Why The Mortgage Crisis Happened – A Historical Timeline

Presidential candidate Barack Obama has put free-market capitalism at the root of the current mortgage industry debacle, denying the real history of government interference in that market.

On Sept. 15, with banking giant Lehman Bros. filing for bankruptcy protection, Obama was given the opening to begin weaving his anti-capitalist storyline. And that he did. Artfully blurring the mortgage industry crisis with generalized tax policy, Obama declared: “I certainly don’t fault Sen. McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years, one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.”

House Financial Services Chairman Barney Frank, left. Sen. Barack Obama talks about Fannie Mae and Freddie Mac last month, middle. Rep. Richard Baker in 2001. The words were carefully chosen. That day in Colorado marked his return to the teleprompter and a strictly refocused campaign message intent on fusing the mortgage industry woes and free-market capitalism in general. Confident the American people are primed for his brand of “change,” Obama maintained his anti-capitalist theme.

Contrary to the Obama narrative, however, free-market capitalism is not at the root of the current mortgage industry crisis, but rather the very socialism he hawks. The historical record makes this fact unmistakably clear.

1933-38
President Franklin D. Roosevelt initiated a series of “New Deal” reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.

1968
As part of President Johnson’s Great Society reform plan, much of Fannie Mae became a privately owned yet government-chartered company, a government-sponsored enterprise (GSE) providing authority to issue mortgage-backed securities. Fannie Mae buys home mortgages in order to preserve liquidity in the secondary mortgage market. Though private, it remained backed by the federal government.

1970
President Nixon chartered Freddie Mac, the Federal Home Loan Mortgage Corporation, as a GSE to compete with Fannie Mae.
Designed to help grow the secondary mortgage market, Freddie Mac purchases mortgages from lending institutions to either be securitized as mortgage-backed securities and sold in the secondary market or held by Freddie Mac. At this time the secondary market for conventional mortgages was small.

1977
Sen. William Proxmire, a Democrat from Wisconsin, introduced a community reinvestment Senate bill. Opponents argued the bill would allocate credit without regard for merits of loan applications, thereby threatening depository institutions.
Proponents countered that it was only to ensure that lenders did not ignore good borrowing prospects in their communities. The bill’s sponsor stressed it would neither force high-risk lending nor substitute the views of regulators for those of banks.
President Carter, pressed by grass-roots organizations (though opposed by the banking industry) signed into law the Community Reinvestment Act. In the years following, CRA has undergone several revisions. [...]

(view the full article for an extensive historical timeline of the events leading to the current financial crisis)