To explain the mortgage crisis that became a global credit crisis, US Rep. Barney Frank (D-Mass.) started by putting the blame on the party politics of Ronald Reagan. Instead of borrowers, brokers, financial markets or even the Federal Reserve Bank, the current chair of the House Committee on Financial Services went back twenty years to the former president's philosophy of government.
"Reagan's central idea," said Frank, "was 'Government is not the answer to our problems - government is the problem.' His philosophy is why we're here today."
rank was speaking Monday in a forum at the John F. Kennedy Library, but he was also in Dorchester, the heart of the mortgage crisis in Boston. According to an article appearing the same day in Banker & Tradesman, housing foreclosures in Dorchester had more than tripled in the first quarter of this year, compared with the same period in 2007, to a total of 171. That was more than half the total for whole city.
\When it came to assigning blame, Frank included everyone from champions of deregulation in financial services to prominent Republicans in Congress, and even the former chairman of the Federal Reserve Bank, Alan Greenspan.
Frank had praise for Greenspan's monetary policy - keeping interest rates low when some believed employment levels were high enough to be inflationary. But he faulted Greenspan with a "rigid ideological distrust" of deregulation.
Most of the foreclosures currently being tracked in Boston were made by mortgage companies, which were usually much less regulated than banks. Once the loans were made, they were recombined and sold in financial markets, where high risk was often outweighed by high returns and high ratings for investors.
When prompted by the moderator, New York Times columnist Paul Krugman, Frank rejected explanations of the mortgage crisis as being caused by low interest rates, cycles in the real estate market, or requirements of the Community Reinvestment Act.
"It was not just the housing bubble," said Frank. "People made housing loans that shouldn't have been made."
Also contradicted were the arguments by lenders (including those attributed to former chair of Countrywide Financial Corporation, Angelo Mozilo) that it was wrong to equate higher-interest subprime lending with predatory lending, and that subprime loans actually expanded home ownership opportunities for people of color. Frank took the side of UMass-Boston researcher James Campen, who showed a disproportionate concentration of subprime loans in the Boston area among people of color - even those with higher income.
"It's not that in a fair situation they would have gotten zero loans," said Frank. "In a fair situation, they would have gotten prime loans."
But Frank also extended blame for the ensuing mortgage meltdown to a way of thinking that resembled a policy theme of President Bush: the "ownership society."
"We made a mistake," said Frank, "when we equated providing decent housing for everyone with giving everyone the right to own a home."
To place lenders and mortgage originators under the same regulation as banks, the Committee on Financial Services approved legislation last November. The bill would set a standard for a borrower's ability to repay a loan, and there would be an extension of liability to the investors who buy loans in the secondary market.
Opponents of the legislation say it will make loans even more expensive and make it difficult for owners of small businesses to get mortgages on the basis of stated income. High-interest subprime loans based on income statements that were erroneous or falsified have been blamed for many of the mortgages that would end up in foreclosure
Frank credited the current Federal Reserve chairman Ben Bernanke with being "useful" by favoring the kind of regulatory powers allowed by Congress in 1994. Those were powers that Frank said Greenspan "explicitly refused" to impose on mortgage companies.
"What we have now are people afraid to buy things," said Frank.
"Good regulation," he argued, "is an important part of bringing the market back."
Another of Frank's ideas for bringing back the housing market is a compromise on the part of subprime lenders. Instead of trying to recapture the full paper value of bad loans, the companies holding the mortgages would allow refinancing by the Federal Home Loan Bank at lower interest rates. The new mortgages would then be sold in the secondary market. Frank says this could "avert many hundreds of thousands of foreclosures."
"Housing prices would still go down - as they should," he said, "but at a less dizzying rate."
After the forum, Frank emphasized the refinancing would only be available for properties used by owners as their primary residence. That would exclude much of the housing that has been faced with foreclosure in Boston, where it's not unusual to find a single owner defaulting on mortgages in multiple units. To help neighborhoods hard hit by foreclosures of these units, the legislative proposal Frank announced in March with US Senator Christopher Dodd would also provide $10 billion for acquisition and repair of vacant properties. The money could be used by public agencies or community-based non-profits.
"We want to give the money to the cities to buy these properties," said Frank.
The outcome on response to the mortgage crisis by Congress also depends on the election in November. Frank positioned himself much closer to the Democratic candidates, Hillary Clinton and Barack Obama. Though he said Clinton's call for a foreclosure moratorium was "unworkable," he contrasted the Democrats with the backing for John McCain from a supporter of deregulation and foe of the Community Reinvestment Act, former Texas Senator Phil Gramm. For Frank, it was one more piece of the argument that, for all its disrepute, party politics makes a difference.