Unmasking the Real Culprits of the Housing Collapse

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Frontpage Interview’s guest today is Paul Sperry, former Washington bureau chief for Investor’s Business Daily and author of The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Great Recession.

FP: Paul Sperry, welcome to Frontpage Interview.

Sperry: Thank you, always a pleasure, Jamie.

FP: I would like to talk to you today about the root causes of the financial crisis and why we can’t seem to get it behind us. What can you tell us?

Sperry: It’s complicated, but I’ll give you the Readers Digest version:

The government forced banks to rubberstamp home loans for lower-income folks who couldn’t otherwise qualify, and then blamed Wall Street when those high-risk loans failed in a classic case of government creating a problem and then blaming the private sector. The crisis was the inevitable outcome of more than a decade of bad housing policy in Washington. And now some of the same radicals are doubling down on the same stupid mistakes they made before the crisis.

FP: So this goes back to the 1990s and Clinton?

Sperry: As a matter of fact, he’s the prime suspect. But he had several accomplices — and many of them have returned to the scene of their financial crime. Because they were never held accountable, they’ve managed to land key jobs inside the Obama administration where they’re formulating more reckless housing and banking policies.

FP: Like who?

Sperry: Well, like Eric Holder and Tom Perez, who are leading a new bank shakedown at Justice for affirmative-action mortgages. And then there’s Shaun Donovan and Bill Apgar, who are picking up where they left off at HUD. They’re the geniuses who originally plunged Fannie and Freddie into the dangerous subprime securities market. I identify several other repeat offenders from the old Clinton gang in my book as well. But Clinton was the mastermind. Now he’s covering up his role by blaming Republicans and Wall Street.

His hubris never ceases to amaze me. He’s out there right now on a book tour trying to be the hero and save the economy that he himself murdered. It’s his own bad policies we need saving from. His housing regulations actually created the subprime bubble and started the feeding frenzy on Wall Street.

FP: What’s your evidence?

Sperry: Studies show the subprime bubble began in 1997 after Clinton’s lending mandates went into effect. But you don’t have to take my word for it. Before the crisis, Clinton and his regulators actually bragged about inventing the new subprime market on Wall Street. As I document in the book, they were all for subprime mortgages before they were against them. Clinton also bragged about shaking down banks for nearly $1 trillion in risky multicultural loans. The historical record is clear, and so is Clinton’s guilt.

The great irony is that back then, everyone was worried about Clinton socializing the health-care industry. Only he was busy socializing the mortgage industry, and almost nobody paid attention.

FP: What was his motivation?

Sperry: Boosting minority home ownership, and locking in their vote. He declared traditional underwriting standards “racist,” and enlisted no fewer than 10 federal regulatory agencies to crack down on prudent lenders. He named his anti-bank SWAT team the Interagency Task Force on Fair Lending, and that regulatory infrastructure remained in place throughout the 2000s.

The goal, shocking as it may sound, was to deliberately drive down mortgage underwriting standards in the name of diversity. This was the official policy of the United States government. Let me repeat that to be perfectly clear: The federal government, for the first time, made it a policy to gut time-tested rules for evaluating credit risk in the banking industry.

FP: Is there any truth to the charge that banks were discriminating against minorities?

Sperry: No. Clinton’s minority crusade was based on a lie — that lenders systematically and intentionally discriminate against minorities. Economists discredited the 1992 federal report that gave birth to the lie, but Clinton ignored their warnings and hired the leftwing activist who constructed it. He appointed her to a key position at Treasury to help lead his crusade. By
forcing banks to make hi-risk loans to folks who couldn’t afford them, they only ended up hurting the minorities they claimed to help.

Clinton was a home-wrecker in more ways than one, and he has a lot to answer for. History should deal more harshly with this impeached president than it has already. Of all the scandals, this was by far his worst. It’s just that no one could see the damage until the bubble burst and he’d long left office.

FP: But the bubble burst on Bush’s watch. Did he contribute to it?

Sperry: Bush continued Clinton’s reckless housing policies and that was a big mistake, and i don’t let him off the hook in my book. But it was Clinton who changed the rules for lending and fundamentally changed the home-finance market for the worse.

FP: Is there a solution?

