Rate Watch #1182 – People Still do not Understand what Caused the Great Recession

March 18, 2019

By Dick Lepre





A recap of all of last week's fundamentals is here.

Most people believe that the Great Recession was caused by bad mortgage lending.  They are correct. Most people believe that lenders did this on their own.  The truth is more nuanced.

The National Homeownership Strategy

Groundwork for the Great Recession was laid by Congress as it gave HUD the regulatory authority to dictate to FNMA and FHLMC their lending standards. 

In 1994 President Clinton set as a national goal to raise the homeownership rate to 67.5 percent by the end of 2000. 

Clinton's goal seemed completely noble. HUD (Department of Housing and Urban Development) noted that the homeownership rate has declined from 1980 to 1986 and then flattened.


Clinton's reasoning was put forth in a speech he gave on June 5, 1995.


"You want to reinforce family values in America, encourage two-parent households, get people to stay home? Make it easy for people to own their own homes and enjoy the rewards of family life and see their work rewarded. This is a big deal. This is about more than money and sticks and boards and windows. This is about the way we live as a people and what kind of society we're going to have."

It is hard to argue with that. It is reasonable to believe that people who own their own home have more to lose and are more likely to stay employed and be, for lack of a better term, good citizens.


Clinton has started this process by directing HUD secretary Henry G. Cisneros to work with leaders in the housing industry, representatives of nonprofit groups, and officials at all levels of government to develop a National Homeownership Strategy that would increase ownership opportunities among populations and communities with lower than average homeownership rates.


On November 3, 1994, President Clinton sent a letter to Secretary Cisneros at HUD. 

Dear Henry: 

"Homeownership is the American Dream. Our nation has embraced this dream since the National Housing Act of 1949 made 'a decent home and a suitable living environment for every American family' a goal of national policy. The United States is the first major industrial country to make homeownership a reality for a majority of its people. Thanks to effective cooperation between industry and government, the doors of homeownership have been opened to millions of families in the past 45 years. However, since 1980, the national homeownership rate has been declining. Reversing this trend is vital to American families, to communities, and to our economy. Homeownership strengthens families and stabilizes communities. It encourages savings and investment and promotes economic and civic responsibility. Expansion of homeownership is an integral part of the Administration's economic plan. It spurs new investment, strengthening the economy and creating jobs. A stronger economy in turn enables more people to buy homes. For all these reasons, it is in our national interest to expand homeownership opportunities for all Americans."


"Today, I am requesting that you lead an effort to dramatically increase homeownership in our nation over the next six years. I request that you report back to me within six months, with a concrete strategy involving the private and public sectors, and all levels of government, that builds on the base of the more than 1.5 million additional families who have been able to buy their own homes since the beginning of this Administration. Your program should include strategies to ensure that families currently underrepresented among homeowners - particularly minority families, young families, and low-income families - can partake of the American Dream."


"In the course of developing this strategy, you should explore ways to combine private and public sector resources.”


Sincerely, Bill Clinton


In response HUD formulated the National Homeownership Strategy.


The body of that can be seen here. Interestingly, when the housing bubble burst HUD removed this from its web site.


The strategy said:


"For many potential homebuyers, the lack of cash available to accumulate the required down payment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."

The boldfaced phrases are telling: lack of cashdo not have sufficient income to make the payments, fueled by creativity. HUD got what HUD asked for.

The seeds of the housing bubble and the monumental disaster which occurred when it burst were sewn.

HUD's thinking was that if some people could not qualify for mortgages pre-National Homeownership Strategy then something was wrong with lenders. 

Cisneros did not simply put this plan out there. He needed help. He put Fannie Mae and Freddie Mac under pressure to do more lending to "underserved" markets. While Cisneros's own HUD administration acknowledged that mortgages financed by Fannie and Freddie in "underserved" areas have a higher risk of default, it did not see that "there need be any safety and soundness impediment" to the policy. It was under Cisneros's direction that HUD agreed to allow Fannie and Freddie credit toward its "affordable housing" targets by buying subprime mortgages originated by others.


