Rules of the Game

It always drives liberals nuts when a conservative blogger blames something on Bill Clinton. So I'm not going to blame Bill Clinton today. But it's necessary to bring the following article from the Los Angeles Times to your attention (H/T: Ed Morrissey).

Back on May 31, 1999, reporter Ron Brownstein chronicled "one the hidden success stories of the Clinton era.

It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.

These numbers are dramatic enough to deserve more detail. When President Clinton took office in 1993, 42% of African Americans and 39% of Latinos owned their own home. By this spring, those figures had jumped to 46.9% of blacks and 46.2%of Latinos.

That’s a lot of new picket fences. Since 1994, when the numbers really took off, the number of black and Latino homeowners has increased by 2 million. In all, the minority homeownership rate is on track to increase more in the 1990s than in any decade this century except the 1940s, when minorities joined in the wartime surge out of the Depression.

No matter your view of Clinton generally, it was positive news. But as always, there were other factors at play. Brownstein turns to an old Clinton hand whose name came up recently in the news:

But the economy isn’t the whole story. As HUD Secretary Andrew Cuomo says: “There have been points in the past when the economy has done well but minority homeownership has not increased proportionally.” Case in point: Despite generally good times in the 1980s, homeownership among blacks and Latinos actually declined slightly, while rising slightly among whites.

All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

But how did it happen? The answer lies at the heart of our crisis nine years on:

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

Emphasis mine. So what do you have here? Two Washington specialties -- an unfunded mandate and a system that encourages moral hazard. Both the banks and Fannie Mae assumed that Uncle Sam would ultimately pick up the tab if the market went south. It did. And that is where we are today.

So do you blame Bill Clinton for this? You could but I don't, at least not completely. Clinton left office in 2001 and the current administration has left this unstable edifice standing for over 7 years now. The Bushies noticed problems as early as 2001 and did propose reforms in 2003, as I noted yesterday. But the reforms never went anywhere for two reasons: opposition from congressional Democrats like Barney Frank and Christopher Dodd, and (perhaps more importantly) an unwillingness by the Bushies to fight the battle, most likely because they were afraid to be demagogued on the issue. It's all very understandable and makes perfect sense. And meanwhile, there was money to be made and a lot of people did make a lot of money during the past nine years. But now the bills are coming due.

It's easy to find news reports that chronicle the missteps and missed opportunities of the past. There's an especially apt line in Renoir's famous 1939 movie La Regle du Jeu ("Rules of the Game"). One of the characters attempts to explain the seemingly ordinary events that take place during a weekend hunting party in the French countryside that lead to a very bad end. The conclusion: they all had their reasons. It's true of all the players in our current melodrama. Chronicling the cruelty, stupidity and cupidity of everyone involved could occupy this feature for months but it won't change anything. What we need to do now is focus on the way forward.