The ABA, Obama And Government's Role

Anyone listening to President Obama's State of the Union Address could note help but notice his disdain for banks. The American Bankers Association, representing 8,000 banks noticed and took offence, especially with Obama's statement,

So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions.

Victoria McGrane, writing for Politico in "Bankers to Obama: Stop trashing us," Politico, February 27, 2009, states,

In a letter to the White House, ABA CEO Edward Yingling says bankers across the country were "disappointed and concerned" with rhetoric like that.

"Mr. President, of the over 8,000 banks in this country, very few ever made a single subprime loan, and they did not engage in the highly leveraged activities that brought down Wall Street firms," Yingling said.

I would go further than the ABA and suggest (politely of course) to President Obama that the government should acknowledge its own errors in contributing to the housing bubble and financial crisis in addition to those made by the private sector.

Part of the government's misadventure came in pursuing an increase in home ownership for Americans. The government sponsored entities (GSE's), Fannie and Freddie, were directed by the Department of Housing and Urban Development (HUD) to increase the share of loans they made to borrowers with income below the median to 40% in 1996. In 2000, the share was upped to 50%, and in 2008, to 56%. Yes, they were regulated into financing these loans. The debacle was bipartisan as noted by Slate (Shafer, Jack. "Fannie Mae and the Vast Bipartisan Conspiracy," Slate, September 16, 2008.).

They also granted the GSE's authority to lower underwriting standards. Underwriting standards are the quality guidelines used by lenders to gauge the creditworthiness of borrowers.

Stan Liebowitz ("Anatomy of a Train Wreck: Causes of the Mortgage Meltdown," Independent Policy Report, October 3, 2008.) tracks changes in income verification standards from the Boston Fed to the GSE's and on to Countrywide Home Loans, Inc., a paragon of lending virtue according to an article published in the Housing Policy Debate published by the Fannie Mae Foundation (Listokin, David and Elvin K.Wyly "Making New Mortgage Markets: Case Studies of Institutions, Home Buyers, and Communities," Housing Policy Debate, Volume 11, Issue 3, 2000.).

According to the transcript of an American Enterprise Institute event, "How Serious Is the Mortgage Problem That Will Confront President Obama?," Ed Pinto states,

There are 57 million, approximately, mortgage loans in the United States and fully 25 million or 44 percent are nonprime. That’s roughly double the estimates that a number of people were making pre-September 2008, and it also startled a lot of people to find out that Fannie Mae and Freddie Mac had ten million of these 25 million loans or about 40 percent of the total. Then you throw in FHA, which has another three and a half million or another 14 percent and you’re looking at the federal government having direct involvement in well over half of the total of subprime and Alt-A lending or nonprime lending.

The private sector was also involved, and their role should not be diminished. But if we do not mention the failure of the government, we are missing a big piece of the puzzle and regulatory reform is likely to be ill-formed.