Unmasking the Real Culprits of the Housing Collapse
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.
FP: What do you say to people who say deregulation, such as the repeal of Glass-Steagall, caused the crisis?
Sperry: Glass-Steagall had nothing to do with lowering mortgage underwriting standards, the central cause of the mortgage meltdown -- though you could argue that the repeal of that regulation had the effect of strengthening antiredlining regulations. Glass-Steagall triggered a wave of bank mergers, which in turn helped regulators punish banks that didn't make enough risky political loans. In order to get merger approval, they had to first pass CRA lending exams, which required banks practice "flexible underwriting." The added desire to merge and expand gave regulators added leverage over banks.
Make no mistake: Overregulation was the problem, not underregulation. Banks came under siege by regulators who politicized their mortgage-underwriting decisions.
FP: So are you saying banks are blameless?
Sperry: No, but government deserves most of the blame. It's quantifiable based on the 27 million bad loans in the system in 2008. Washington accounted for 71% of them by virtue of Fannie and Freddie, FHA and HUD and other entities controlled by the government. Obama and the Occupy Wall Street crowd have it wrong: It's not the "1% economy," it's the 71% economy.
FP: Weren't derivatives, CDOs & credit default swaps part of the problem?
Sperry: Mortgage-backed securities were nothing new. What was new was all the bad underlying loans and the bad underwriting -- and that was a function of bad government.
FP: What about the credit agencies -- aren't they to blame?
Sperry: The reason they didn't rate subprime securities as junk is because the underlying mortgage assets were underwritten by Fannie and Freddie and therefore considered safe as Treasuries. And Fannie and Freddie drove demand on Wall Street for those securities while trying to meet HUD's hard lending quotas. By 2005, the government-backed mortgage agencies commanded the lion's share of the subprime securities market. And contrary to popular wisdom, subprime investments weren't profitable for Fannie and Freddie. The now-toxic twins took a $200 million-a-year hit subsidizing those riskier loans -- and that was before the crash.
FP: So greed wasn't a factor?
Sperry: Greed became a factor when high prices hid the risk, yes, but the main fault lies with government. If someone poisons a well, who's more at fault for harming the villagers -- the guy who poisons the well or the guy who distributes the water? The government poisoned the well.
FP: How much fault lies with borrowers?
Sperry: As artificial demand drove home prices higher and higher, and as lending standards were relaxed across the board, a lot of people got greedy and cashed out equity for toys and ended up with more debt than they could afford. Subprime borrowers knew they had to pay higher rates to cover their higher risk. They knew they had crappy credit and would get commensurately crappy loans. But they wanted the money. Nobody held a gun to their heads.
FP: What would you say to those who would argue that your position blames minorities?
Sperry: In fact, a lot of deadbeat borrowers were white, and I profile a few of the more egregious cases in the book. But no, I don't blame minorities, I blame the politicians who pushed them into homes they couldn't afford. They didn't do them any favors -- they're worse off than ever now, and that's the real tragedy and the real scandal here.
FP: What is the true record in terms of blacks being hustled into "predatory loans" with higher rates and fees?
Sperry: Yes, that happened, but they were hustled into them by HUD, which was the biggest "predatory lender" of all. HUD and other regulators advised lenders to actually "target" black neighborhoods and pay brokers higher commissions for minority loans or face various penalties. The Justice Department ordered the same thing through consent decrees.
Now, subprime loans charge higher rates and fees. But a little-noticed Fed study found that blacks and Hispanics defaulted on prime loans at the same rate as subprime loans. This indicates that the problem of all the busted subprime loans wasn't so much the terms of the subprime loans, as the media would have you believe, as it was the uncreditworthiness of the borrowers, who happened to be disproportionately minority. On average, African-Americans and Hispanics tend to have the worst credit histories and the worst default rates on loans, according to the Federal Reserve, and that tends to be the case at all income levels -- poor, middle class or rich. So they tend to get the worst deals on loans.
FP: How do we really know that banks don't discriminate against minorities?
Sperry: Because, for one reason, banks tend to favor Asian loan applicants over whites. On average, Asian minorities get rejected least for credit, and they get the best deals on loans -- and that's simply because they tend to have the best credit, better than whites. In fact, studies show the poorest Asians tend to have even better credit than the wealthiest blacks. So it's not even a matter of income level and propensity to pay. It's a function of willingness to pay, and to pay on time. It's a function of credit and culture, not color. The only color that matters in the lending business is green -- unless of course the government decrees otherwise.
FP: What are your thoughts on the Financial Crisis Inquiry Commission, which was the official body set up by Pelosi and Reid to get to the bottom of all this?
Sperry: These Democrat-appointed "investigators" should be investigated for misusing $10 million in public funds to mislead the public. And their "authoritative" and "definitive" report should be moved over to the fiction aisle in bookstores. It frames Wall Street and exonerates Washington, including Fannie and Freddie. As I reveal in my book, FCIC chairman Phil Angelides ran a dirty investigation. He put trial lawyer cronies in key slots where they went gunning for the very same banks their law firms are suing. They even leaked preliminary findings to their partners. We're not just talking cover-up, we're talking major corruption here.
Jamie, this financial crisis is, in fact, a political scandal -- the worst since Watergate -- and now there's a full-blown cover-up. And the real culprits in Washington are covering their tracks so they can get away with doing it all over again. And so far they are getting away with it.
FP: Paul Sperry, thank you for joining Frontpage Interview.
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