BARNEY FRANK - FOLLOW THE MONEY - MUST READ FOR MORTGAGE BROKERS

It's not hard to trace this economic mess back to Bill Clinton

This $700 billion bailout of Wall Street has America confused, dazed and divided. Before one can make an intelligent decision as to the legitimacy of the bailout it's instructive to fully understand how we got to this point.

We can all agree that subprime lending is at the root of our current economic woes. Subprime mortgages are granted to those with less than stellar credit and/or those whose income-to-debt ratios are not satisfactory by conventional lending standards. There have always been lenders who catered to this market but they did so with much higher interest rates in an attempt to cover the risk. That all began to change in the '90s and that's where this story begins.

Fannie Mae and Freddie Mac have historically bought loans from lenders in order to free up more money so that lenders can write more mortgages. As The New York Times reported in September 1999, Fannie Mae had "been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits." This was part of the Clinton administration's rewriting of the Carter-era Community Reinvestment Act. Banks were given strict new numerical quotas and measures that were based on their level of "diversity" in their loan portfolios. In order for these banks to expand or merge, they had to have a good CRA rating. As the Times ominously noted in 1999, "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

The Village Voice observed that Clinton's HUD secretary, Andrew Cuomo, "made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis." Among those decisions were changes that accelerated Fannie and Freddie getting into the subprime loan market. One of the rule changes gave Fannie and Freddie permission to hold just 2.5 percent of capital to back their investments. Banks were required to hold 10 percent.

As the Times reported in 1999, "By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings." Indeed, they did.

Flash forward to September 2003. President Bush was growing increasingly concerned about the "toxic paper" Fannie and Freddie were acquiring. He proposed putting oversight of both under the Treasury Department. The president cited a report by outside investigators in July 2003 that found Freddie Mac had manipulated its accounting to mislead investors. But congressional Democrats balked. Rep. Barney Frank, the ranking Democrat on the Financial Services Committee, fired back saying, "These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Keep in mind, that was five years ago. Subsequently, Democrats blocked any attempts to fix the problem.

Other lenders followed Fannie and Freddie's nosedive into the subprime mess. As the City Journal noted in the winter of 2000, "The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities - and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks." Meanwhile, Fannie's disgraced CEO, Franklin Raines, who steered Fannie toward the cliff, jumped off just in time, reportedly earning $90 million during his time as Fannie Mae's CEO.

The subprime crisis, which has now led to the largest bailout plan in American history, was not caused by Republican deregulation - as some liberals would have you believe - but by the irresponsible mandates of Clinton-era policies that sought to loan money to people who didn't deserve it. Congressional Democrats continued to whistle past the graveyard in their quixotic attempt to put every American in their own home.

Not every American has proven him or herself competent enough to own a home. It's costing us $700 billion to find that out.