The Republican Mortgage Crisis

To the many Americans who don't follow the business news in their local paper, when the current crisis in the financial markets made its way into nightly television news broadcasts, it seemed like it came out of nowhere. Yet for those who looked for them, there were signs that a crisis in the mortgage industry and related markets was looming for at least a year, and the irresponsible economic policies that helped facilitate it date back to the early days of the Bush administration.

RealtyTrac, which advertises itself as "the leading marketplace for foreclosure properties," reported more than 1.2 million foreclosure filings in 2006, up 42 percent from 2005 and "a foreclosure rate of one foreclosure filing for every 92 U.S. households."

"It's true that foreclosures could have a negative impact on the housing market if they continue to increase at this rate. And in some of the more problematic local markets they already may be contributing to slowing home price appreciation and a glut of homes for sale," James J. Saccacio, chief executive officer of RealtyTrac said in a company press release on January 2007. "However, most local markets have been able to re-absorb foreclosure homes without seeing any major damage to the local economy, Saccacio added.

August 2006

RealtyTrac reported 115,292 foreclosures -- a 24 percent increase over July, and a 53 percent increase over the previous year. A key reason for the increase in foreclosures, according to real estate analysts, was increased monthly payments on adjustable rate mortgages. Adjustable rate mortgages typically feature low introductory rates followed by regular rate increases. For instance, a $200,000 adjustable rate mortgage that started with monthly payments of $950 in 2000 might have jumped to $1200 in 2006.

Many of the worst hit markets were in the Midwest, which was suffering from layoffs and other economic woes related to shifts in demand for and production of manufactured goods. Manufacturing makes up a larger part of the midwest economy, on average, than it does in the rest of the nation. The decline in marketshare for the Big Three automakers, for instance, had widespread negative effects on the midwest economy. Job growth in the midwest lagged that of the rest of the US economy, as well, limiting income growth, and "restricting the demand for housing," according to Bill Testa, Vice President for Regional Programs at the Federal Reserve Bank of Chicago.

When the housing market was hot, homeowners faced with sharply increased mortgage payments might have been able to sell their home easily, or, given rapidly appreciating home values, refinanced. In a slow market, though, these options start to disappear.

October 2006

Despite the growing number of foreclosures a Moody's report on collateralized debt obligations (securities structured from various kinds of debt) found that 40 percent of the 678 issues they examined were collateralized by residential mortgage-backed securities (RMBS). Of that 40 percent, something over 70 percent were based on subprime and home equity loans.

Only a small fraction of RMBS are used to collateralize CDOs. In 2005, for example, the FDIC reported $200 billion of MBS was purchased for CDOs, while according to the Securities Industry and Financial Markets Association (SIFMA), $1,326 billion was issued in private RMBS.

Moody's noted in their October 2006 report that there can be a delay of three to seven weeks before their ratings reflect those of other agencies; the implication is that their observations of CDOs would lag developments in the underlying RMBS.

As reported in the NY Times , Balestra Capital's Jim Melcher was among the financial analysts and managers observing these trends in the housing and mortgage markets, and the market for related securities. In October 2006, using complex but common investments, Melcher bet $10 million that RMBS would decline in value. As the crisis deepened, he eventually bet $60 million of the $100 million or so in the hedge fund he managed. (As of mid-August 2007 Melcher's fund had doubled in value.)

December 2006

On December 7, OwnIt Mortgage Solutions, a California-based lender partly owned by Merrill Lynch, closed. The LA Times reported that OwnIt ran out of cash to meet its obligations and claimed that Merrill had cut off funding. OwnIt was reportedly the 11th largest issuer of subprime mortgages in the US. According to Bloomberg news, Merrill had sold at least $4 billion of securities backed by OwnIt mortgages.

February 2007

HSBC announced that it would charge off $10.6 billion in bad debts related to its subprime mortgage business. The amount was about 20% higher than HSBC's annual forecast of $8.8 billion. The bank acknowledged that it had underestimated how many mortgage holders would fall behind as their monthly payments increased because of higher interest rates.