If you want to think that dissing Cisneros is part of a right-wing ploy please read this New York Times article.


The scary thing is that this worked - at first. Homeownership went up, Clinton took credit for the boom in housing, and the economy boomed.


HUD however saw this as a process with no limits. After Cisneros resigned, Andrew Cuomo took over. During the Cuomo years, mortgage industry officials and housing advocates wanted Fannie Mae and Freddie Mac to purchase higher volumes of riskier loans that were offered to less creditworthy borrowers. Cuomo's HUD continued to pressure Fannie and Freddie to increase the portion of their portfolios consisting of loans to moderate-income borrowers. It was Andrew Cuomo’s HUD that in 1999 mandated that Fannie and Freddie purchase 50% of the “mortgage loans to benefit low- and moderate-income families. Cuomo applied pressure by having HUD publicly "investigate" whether Fannie and Freddie were sufficiently in compliance with government fair-lending standards designed to prevent discrimination.

The extent to which FNMA, FHLMC, and FHA owned subprime and Alt-A mortgage at the time of the crisis is not usually discussed. In fact, as of 6/30/2008 FNMA owned 9,277,000 such loans, FHLMC owned 7,238,000, FHA and VA owned 4,760,000 and there were 2,240,000 CRA and HUD program loans. Bottom line is that the U.S. government and the GSEs owned 23.8 million of the 31.1 million subprime or Alt-A loans.  (Alt-A loans were generally characterized by reduced income documentation or even stated income.)


There were people picketing on Wall Street blaming the banks who made the loans which caused this disaster and I doubt if 1% of those people ever heard of the National Homeownership Strategy. When I first wrote about the topic ten years ago I contacted three San Francisco Bay Area finance and real estate reporters. None of them had ever heard of the National Homeownership Strategy.


Banks and Wall Street did help the housing bubble. How?


In essence two paths happened. In one path FNMA constantly lowered their underwriting standards to satisfy the increasing demands from HUD. HUD continually pushed higher the percent of loans that FNMA had to do to people who previously could not qualify. At a certain point FNMA said "We cannot do they percent of loans that you demand. Our models say they will default." HUD's response was to say, "Fine. Don't do them. We will have banks do them and you will then buy the securitized loans to fill the quota that you cannot meet."


At that point, banks and Wall Street saw the opportunity. If HUD demanded that there be more loans to people who lacked cash and did not have sufficient income to make the payments then the mortgage industry and Wall Street would find these new homeowners and make loans to them. HUD's demand that FNMA buy these subprime loans, in effect, made them prime because despite the fact that the borrowers were not going to make the payments, the government implicitly (and then explicitly) stood behind FNMA and FHLMC.


In 1999, Countrywide, which had become the nation's largest residential housing lender, reached an exclusive agreement to sell FNMA billions of dollars in mortgages in exchange for lower "guarantee" fees that Fannie charged originators when it bought their loans. The success, and then failure, of both entities became intertwined as FNMA purchased large amounts of subprime loans and securities, which allowed subprime lenders like Countrywide to grow their businesses. When the subprime market collapsed in 2007, Countrywide and FNMA collapsed as well.


In addition Wall Street investment banks with the aid of bogus ratings from debt rating agencies securitized crap mortgages.


A sinister thing happened to disguise the problem. As more and more people who could not make mortgage payment and had no down payment were encouraged to buy homes the demand rose to an unnaturally high level and the housing bubble delusion lived for too many years. People who couldn’t make payments were still able to sell at a profit.

I am not painting this as entirely a "Clinton did this" issue. When Clinton left office, Bush was so enamored of the housing bubble that he removed the requirement of 3% down and we then had no down payment loans. In June 2008 NYT columnist Paul Krugman wrote a piece blaming Bush “Owning a home lies at the heart of the American dream.” So declared President Bush in 2002, introducing his “Homeownership Challenge” - a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups." Krugman made no mention of the National Homeownership Strategy.


