It is fashionable in some circles to fume and fuss that the current financial crisis was born out of greed. It wasn't. Quite the opposite, this mess was born out of the best of intentions, which is dangerous enough in Washington. The greed came later.
The mess began as a neat idea, the well-intentioned goal of helping more working-class renters to become homeowners.
Many did. The numbers of minority and other first-time homeowners climbed. The housing market prospered. Congress, the lending industry, the Clinton administration and the Bush administration each took credit for the boom. Almost everyone tried to ignore the growing bubble beneath the housing boom.
As more and more money chased fewer and fewer qualified home buyers, the needy were elbowed aside by the greedy. Thousands of buyers were lured by loan officers into no-money-down, interest-only and other tantalizing loans, often for higher amounts than the applicants could afford.
Housing prices soared. The bubble now has burst. With mortgage foreclosures mounting and big banks and thrifts going bust, like the record-breaking Washington Mutual last week, the finger pointing begins as to who let it happen.
The answer: Just about everybody who could have put the brakes on failed to do it, often with the best of intentions.
In 1999, for example, Fannie Mae Corp., the nation's biggest underwriter of home mortgages, announced it was easing the credit requirements on loans that it would purchase from banks and other lenders. The purpose was to help increase home ownership among minorities and others whose incomes, credit ratings and savings were too low for them to qualify for conventional loans.
Their alternative was "subprime" loans, which could charge three or four percentage points higher than conventional rates. Faced with those whopper rates, many prospective buyers figured they might as well keep renting.
Fannie Mae's pilot program, announced by its chairman, Franklin D. Raines, allowed qualified buyers to pay as little as one additional percentage point for a conventional 30-year fixed rate mortgage. After two years, that extra point would be dropped if the borrower had kept up his or her monthly payments.
Of course, Fannie Mae was taking on more risk. But Fannie Mae also was being pressured by the Clinton administration to help working-class home buyers, by its stockholders to grow more profits, and by banks, thrifts and mortgage companies who wanted to make more subprime loans possible. Soon the entire lending industry was being pressured to ease up on considerations of income, credit history, down payment and closing costs in determining the creditworthiness of customers.
Everybody knew how disastrous that could be in an economic downturn. Memories of the government's savings and loan bailout in the 1980s were still fresh. "If they fail," Peter Wallison, a resident fellow at the American Enterprise Institute, was quoted as saying in a 1999 New York Times story about Fannie Mae's move, "the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry." That's what's happened.
Conservatives now point to that historical moment to place blame for today's Wall Street collapse in Clinton's lap. Yet President Bush also embraced the expansion of higher-risk home loans, as part of his national drive to expand home ownership through grants, tax credits and his 2003 call for "the entire housing industry to help at least 5.5 million minority families become homeowners by the end of this decade." They tried. Again, the president's intentions were good.
Unfortunately, today's home finance crisis now resembles the Federal Housing Administration disaster in the early 1970s. In Chicago, Detroit and other cities, blocks of boarded-up houses were left in the wake of unscrupulous lenders who exploited government-insured mortgages. Finger-pointing and overdue regulations followed that scandal, too. So did a drying up of home buying opportunities, which is the exact opposite of the program's hopes. A similar post-disaster dance of blame is shaping up in Washington now.
Public-private partnerships can work, if you remember the lessons of past intentions. First, we need regulations and oversight that remembers the sneaky side of human nature, including the inevitable temptation to make an easy buck off of someone else's good intentions.