A week later ResMae, a home lender catering to people with bad credit, declared bankruptcy; most of its assets were acquired by Credit Suisse. A week after that, NovaStar Financial, another subprime lender, reported a fourth quarter loss of $14.4 million, and warned that it might not be able to pay dividends for four years.

March 2007

March 7. The FDIC ordered Fremont General Corporation to stop making subprime mortgage loans. An FDIC press release stated that the agency found "that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank." A few days later the second largest subprime lender, New Century Financial, reported that its own lenders were cutting off financing, and that it did not have funds to meet its estimated $8.4 billion obligations. Documents filed with the SEC reported that several New Financial lenders were demanding that the firm repurchase all its outstanding mortgage loans. Creditors included Morgan Stanley, Citigroup, Barclays, Bank of America, Credit Suisse First Boston and Goldman Sachs's mortgage unit.

March 14. H&R Block's CEO Mark Ernst reiterated on March 14 that the firm's Option One mortgage unit was for sale -- a possibility he had first announced in November 2006. A week later another subprime lender, People's Choice Home Loan Inc., filed for bankruptcy protection.

March 28. Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee of the US Congress that problems with subprime mortgages were not spreading to the rest of the economy. "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Bernanke said, although he warned that the housing slump could be worse than expected.

April 2007

April 2. New Century Financial filed for bankruptcy, listing $100 million in liabilities making it the largest subprime mortgage failure up to that point. Meanwhile, American Home Mortgage Investment Corp. warned that its first quarter profits would be much lower than expected, in part because borrowers were defaulting on so-called Alt-A loans (loans to people with better credit than qualify for subprime loans).

June 2007

Saying that increased defaults on home loans had hurt its mortgage-related businesses, Goldman Sachs reported nearly flat quarterly net earnings on June 14, 2007. Revenue declined by 1%. A week later Bear Stearns, which the NY Post identified as "the premier issuer and trader of mortgage-backed bonds on Wall Street," announced that it was injecting $3.2 billion into its High-Grade Structured Credit Strategies Enhanced Leverage (a hedge fund comprised largely of mortgage-backed bonds).

Hedge funds figure prominently in the subprime mortgage crisis, partly because nearly $2 trillion worldwide may be invested in them, partly because they "leverage" their investments (i.e. they borrow heavily using one set of securities as collateral, in order to invest in other securities that they hope will bring higher returns), and partly because, in their continual search for higher returns, some hedge funds have become major investors in securities backed by mortgages, including subprime mortgages.

Clif Asness of AQR capital described hedge funds as follows:

Hedge funds are investment pools that are relatively unconstrained in what they do. They are relatively unregulated (for now), charge very high fees, will not necessarily give you your money back when you want it, and will generally not tell you what they do. They are supposed to make money all the time, and when they fail at this, their investors redeem and go to someone else who has recently been making money. Every three or four years, they deliver a one-in-a-hundred-year flood.

On June 22, Business Week reported on Bear Stearns $3.2 billion plan to rescue its High-Grade Structured Credit Strategies Fund. Unfortunately for investors, the rescue plan apparently did not include the firm's High-Grade Structured Credit Strategies Enhanced Leverage Fund, which lost 23% of its value since April. Losses in that fund had led Bear Stearns to "suspend investor redemptions" and sell off $4 billion in high grade mortgage-backed bonds.

July 2007

July 10.Credit rating firm Standard & Poor's announced that it would probably downgrade a relatively small $12 billion worth of bonds backed by subprime mortgages. Later the same day Moody's Investor Service downgraded 399 bonds with a total value of $5.2 billion. In a conference call with investors S & P executives were asked what they knew now that they didn't know three months ago. "There was, in essence, no answer offered," Joshua Rosner, a managing director at the investment firm Graham Fisher, told the International Herald Tribune.