Sperry: Get government out of the mortgage business. That means, for starters, gradually privatizing Fannie and Freddie and abolishing their affordable housing charter. And at a minimum, defanging the Community Reinvestment Act, the antiredlining regulation Clinton added teeth to and that Obama’s now expanding. The CRA corrupts the flow of capital by rechanneling it into largely unprofitable investments.

We also need to repeal or at least defund Dodd-Frank and the powerful new bank watchdog agency it created. The Consumer Financial Protection Bureau and its army of diversity cops are gearing up next to socialize small business loans, which pose even more risk than mortgages. The prescription that Barney Frank and the other affordable-housing zealots sold as “reform”
is simply more poison.

FP: Speaking of the Community Reinvestment Act — how big a factor was the Community Reinvestment Act?

Sperry: One Federal Reserve study estimated that as many as half the subprime loans were at least “indirectly attributable” to the CRA. Virtually everything ties back to Clinton’s major CRA revision, which fully went into effect in 1997. It’s the central thread running through this scandal – from banks to subprime lenders to Fannie and Freddie to even Wall Street firms who’ve taken the fall for the crisis. You’ll see it written in all the rules and regulations governing these entities. And by the way, all this is documented in the book as well, included among the 50 pages of footnotes, data tables, charts and other supporting evidence located in the appendix.

FP: How do you answer critics who say Countrywide Financial and other independent mortgage lenders unregulated by the CRA made most of the subprime loans?

Sperry: Countrywide wasn’t directly regulated by the CRA, but it was regulated by HUD. And it underwrote nearly $800 billion in subprime loans to meet HUD’s soft quotas. This and other red herrings are all litigated in my book. Without getting too far into the weeds, CRA’s apologists also don’t count the trillions of dollars in subprime loan commitments made by regulated banks to buy off CRA shakedown artists holding up their merger plans.

FP: What about the role of the Federal Reserve and interest rates in the crisis?

Sperry: The Fed poured fuel on the easy-credit bonfire ignited by bad housing policy. But the bubble started long before Greenspan started slashing interest rates. So clearly something else was at work, and that something was the weaker lending standards that government imposed on both private bankers and Fannie and Freddie, who in turn set standards across the entire mortgage industry.

FP: But the housing bubble was global, right?

Sperry: Actually Australia and Canada weren’t swamped by subprime loans. They kept lending standards relatively tight.

FP: What role did Obama play, if any, in the crisis?

Sperry: He helped ACORN and NPA (National People’s Action) shake down banks for risky multicultural loans. I looked up some of the clients he claimed were “victims” of lending discrimination and they all had bad credit. Every one of them. They were turned down for mortgages for the simple reason they posed too high a default risk for the bank. It had zero to do with the color of their skin. But that didn’t stop Obama from crying racism and shaking down Citibank and other lenders. Now he’s using the power of the entire federal government to shake down allegedly racist banks for the same kinds of risky loans. Some 70 banks are now under investigation, and several have already settled by among other things, agreeing to relax mortgage underwriting standards for minorities. So here we go again.

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  • http://libertyandculture.blogspot.com/ JasonPappas

    Paul Sperry has done his research. The details are confirmed in other books. Gretchen Morgenson, a New York Times reporter, details how Fannie Mae and the federal government led the subprime charge in the 1990s. Morgenson gets many of the details right, including the harmful government regulations, but absurdly blames "deregulation" because the regulations were the wrong regulations. Sperry gets the details right and the principle that summarizes the whole problem.

    Sperry misses one point (perhaps it is in his book). Fannie securities mortgages and protects the investors against loss. However, Fannie (and Freddie) also have proprietary trading operations in which they are the investors themselves speculating on mortgage securities. Many of the subprimes in the mid-00s weren't securitized by F&F but they were the customers that were buying these securities for their own portfolios. They were driving the market and continued to do so in 2007 when private investors were fleeing. They wound up with the largest portfolio of subprime mortgages after European banks (who are also government backed).

    Overall, Sperry has done great work. Read Peter J. Wallison's columns in the Wall Street Journal for ongoing coverage.