Krugman may have regarded the National Homeownership Strategy as an inconvenient truth which he could choose to ignore, but he was certainly correct that the Bush administration worsened the problem started by the National Homeownership Strategy.


It was under Bush's HUD Secretary Jackson that HUD decided in 2004 to increase Fannie and Freddie's "affordable" housing goals while allowing the financial giants to continue the Clinton-era policy of counting subprime mortgages as credit toward meeting that goal. Despite Fannie's 81-percent increase in lending to minority families in 2003, Jackson chastised the organization for its "failure to lead."


Jackson's pressure on the GSEs came despite the fact that regulators were growing increasingly concerned with subprime lending. The Washington Post found that "housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy."


According to Peter Wallison:


The increased demand from the GSEs and the competition with private-label issuers drove up the value of subprime and Alt-A mortgages, reducing the risk premium that had previously suppressed originations. As a result, many more marginally qualified or unqualified applicants for mortgages were accepted, and these loans joined the flood of junk loans that flowed to both the GSEs and the private-label issuers beginning in late 2004.


By 1997, Fannie was purchasing 97% LTV mortgages, and by 2001, it was buying mortgages with no down payment at all. By 2007, Fannie and Freddie were required by HUD to show that 55 percent of their mortgage purchases were LMI (low to moderate income.) Moreover, 38 percent of all purchases had to be from underserved areas (usually in inner cities), and 25 percent had to be purchases of loans that had been made to low-income and very-low-income borrowers.


Wallison states: With the publication of "Reckless Endangerment," a new book about the causes of the crisis, this story is beginning to unravel. The authors, Gretchen Morgenson, a business reporter and commentator for the New York Times, and Josh Rosner, a financial analyst, make clear that it was Fannie Mae and the government housing policies it supported, pursued and exploited that brought the financial system to a halt in 2008.


The Financial Crisis Inquiry Commission (FCIC) reported in January that the 2008 crisis was caused by lax regulation, greed on Wall Street and faulty risk management at banks. HUD? Never heard of them. National Homeowenrship Strategy? Never heard of it. The fact is that the massive bureaucracy of government has been continuously disingenuous about the root cause of the mortgage mess and the recession we are in. Bureaucracy preserves itself by blaming others for its mistakes.


The National Homeownership Strategy was the economic equivalent of a bad drug habit. Not only did it screw the people whom it purported to serve but it was also the genesis of one of the worst disasters in American financial history and, worse yet, neither the media nor politicians want to tell the true story.


Parts of this newsletter are copied from the following sources:


American Presidency Project: William J. Clinton: Remarks on the National Homeownership Strategy http://www.presidency.ucsb.edu/ws/index.php?pid=51448#ixzz1ZxfXrNdB


The original National Homeownership Strategy publication http://www.globalurban.org/National_Homeownership_Strategy.pdf


HUD explanation (before the bubble burst) as to how massively successful the National Homeownership Strategy was Homeownership: A Housing Success Story


piece from the William J Clinton Presidential Center in which in 1997 he takes credit for the success of the National Homeownership Strategy.


piece from the Bush presidential archives in which he takes credit for "Expanding Homeownership Opportunities for All Americans."


Carol D. Leonnig, "How HUD Mortgage Policy Fed the Crisis," Washington Post, June 10, 2008, p. A1.


The sad history of HUD by Tad DeHaven of Cato Institute.


One of the best pieces detailing the failed history of the National Homeownership Strategy was from Mother Jones. Not exactly a right wing magazine.

Three Studies of Subprime and Alt-A loans in the U.S. Mortgage Market, Edward Pinto


Technical Analysis from Jim Grauer

The 10-year Note should trade in the 2.50%-2.80% yield range for this coming week.

Detailed stochastic analysis is here http://www.loanmine.com/CustomPage378.x


Dick Lepre
Senior Loan Advisor

3240 Stone Valley Rd West
Alamo, CA 94507

Cell: 415.244.9383
eFax: 866.488.2051
BRE License # 01143973

NMLS #302379



LendUS, LLC dba RPM Mortgage NMLS #1938

Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act