Earlier in the week Ohio Attorney General Marc Dann told CNBC that he was looking into S&P, Moody's, and Fitch Ratings (a British firm) decision to give high ratings to bonds that were backed with subprime mortgages. Dann suggested that the higher ratings had induced buyers, including the Ohio pension funds, to purchase the subprime securities. "The folks on Wall Street knew or should have known these loans they were remarketing were fraudulently obtained," he told CNBC.

July 17. Investment firm Bear Stearns told investors that its High-Grade Structured Credit Strategies Enhanced Leverage fund was worthless, and that its less leveraged High-Grade Structured Credit Strategies had lost more than 90% of the value it held in March.

July 18. In his semiannual report to Congress, Federal Reserve Chairman Ben Bernanke projected moderate growth, although at a slower rate than the Fed's February report had predicted, due in part to "weaker-than-expected residential construction activity." With traders and investor apparently responding to profits in the financial sector and increased orders for manufactured goods rather than the growing mortgage crisis, the Dow Jones industrial average broke 14,000 for the first time.

July 25.In one of the first indications of the spread of the subprime crisis outside the US, Australian hedge-fund manager Basis Capital hired the US firm Blackstone Group to help manage losses related to mortgage-backed securities. "Blackstone's role will include negotiating with investment banks to prevent adverse pricing and selling of assets, as well as add to the international experience of the funds' investment management and advisory teams," Basis Capital told the Wall Street Journal.

July 29. German finance minister Peer Steinbrueck called top German banking executives to discuss a bail-out of Düsseldorf-based IKB, which suffered heavy losses in its Rhineland Funding investments. Rhineland Funding had invested in debt instruments, including securities backed with subprime mortgages.

August 2007

August 1. Bear Stearns fired its co-president, Warren J. Spector, who had responsibility for the firm's asset management business (including the failed hedge funds) and associated risk controls. According to the NY Times some thought Spector was destined to become Bear Stearns's next chief executive. In a conference call with investors on Friday, April 3, the Bear Stearns finance chief did little to calm investors, calling the crisis the worst he had seen in 22 years, and comparing it to the Internet bubble of 2000 and the failure of Long Term Capital Management in 1998. The Dow Jones Industrial (DJI) average dropped more than 280 points.

August 1. American Home Mortgage filed for bankruptcy protection. Unlike other troubled mortgage lenders, almost none of American Home's mortgages were subprime. The same day, Aegis Mortgage suspended operations, and filed for bankruptcy itself a week later. Referring to the market for mortgage debt, JMP Securities analyst Steven C. DeLaney told the Associated Press, "The market today has just basically shut down." As the mortgage debt market shrinks, people seeking mortgages face tougher terms, stricter standards, and are more likely to be turned down. In its bankruptcy filing, Aegis noted that it faced growing demands that it buy back loans it had sold that were not producing cash flows (presumably because homeowners had defaulted).

August 9. French bank BNP Paribas announced that it was suspending investor withdrawals from three hedge funds with a total of $2.2 billion in assets, of which approximately 35% was invested in securities backed in part by subprime mortgages. The funds had previously allowed daily withdrawals, which meant that the bank had to value its holdings every day. While mortgage backed securities aren't actively traded, brokers calculated prices using computer models of cash flows and interest rates. The recent turmoil in the subprime market, however, rendered the models useless, to the point that Paribas's brokers were not providing any price information. In turn, Paribas could not value its assets. As the Wall Street Journal

The brokers' reluctance is understandable. Many of them also are highly exposed to subprime securities through their underwriting and prime brokerage businesses. A low price set by any trading desk could force them to report losses of their own.

It also could trigger losses for their hedge-fund clients, who might then have to sell assets at distressed prices to meet margin calls requiring them to post additional collateral or have their brokers sell their holdings.

