Senate Democrats

Mortgage Market Turmoil: The Bush Administration’s Record of Denial and Regulatory Neglect

Under years of Republican-controlled Washington, Americans have seen their dreams of homeownership and a secure retirement gambled away by reckless economic policies that put Wall Street and special interests ahead of middle class families.  Not only did the Bush Administration ignore the warning signs about risky mortgages, they encouraged the very practices that are at the heart of the current economic crisis.  Instead of blocking legislation that will help America recover from this crisis, Republicans should work with Democrats to restore confidence, security, and prosperity for hard-working families.

The epicenter of the current market turmoil has been caused by risky mortgages that the Administration failed to regulate. Beginning in 2000, Federal Reserve Governor Ned Gramlich warned that predatory lending would "jeopardize the twin American dreams of owning a home and building wealth." (Governor Gramlich, 1/18/02) In 2006, Moody’s Economy.com warned that "problems in the mortgage-backed market would spill over into the rest of the U.S. fixed income and stock markets…The turmoil in the U.S. financial markets would immediately reverberate around the world, engendering a global financial event." (Moody’s Economy.com, October 2006) The Federal Reserve staff observed a prolonged loosening of standards for mortgages starting in late 2003. (Federal Reserve staff briefing for Senate Banking Committee staff, 3/20/07)

The Republican-appointed regulators ignored warnings throughout the Bush Administration. Instead of heeding the warnings and working with Congressional Democrats to protect American consumers, regulators ignored these warnings, failed to enforce existing protections, and actually encouraged Americans to take out risky mortgages.

·        No oversight from Bush Administration. "There was a lack of regulatory oversight during the Bush administration…that’s one of the reasons we are in the mess that we are in…many bad mortgage loans and other loans were made in part because regulators were not empowered and were not playing their proper role." (Mark Zandi, NPR, 9/16/08)

·        Former Federal Reserve Chairman Alan Greenspan "didn’t really get it until very late." "Asked why he didn’t speak out, if he knew these practices were going on or even suspected that there was something illegal or shady, Greenspan admits, ‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn’t really get it until very late in 2005 and 2006.’" (CBS News, 9/13/07)

·        Regulators encouraged risky mortgages. In 2004, Alan Greenspan continued to encourage higher-risk mortgages. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage…the traditional fixed-rate mortgage may be an expensive method of financing a home." (Federal Reserve Chairman Greenspan, 2/23/04)

·        Regulators to blame for spike in risky mortgages. "When consumers hear from a Fed chairman that it makes little sense to take on fixed rate debt…not by coincidence, the adjustable rate portion of newly originated mortgage debt shot up…And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble?" (Morgan Stanley Chief Economist Stephen Roach, 4/22/05)


Bush-McCain Republicans have been in denial about economic and housing crisis.

·     Secretary Paulson plays down the subprime market turmoil saying the economic fallout will "be painful to some lenders, but it is largely contained." (MarketWatch, 3/13/07)

·     "[T]roubles in the subprime sector on the broader housing market will likely be limited." (Federal Reserve Chairman Bernanke, Forbes, 5/17/07)

·     Secretary Paulson "did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained.’" (Reuters, August 1, 2007)

·     President Bush says that the economy is stable: "[I]t looks we’re headed for a soft landing." (White House morning press briefing, 8/9/07)

·     "Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that ‘the worst is likely to be behind us‘….Mr. Paulson’s comments, made in an interview Tuesday, reflect Treasury’s view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto [housing] legislation…" (Wall Street Journal, "Paulson Sees Credit Crisis Waning," 5/7/08)


Instead of protecting Americans’ savings, the Bush Administration promoted Social Security privatization, placing not only homeownership at risk, but retirements at risk.
"You will be able to achieve the objective of getting a better rate of return on your money and have more money available for you on retirement than if it had sat in the Social Security trust." (President Bush, 2/4/05) "[I]t’s not risky." (President Bush, 1/11/05) "Over time, the securities markets are the best, safest way to build substantial personal savings." (Vice President Cheney, 1/13/05)

The White House blocked Government Sponsored Enterprises (GSE) reform. Back in the 109th Congress, Democrats supported bipartisan legislation drafted by the Republican Chairman of the House Financial Services Committee, Representative Oxley, which would have given the new GSE regulator broad authority over setting capital requirements and limiting portfolio size. This bill passed the House 331-90. Senate Democrats supported the measure, but the Bush Administration opposed it. According to Mr. Oxley, the White House gave Congress and the GSE reform legislation "a one-finger salute."

·     "’We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,’ Mr. Oxley says." (Financial Times, 9/11/08)

·     GSE reform "wasn’t a priority of this Administration’s. They quite frankly put it on the back burner. And now we see what we have." (Douglas Holtz-Eakin, NPR, 9/16/08)

Democrats have been fighting to protect Americans from risky mortgages.

·     Democrats enacted a law to protect Americans from abusive mortgages. In 1994, under a Democratic Congress and Democratic White House, Congress enacted the Home Ownership and Equity Protection Act ("HOEPA"), which gives the Federal Reserve the authority to prohibit unfair and deceptive lending practices by both federally- and state-regulated mortgage lenders. HOEPA requires the Federal Reserve to issue regulations to prohibit abusive and deceptive practices. It took the Fed 14 years to finally implement these regulations, after the Senate Banking Committee urged them to do so through numerous hearings and several letters.

·     Democrats fought to protect homeowners from risky mortgages. Since 2000, Senators Sarbanes,Schumer, and Dodd have repeatedly introduced legislation to protect against predatory lending. None has ever had a Republican cosponsor in the Senate.

·     Bush Republicans blocked housing legislation as crisis deepened. Even after reaching a bipartisan agreement on the Foreclosure Prevention Act, and its successor, the Housing and Economic Recovery Act of 2008 (HERA) in June, Republican Senators delayed the final passage of the legislation for weeks. Between the two bills, Republicans conducted six filibusters to prevent the passage of this legislation. In addition, the White House issued numerous veto threats against both bills.

·     Democrats enacted housing legislation to preserve homeownership and reform the GSEs. The legislation enacted in July created a foreclosure rescue program (HOPE for Homeowners); expanded the FHA program to reach many more borrowers; provided funds for foreclosure prevention counseling and for local governments to buy and rehab foreclosed properties. It also created a much stronger regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (GSEs).

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