  • Loupdegarre

    The name glaringly omitted from all the articles on the Goldman Sachs Fraud case is George Soros who was feeding at the same Abacus trough as John Paulson. I know for a fact that Paulson and Soros used these products and had the portfolios stacked with CDO’s from Ameriquest. Why? Because they knew that Democratic presidential hopeful Eliot Spitzer was going to go after Ameriquest and the bonds written on their CDO’s were bound to drop drastically. I also believe all parties involved knew this would collapse the mortgage market. Why do I believe this? Ask yourself, how did Herb and Marion Sandler who owned World Savings the inventor of and the biggest writer of Adjustable Rate Mortgages and huge donors to liberal left wing causes know to sell their company just before the whole thing went south? I do believe this is just the tip of the iceberg and you will see class action suits on behalf of employees of several mortgage companies that were run in to the ground purposefully to make Soros, Paulson and GS billions, while they lost income, homes and savings.

  • Asher

    No wonder the Housing market collapsed. The Left and Acorn forced the banks to give out loans to those who couldn't afford to pay their mortgages, eventually failing on their payments and when the economy went sour, even more homeowners went belly up on their responsibilities. You see it is the perfect storm, Collapse the economy, open the borders so more people are freeloading off the legal tax payers, create chaos, OWS, sue companies and organizations, (libel Lawfare), and create class warfare between people and political parties so nothing gets done…Put one of your own in the White House who appeases your enemies…..

  • G Dub

    One needs to go back even further to the second worst POS in our history: Carter.
    In 1977, the Community Reinvestment Act was THE chicken and egg of the housing market collapse.

    • http://libertyandculture.blogspot.com/ JasonPappas

      Sperry does include the Community Reinvestment Act as part of the problem. However, he goes the extra mile and explains how. Many argue that the CRA loans weren't that many to create a problem. True. It was not just loans labeled CRA that were the problem. During the late 1990s when banks were allowed to expand across state lines and grow to huge proportions, permission for mergers and acquisitions could be denied to banks that didn't satisfy lending according to the letter or spirit of the CRA. Thus, the government breed a new type of bank–one with a disposition to loose lending standards. With Fannie and Freddie will to buy the loans and take them off the banks books, the process was set in motion.

  • James Morgan

    The question now is what are we (YOU!) going to do about it? VOTE OBAMA AND ALL DEMOCRATS OUT OF OFFICE IN 2012!

  • xios

    This article pretty much sums up how I experienced it. I am an appraiser and provided reports for many different brokers, lenders, and credit unions in the boom years. These institutions are audited federally and by the states every 6 months. If you had any complaint filed against you by a minority client you risked having your license revoked, so these companies toed the line and made countless "stated income" loans to people they knew were lying. Also instrumental in driving up property values artificially was the collusion between real estate agents, home sellers, and loan officers. In the DC area, Hispanic agents would pick the (inflated) sale price, there was no bargaining by the Hispanic buyer, the loan package would be prepared by the Hispanic loan officer, and the overage beyond what the seller asked for was split between the agent, loan officer, and seller. Appraisers were hooked in by legal agreements in the sales contracts which effectively stated-"We don't care what the appraiser comes up with, the buyer will still pay the contracted amount". Done deal. I know this probably went on with other groups of people, but I saw this first hand in the DC area Hispanic community.

    • http://libertyandculture.blogspot.com/ JasonPappas

      Quite interesting. One commentator noted that the biggest bubble states that blew-up and had the most defaults have a large hispanic community: California, Arizona, New Mexico, and Florida.

      Another explanation I saw for these states was the long-standing restrictions on land usage. Greater demand pushes up prices on a constrained supply. Put the two effect together …

  • http://apollospaeks.blogtownhall.com/ ApolloSpeaks

    Sperry's research simply underscores the fact that we have an reckless, incompetent, leftist loon in the White House who has learned nothing from the 08 housing crash. Made deaf, dumb and blind by the egalitarian ideal he is starting the subprime bubble all over again-but this time it includes small minority owned businesses.

    • 2maxpower

      lol …obama learn anything from the 08 housing crash.

      he is all for that kind f thing. it isn't just obama. he is nothing without the entire marxist group that has been in the government since the early 1900's

  • http://apollospaeks.blogtownhall.com/ ApolloSpeaks


    we have a reckless, incompetent, leftist……….

  • 2maxpower

    …and the crooks carry on. the rule of law was finished before Clinton left office.

    I don't see a solution that doesn't include a civil war.