007. As one 2006 Fannie Mae official revealed, “Everybody understood that we were now buying loans that we would previously have rejected. But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”
When the crisis hit, Fannie, Freddie, and other Federal agencies were on the hook for 76% of all bad loans—not the Wall Street banks.
Worse, the Financial Crisis Inquiry Commission swept the evidence that proved government complicity in the crisis under the rug, even censoring Wallison’s dissenting opinion. The Commission’s unchallenged narrative buoyed the vast (2,300 page) Dodd-Frank Act, a bill that never seriously addressed housing policy, Fannie, or Freddie. And today the Obama Administration is again trying to reduce underwriting standards in order to sell more homes.
Hidden in Plain Sight explains why the real lessons of the financial crisis have been ignored, and why, without a real understanding of its causes, another financial crisis is surely lurking in the future.
• The Department of Housing and Urban Development (HUD) forced Fannie Mae and Freddie Mac to reduce their underwriting standards, then blamed them for the mortgage meltdown.
• In 2008, 76% of the subprime or otherwise weak mortgages were on the books of government agencies. Only 24% were on the books of the private sector.
• The members of the Financial Crisis Inquiry Commission never had an opportunity to review the report as a group before it was issued. Congress adopted the Dodd-Frank Act six months before the FCIC reported its conclusions, showing that Congress knew what the commission would say.
• The Group of Thirty—an international organization composed of central bankers and bank regulators under the chairmanship of Paul Volcker—proposed the fundamental elements that became Dodd-Frank only four months after the onset of the crisis, without any serious discussion of whether the causes of the crisis had been correctly assessed.
• The six federal agencies charged under Dodd Frank with defining the terms of a high-quality prime mortgage, under pressure from the Obama administration, recently released a rule that equates a prime mortgage with a loan that has no minimum down payment and no required minimum credit score.
• Because the US government’s housing policies were never seen as the cause of the crisis, these policies will be repeated in the future, with the same results.
Peter J. Wallison holds the Arthur F. Burns Chair in Financial Policy Studies and is co-director of the American Enterprise Institute’s program on Financial Policy Studies. From June 1981 to January 1985, he was General Counsel of the United States Treasury Department, and from 1986 to 1987, Wallison was White House counsel to President Ronald Reagan. He was a member of the congressionally-authorized Financial Crisis Inquiry Commission (2009-2011).
To schedule an interview or for other requests, contact AEI Media Services at [email protected] (202.862.5823).