The Community Reinvestment Act likely started out with good intentions. It made it illegal to engage in what is known as “redlining” or singling out loan applicants by race. The problem is that there are enough minorities in poverty stricken inner city areas that banks who simply use standard good credit practices would leave out most anyone in those regardless of race. This created a loophole for groups such as ACORN to file a long series of harassment lawsuits charging redlining. ACORN also engaged in physical harassment of bank employees and other tactics to get them to lower credit standards.

Under the Clinton administration, federal regulators began using the act to combat “red-lining,” a practice by which banks loaned money to some communities but not to others, based on economic status. “No loan is exempt, no bank is immune,” warned then-Attorney General Janet Reno. “For those who thumb their nose at us, I promise vigorous enforcement.”

In the name of fighting “racism” and “redlining” ACORN and the government forced banks to make riskier loans in areas less economically stable or viable and customers who had low income and were a high credit risk. Banks said it was risk management, Democrats said it was racism.

Abuse of the CRA was the first step in what became the mortgage crisis. For a more detailed article on ACORN and the abuse of the CRA, and Barack Obama’s role in ACORN please visit this link HERE.

This risk banks were subjected to was amplified greater because loan customers wanted fixed rates and depositors wanted a variable rate. The banks had to keep enough liquid assets to cover loans. This limited the number of loans that a bank. So how did they get around this?

Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac were created as a partially private corporation backed by the US Government to buy loan bonds or buy the mortgages outright from banks. Congress created a regulation and monitoring agency called the OFHEO that reported to the Banking Committee’s in the Congress and exempted them from reporting to the Securities Exchange Commission (SEC).

OFHEO has two missions.

An affordable housing mission that reports to HUD, but has no real enforcement power and a mortgage finance mission that has almost no enforcement power and reports to the finance committee’s in Congress.

OFHEO is paid for by Fannie Mae and Freddie Mac and is not paid for by the tax payer.

Sounds odd you say? It is. Separation of powers would be true for a real constitutional agency, but Fannie Mae, Freddie Mac and OFHEO are a part of the GSE system and are not real constitutional agencies as authorized by Congress under Article I Section VIII.

Most of the mortgage industry debt is managed by GSE’s which are unique animals in government being part government and part private. That is why GSE’s do not follow the standard separation of powers as they were set up. GSE’s are almost certainly unconstitutional to begin with, so it is no surprise that their monitoring and enforcement are not typical as well.

OFHEO has begged Congress year after year to have itself replaced by REAL banking regulators with REAL enforcement power either under the Federal Reserve or the Treasury Department. Here is an example from their 2007 Report:

Legislation
OFHEO has continued to strongly support enactment of legislative reform to strengthen GSE oversight. During the past year, the agency worked with the Bush Administration, Congress and interested parties on legislation that will provide bank regulator-like powers to a newGSE regulator overseeing Fannie Mae, Freddie Mac and the Federal Home Loan Banks.The House of Representatives passed, on a bipartisan basis, GSE regulatory reform legislation (H.R. 1427) in May 2007 [Barney Frank and Finance Committee Democrat members in both houses of Congress opposed it year after year till 2007 - Editor]. It is a balanced bill that will strengthen the nation’s housing finance system by enhancing oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It is my hope that the Senate will complete its work on this important legislation soon.
http://www.ofheo.gov/media/pdf/OFHEOPARNovember2007508.pdf

Democrats blocked that legislation year after year and below we posted the youtube VIDEO of members of the Finance Committee’s in Congress showing Democrats like Chris Dodd and Barney Frank and Maxine Waters all saying that Fannie Mae and Freddie Mac and the mortgage industry was in just dandy financial shape.

This was step two that led to this crisis. The abuse of CRA as we described above forced banks to make more loans available that carried more risk, so banks were eager to sell these higher risk loans to Fannie Mae and Freddie Mac. With the housing boom the inflated value of the houses it had as collateral for the loans on paper made it look like Fannie and Freddie had more collateral assets than reality could bear. With the housing market inflating due to easy loans and low interest rates making it TOO EASY to get a loan for a new home, demand for loans went up. Fannie and Freddie started buying loans at a furious rate. The more loans they bought, the more income on paper they could claim, but more and more people were defaulting on the bad loans….

Political appointees (not financial guru’s) were placed in charge of Fannie Mae and Freddie Mac; people like Franklin Raines, Jeff Johnson and former Clinton Deputy Attorney General Jamie Gorelick. It was the policy of the Clinton Administration and Congressional Democrats to lean on banks, and Freddie and Fannie to get loans to low income people so that “everyone could have a home” (besides all that loan money out there propped up and somewhat inflated the economy so it helped make the numbers look good).

So let’s add up the cards we have now, the government and Fannie and Freddie, are encouraging banks to give bad loans and Freddie and Fannie would buy them up to help absolve the banks from the risk by buying the high risk loans up. Political appointees with political motivations, rather than sound financial motivations were in charge, and the people the regulators and Fannie and Freddie reported to, was not the SEC, which demands sound accounting practices, but the congressional committees that as policy wanted more loans given out as well, mostly Democrats

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