Like other mutual funds, the Paribas funds issued commercial paper (debt) to borrow funds to invest in yet-higher yielding assets. Paribas's predicament created anxiety for their lenders and other creditors throughout the world, and, in the words, "threw the commercial-paper market, and much of the financial system, into a panic."

At a news conference Bush said that he empathized with those who lost their homes, but rejected "direct grants to homeowners." He also proposed lowering the federal corporate tax rate. The Dow Jones Industrial average lost more than 380 points.

August 10. Central banks around the world "injected" hundreds of billions of dollars into financial markets. Essentially, central banks, like the Federal Reserve in the US, bought bonds on the open market. But whereas central banks will typically buy or sell government bonds, in this case the Federal Reserve bought bonds backed by subprime mortgages.

The European Central Bank (ECB) provided $214 billion over a two-day period. Over the same period the US Federal Reserve provided $60 billion, and the Bank of Japan $8.5 billion. The central banks took similar actions during the third week in August, with the ECB in particular providing $371 billion to euro-zone banks that the described as "unusually hungry for cash." Also, in a "rare move," the Russian central bank sold $4.5 billion to support the ruble, and injected $3.4 billion in short-term securities.

August 12. The Dow Jones industrial average dropped to 12,861.

August 13. Investment firm Goldman Sachs announced that it was joining with a group of outside investors to provide $3 billion to its Global Equity Opportunities, which had lost approximately 14% of its value over the past 12 months. Like the BNP Paribas and Bear Stearns funds, the Goldman Sachs fund used computer models whose assumptions don't appear to hold in the current market conditions.

"Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation," Goldman said in a statement. "Across most sectors, there has been an increase in overlapping trades, a surge in volatility, and an increase in correlations. These factors have combined to challenge many of the trading algorithms used in quantitative strategies."

August 16. Countrywide Financial, the nation's largest mortgage lender, drew down its entire $11.6 billion credit line in order to continue daily operations. The action highlighted the continuing difficulties lenders faced in obtaining credit, both to obtain funds to loan to homeowners, but also to meet investor demands that the originating firms buy back defaulted mortgages that had been packaged into securities. Two financial analysts who spoke to Reuters suggested that Countrywide might face bankruptcy if the stock market loses confidence in Countrywide's ability to operate, or the liquidity crisis lasts longer than three months.

August 17. The Federal Reserve announced that it would cut the discount rate -- the rate at which the Fed loans money to commercial banks and other depositories -- from 6.25 percent to 5.75 percent. In contrast to the Fed's open market bond transactions, which are normally limited to trading government securities, loans from the so-called "discount window" may be secured with a variety of credit instruments, including high-rated private debt securities. Analysts suggested that the Fed was providing an opportunity for banks to use their mortgage-backed securities to secure loans for cash.

Traditionally, borrowing from the discount window was an indication that an institution was in financial distress, and the rate was a "discount" from the federal funds rate, which is the rate at which banks loan each other money overnight. In 2003 the Fed attempted to remove the stigma by raising the discount rate above the federal funds rate, but the image of the discount window as something of a last resort remained.

August 22. Citigroup, Bank of America, JPMorgan, and Wachovia each borrowed $500 million from the discount window. The banks said in a joint statement that the use of the discount window was intended to "encourage its use by other financial institutions." Some analysts suggested that the main purpose of the apparently coordinated move was to signal to bond markets that funds were available. "From the Fed’s point of view, the risk was that banks would stop lending. That immediately pushes the pressure of the credit markets right into the U.S. economy," Brad Hintz of Sanford C. Bernstein & Company told the NY Times, adding "By opening up the window, the Fed is really saying: 'You go out and lend because we will lend to you. This tells us that confidence is coming back to the fixed-income market."

