Government Policies and The Subprime Mortgage Crisis - Government "affordable Homeownership" Policies - Policies of The Bush Administration

Policies of The Bush Administration

President Bush advocated the "Ownership society." According to a New York Times article published in 2008, "he pushed hard to expand home ownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards." .

There appears to be ample evidence that the Bush administration recognized both the risk of subprimes, and specifically the risks posed by the GSE's who had an implicit guarantee of government backing. For example, in 2003, the Bush administration, recognizing that the current regulators for Fannie and Freddie were inadequate, proposed that a new agency be created to regulate the GSE's. This new agency would have been tasked specifically with setting capital reserve requirements, (removing that authority from Congress), approving new lines business for the GSE's, and most importantly, evaluating the risk in their ballooning portfolios. It was in specific response to this regulatory effort that Barney Frank made his now infamous statement "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Had this new regulatory agency been put in place in 2003, it likely would have uncovered the accounting fraud regarding executive bonuses which was occurring at that time at Fannie Mae. This accounting scandal would later force the resignation of Franklin Raines and others executives. This new agency may also have slowed or stopped the further movement of the entire mortgage industry into subprime loans by exposing the full extent of the risks then taken by Fannie and Freddie, who at this time, controlled nearly half of all subprime loans being issued.

Republican Mike Oxley, the former chairman of the House Financial Services Committee, has pointed out that the House of Representatives did in fact pass a law strengthening regulation of the GSEs (the Federal Housing Finance Reform Act of 2005) but the Bush White House scuttled it. In Oxley's words, "All the hand wringing and bedwetting is going on without remembering how the House stepped up on this. What did we get from the White House? We got a one-finger salute."

Efforts to control GSE were thwarted by intense lobbying by Fannie Mae and Freddie Mac. In April 2005, Secretary of the Treasury John Snow repeated call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system." Then Senate Minority Leader Harry Reid rejected legislation saying " we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process." A 2005 Republican effort for comprehensive GSE reform was threatened with filibuster by Senator Chris Dodd (D-CT).