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The Housing Prices Collapse

The current rage in analyzing the current housing crisis is the book by Gretchen Morgenson, Reckless Endangerment. A financial editor and columnist for the New York Times, Morgenson blames the housing prices collapse on government affordable housing policy in league with Wall Street. I have two problems with her book.

First, Morgenson is right on target talking about the lack of regulatory effort, but her history starts with the Clinton adminstration that sought and succeeded in broadening home-ownership. She documents the role President Clinton played in reducing regulations over the banking industry which helped to bring about the housing prices collapse. Morgenson focuses on the mismanagement of Fannie Mae and Freddie Mac and the close relationship between the investment banks and themselves, but what she failed to do was to return to the beginning of deregulation.

Deregulation did not begin with President Clinton’s administration. It began with the Depositary Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) which set a relatively high variable-rate ceiling for all banks and preempted state usury laws with respect to first mortgages. What a disaster that was! Morgenson doesn’t mention it. Then the 1982 Germain Depository Institutions Act freed up the savings and loan banks with disastrous results. Remember those – the S&Ls. The Alternative Mortgage Transaction Parity Act (AMTPA) as part of the DIDMCA prohibited any state law from restricting alternative mortgage financing such as balloon payments and adjustable rate mortgages. The conservatives had taken over the Presidency and their first actions were to prevent states from protecting its citizens against banking greed. So much for states’ rights.

To top it off, Congress passed the 1984 Secondary Mortgage Market Enhancement Act (SMMEA). This allowed the banks to compete with Frannie Mae and Freddie Mac. It opened the door to private mortgage backed securities (MBS). What is that? It is the process of buying mortgage loans from banks, pooling the mortgages, and selling them.
The second issue is Morgenson’s statements that the “Wall Street” learned so much from Johnson at Fannie Mae. The idea that the financial elites learned from the public sector betrays an ignorance about the role financial elites have played in American history.

Read it but remember the forest, not just a few trees.


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