How It Works (or Doesn't)

The mortgage industry represents subprime loans as making the dream of home ownership come true for all, but the reality is somewhat different. 71% of subprime mortgages are delivered by brokers who receive fees for bringing borrowers to mortgage lenders. Brokers typically present themselves as advocates for the borrower, but in most states they aren't legally obligated act in the borrower's best interest. In fact they are rewarded for "steering" borrowers into accepting loans at terms less favorable than those to which they're entitled. They receive cash bonuses called "yield spread premiums" based on how much above the going interest rate for a comparable loan the borrower accepts.

Subprime lenders include non-bank lenders like those discussed above (New Century Financial, Countrywide, OwnIt), as well as big banks like Wells Fargo, Lehman Brothers, and Citigroup. Without regulatory interference, over the last decade lenders systematically lowered criteria for approving loan applications, to entice low-income borrowers. "You could be dead and get a loan," one broker told commentator Jim Hightower. The loans themselves were filled with various pernicious provisions, hidden in pages of legalese, including:

  • Initial interest rates in the neighborhood of 7% which jump to 11% or more within a few years.
  • Inflated appraisals, leading homebuyers to borrow more than the home is worth.
  • Payments artificially lowered by excluding taxes and mortgage insurance, which are then billed separately. (In conventional loan payments these costs are included.)
  • Fees of up to 5% of the borrowed amount, sometimes buried in the mortgage payment. (Typical conventional mortgage fees are <1%.)
  • Penalty fees of several thousand dollars for paying off the mortgage early. (Only 2% of conventional mortgages contain such provisions.)

Tempted by the high interest rates borrowers were paying in the subprime market, Wall Street investment banks bought up the mortgages from lenders, pooled them together and sold securities "backed" by the mortgages. Consistent with the Bush Republican hands-off approach to government regulation, the Fed and other bank regulatory agencies failed to intervene as banks and lending companies extended loans to people with poor credit, allowed others to borrow without putting any money down, and approved applications for borrowers without any documented income. As Jim Hightower described it:

Lenders mislead borrowers, collect fat fees from them, then shift the risk of any bad loans to Wall Street. The Wall Street repackagers then transfer the bad-loan risk to their rich investors, drawing even fatter fees. These investor elites get phenomenal yields on the IOUs, then plant their profits in tax-free havens like the Cayman Islands.

Voodoo Economics: The Curse in Reverse

The irony for the Bush Republicans is that the entire scheme depends on the ability of people at the lower end of the economy to make regular payments. Yet this is the group that the Bush Republicans have ignored if not harmed, as real wages fell, healthcare and fuel costs skyrocketed, and housing prices began to fall.

Bush told reporters on August 8, 2007 that the housing market was experiencing a "necessary reaction" to the influx of cheap money that had driven up housing prices. Three years earlier he had pointed to rising home values as evidence that his push for deregulation had created an "ownership society." In reality, the Bush Republican tax policy systematically shifts the tax burden from the richest taxpayers to middle-class and working-class households. It's common knowledge that about 25% of the 2001-2003 tax cuts benefited the wealthiest 1% of Americans. What is sometimes overlooked, however, is that someone has to pick up the tax bill that the rich are no longer paying. The Bush Republicans have done nothing to decrease spending, and have greatly increased defense-related spending, particularly for the war in Iraq. As of 2004, the federal deficit was more that 40 percent of revenues other than Social Security and Medicare.

Ending the inheritance tax benefited less than two percent of taxpayers, about half of whom received a $3.4 million benefit. Cutting the capital gains taxes allows wealthy individuals to pay a lower marginal tax rate than a typical worker pays on wages. Even the tax cut on stock dividends, which seemed like it might benefit the average 401K holder, was written to only apply to stocks purchased (disproportionately by relatively wealthy individuals) outside of 401K plans.

Writing in in 2004, Robert Kuttner suggested that since the end of the Reagan administration a majority of Republican politicians have come to believe that "deficits don't matter" (as Dick Cheney once told then-Treasury Secretary Paul O'Neill). Yet different factions of the Republican party justify this ideological position in very different ways. Small government advocates like Grover Norquist advocate tax cuts in the hope that the resulting deficits promote spending cuts. So-called "supply siders" believe that tax cuts will stimulate the investment and productivity so that deficits won't matter.

"Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances," Bruce Bartlett, former staff economist for Jack Kemp, wrote in the NY Times this April. "No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity."

Bartlett went on to criticize Bush, Senator John McCain, and Steve Forbes for making the "implausible" assertion that all tax cuts raise revenue. True supply-siders, Bartlett asserted, believe that "some tax cuts, under very special circumstances, might actually raise federal revenues." But the more important supply-side ideas, which, according to Bartlett, most economists accept, are that "incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon." (The latter assertion suggests that inflation is most effectively managed by the nation's central bank, and implies that government budgeting and spending, which is fiscal policy has little effect.)

Bush Republicans cite increased tax revenue in the last two years as evidence of the nation's economic well being. Government borrowing has become less expensive as capital markets have globalized over the last 15 years. China and oil-exporting nations have invested in US debt (Treasury notes), even though other investments might have provided higher returns. Some analysts have suggested that this constitutes a national security issue.

From 2001 to 2006, foreign ownership of US Treasury bonds grew by $1.2 trillion. As Paul Weinstein, Jr. wrote in earlier this year, "Much of this money belongs to governments whose interests do not always mesh with our own." Weinstein added that while ownership of Treasury bonds doesn't matter most of the time, in a crisis the note-holders could "assert inordinate influence over our international policies."

Deficits also make it more difficult for the nation to respond to emergencies, whether homeland security, response to national disasters, or military deployment. The Bush Republicans have borrowed nearly $1 trillion from the Social Security trust fund since 2001, adding to the pressure that Social Security and Medicare will come under as baby-boomers retire. Deficits into the foreseeable future also saddle generations to come with higher tax rates and reduced benefits.

Former Treasury Secretary Rubin summarized the potential effect of high government deficits as follows:

  • The increase in interest rates would reduce investment and interest-sensitive
  • The inability of the federal government to control the budget
    deficit could be interpreted as a broader failure of the nation to
    address its economic problems, and thus prompt a loss of business and
    consumer confidence, which would undermine capital spending and real
    economic activity.
  • A potentially sharp downward movement in the exchange rate could
    cause unexpected shifts in input costs and export opportunities across
    different sectors, which could cause short-term economic dislocations.
  • The disruptions to financial markets could impede the
    intermediation between lenders and borrowers; uncertainty about the
    possibility of substantial inflation could cause creditors to eschew
    the long end of the credit market except at extremely high real
    interest rates. The effect of the decline in asset prices on bank and
    other financial intermediaries’ balance sheets could exacerbate the
  • The drop in asset prices and increase in interest rates could also
    spark a wave of bankruptcies, which could further restrain real
    economic activity.
  • These various effects can feed on each other to create a dangerous
    cycle; for example, increased interest rates and diminished economic
    activity may further worsen the fiscal imbalance, which can then cause
    a further loss of confidence and potentially spark another round of
    negative feedback effects.

The Bush Republicans have presided over government spending that has increased faster than during the Clinton administration. Bush inherited from the Clinton administration a surplus projected at $5 trillion over 10 years. He will likely have added $3 trillion to the national debt by the end of his second term, yet tax cutting has continued, practically unabated. According to Robert Kuttner, "This privately scares many Republican business leaders. But very few are speaking out, either because they don't want to burn bridges to the White House or because they are too pleased with their tax cuts." Writing in 2004, Kuttner suggested that only a dollar crash, or the administration following through on its plan to borrow $2 trillion to finance Social Security privatization could move Republicans to agitate against fiscal irresponsibility.

