Recently the media have made a big deal about the five largest U.S. housing lenders reaching a $26 million deal with the U.S. Justice Department which is supposed to provide some relieve to some struggling homeowners. On January 26, the Albany Time Union published an editorial whereby they claim that the "banks brought down the housing market." A little honesty here would be important for people trying to understand what happened. I start with this simple observation...if there had not been so many sub-prime mortgage loans made, there would not have been a housing bubble or the housing market decline that followed.

This problem started with the passage of the Community Reinvestment Act in the late 1990’s which mandated banks make mortgage loans to unqualified borrows in order to increase home ownership.  For the next ten years, Fannie Mae and Freddie Mac, directed by H.U.D. and  encouraged by a complicit United States Congress, continued to lower the mortgage underwriting standards and increase the percentage of sub-prime loans that Fannie and Freddie insured to the point where there was no hope of these government sponsored entities being able to make good on their insurance guarantees without a massive infusion of borrowed money which the taxpayer is on the hook for.  When we finally ran out of both qualified and unqualified homebuyers, the sudden decrease in demand led to the fall in housing prices which in turn led to large losses for those banks holding subprime mortgages and mortgage securities when the value of the homes fell and those borrowers could not pay.  When these banks were in danger of failing, two Presidents and the Congress bailed them out with borrowed money, again with the taxpayer footing the bill.

Many large banks were certainly aggressive in taking advantage of the situation that our federal government’s market intervention created. The repeal of portions of the Glass-Steagall Act in 1999, which effectively removed the separation between investment banks and commercial banks, permitted a level of risky bank behavior that ultimately resulted in a massive tax-payer funded bail out. Without the politician’s interference in the mortgage market, however, the housing bubble would not have occurred as the market would have slowed down gradually once all the qualified buyers had purchased homes. In short, the banks would not have had the opportunity to make sub-prime loans and then seek to mitigate the risk associated with them by creating and selling ridiculous investment products secured by bad loans.

Without an acknowledgement of the causes of the sub-prime mortgage crisis and resultant housing bubble, we cannot hope to deal intelligently with the problems created as a result.

Tony Garufi and Fraida Varah