And here's a link between the irresponsible Bush Republican fiscal policy and the subprime mortgage crisis. As of May 2007 approximately $350 billion of China's foreign currency reserves were held in US Treasury bonds. Another $230 billion, however, is held in Federal National Mortgage Association (FNMA or "Fannie Mae") and Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") mortgage-backed securities. (FNMA and FHLMC are "government-sponsored enterprises" chartered by Congress; FNMA exists primarily to provide a secondary market for mortgages, and FHLMC guarantees mortgages and packages them into bond-like securities.)

China keeps the value of its currency, the RMB, artificially low, by investing the profits of its huge trade surplus in US assets. The Chinese investment, then, represented a huge flow of cash available to US mortgage lenders. It has also helped reduce the need for banks to calculate the actual risk of subprime investments, as long as the Chinese treasury could be expected to purchase securities backed by US mortgages.

Writing on the blog Madman of Chu, City University professor of Chinese history, Andrew Meyer, has suggested that Chinese political leaders continue to facilitate the securities and real estate bubbles out of fear of the political consequences of economic slowdown.

They hope that they will not be held to account for failing to deliver fundamental political reform as long as the Chinese economy continues to enjoy robust growth. How long this inherently unstable situation can be sustained is an open question. The political consequences of acute economic collapse are likely to be far more grave than the instability that might be engendered by proactive and preemptive reform, but this contingency does not seem to have registered upon China's leadership. If such an acute collapse does occur it will most likely cause the US suffering to parallel that of China, and at that moment America, having enjoyed the prosperity that inflated real estate markets brought, will have reaped the whirlwind.

On August 31, flip-flopping on his August 8 pledge not to support direct grants to homeowners, Bush offered to "modernize and improve" the Federal Housing Administration "by lowering down payment requirements, by increasing loan limits, and providing more flexibility in pricing." Officials said the intent was to make federal mortgage insurance available to 80,000 homeowners with less-than-perfect credit histories. Critics noted that Bush's proposal would assist only a small fraction of the estimated two million defaults in adjustable rate mortgages. Speaking on the PBS News Hour, Diane Swonk, chief economist at Mesirow Financial in Chicago, referred to the administration's action as "squirt guns."

The Bush administration has long argued that Fannie Mae and Freddy Mac have borrowed too much money, fearing that the borrowing would be interpreted as government intent to intervene in a financial crisis.

Democrats have called for a greater level of government help for homeowners. Senator Hillary Clinton has proposed a $1 billion fund to assist homeowners who are behind in their mortgage payments. Former senator John Edwards has proposed a similar fund, and urged regulators to require mortgage lenders to restructure many of their loans. Many Democratic members of Congress want the FNMA and the FHLMC to buy and hold more mortgages than they currently do.

Speaking at an economic symposium in Jackson Hole, WY, after Bush's August 31 remarks, Fed chairman Ben Bernanke said the central bank "stands ready to take additional actions as needed" to prevent problems in the mortgage market from dragging down the rest of the economy. Bernanke gave no explicit indication that the Fed would lower the federal funds rate -- its biggest weapon in adjusting monetary policy. But because he did not give any indication that he would not lower the funds rate, investors and analysts assumed that the rate would likely be lowered at the Fed's next policy meeting on September 18. The Dow Jones industrial average posted a modest gain, up 119.01 or less than 1%.

The "silver lining" of the mortgage crisis, Representative Barney Frank of Massachusetts, who is chairman of the House Banking Committee, told reporters in mid-August, is that that it had eliminated knee-jerk opposition to any regulation.

Anyone opposing more regulation can no longer say, 'if it ain't broke, don't fix it'


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McDonald, Duff "The Running of the Hedgehogs" New York 16 Apr. 2007

"President Bush, Bernanke Weigh In on Credit Crisis" Moderator, Judy Woodruff. PBS News Hour. 31 Aug. 2007

Weisman, Steven R. "Bush Offers Relief for Some on Home Loans" NY Times 31 Aug. 2007

Andrews, Edmund L. and Jeremy W. Peters "Bernanke Says Fed Is Prepared to Act" NY Times 31 Aug. 2007

See also