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Experts Fault Bush’s Mortgage Strategy

President Bush during his first term aggressively sought to loosen mortgage loan qualification standards for first-time homebuyers, seeking to reduce or even eliminate down payments for those who might otherwise have trouble affording their loans.

The White House has pushed back hard against charges that Bush policies led to the current financial crisis, pointing the finger squarely at Congressional Democrats for refusing to rein in Fannie Mae and Freddie Mac. But Bush’s own efforts to increase homeownership among those who could least afford it — an initiative ardently backed by many Democrats — added risk into the system that contributed to the current problem, critics say.

“Politicians in general and Bush in particular all grossly overestimated the benefit of encouraging homeownership by younger and low-income people,” said Joseph Gyourko, chairman of the Wharton Real Estate Department and director of the Samuel Zell and Robert Lurie Real Estate Center. “I think it did lead to some unwise decisions. Equity is, at the end of the day, the only thing that disciplines any investment.”

The inability of millions of homebuyers to afford their loans is at the center of the current financial and economic crisis, which has featured the downfall of major banks that lent to the wrong people and the demise of storied Wall Street brokerage houses that traded in mortgage-backed securities. While many other factors played a role in concocting the current economic mess — including deceptive practices by certain lenders — the failure of many consumers to estimate what they could afford and the assumption prices would just keep going up is a critical part of the equation.

Bush’s efforts to increase homeownership became the core of the “ownership society” that he sought to promote as he ramped up his 2004 re-election bid. Bush pitched the idea as a way to strengthen the country by making people a part of its success.

“The more ownership there is in America, the more vitality there is in America and the more people have a vital stake in the future of this country,” he said in June 2004.

The homeownership campaign was particularly geared toward blacks and Latinos, groups with lower-than-average incomes who — especially in the case of Latinos — the president was hoping to attract to his reelection bid.

To increase homeownership, Bush knew where to look. “The single greatest hurdle to first-time homeownership is a high down payment requirement that can put a home out of reach,” he said in June 2002. The president successfully prodded Congress to pass the American Dream Downpayment Act, which provided funding to assist low- income first-time homebuyers with their down payments and closing costs.

But critics note that down payments were invented precisely to help avoid loan defaults.

“I’m an old-fashioned banker,” said Alex Pollack, a resident fellow at the conservative American Enterprise Institute and former president and chief executive officer of the Federal Home Loan Bank of Chicago.

“Home loans used to be financed by savings and loans institutions,” Pollard said. But in the years leading up to the current financial fiasco, he said, “We remembered the loan part, but forgot the savings part: You get savings, then you can make a down payment and then you get a loan.”

Without enough “skin in the game,” homeowners can be more tempted to walk away from their mortgages, many experts believe.

“If you cut the cushion, the foreclosure risk is higher,” said Zhu Xiao Di, a senior research analyst at the Harvard University Joint Center for Housing Studies.

While Zhu noted that offering down payment assistance may have use in the early years of an expansion — when housing price increases will create equity for buyers — it becomes more risky as the threat of bubble burst rises.

“If you’re in the fifth or seventh year of an increasing price market, there’s no way you can touch it,” he said.

By the time Bush was touting his down payment assistance proposals, the market was well into a price expansion that had begun in 1997.

The president even backed the idea of allowing holders of Federal Housing Administration-backed mortgages to make no down payment at all.

“Another practical way to help people, first-time homebuyers, is to make zero down payment loans possible for those whose mortgages are insured by the Federal Housing Administration,” Bush said in March 2004.

The practice, which White House officials now acknowledge increases the risk of default, was ended in the FHA modernization bill signed by Bush this summer.

At one point, Bush even suggested it was a good idea for lenders to make it easier for people with bad credit histories to get mortgages.

“Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership,” Bush said during an October 2002 conference in Washington, D.C., on minority homeownership. “One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans.”

The White House says it has long sought to establish stricter oversight of Fannie Mae and Freddie Mac, only to be rebuffed by Congressional Democrats. The massive failure this year of the two huge government- sponsored enterprises has been a critical component of the mortgage market meltdown.

On the home page of the White House Web site is a link to a page titled “Setting the Record Straight,” which details White House efforts to avert the collapse of the GSEs. The page notes that as far back as 2003, former Treasury Secretary John Snow testified before Congress on the need for “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises.” But while the page includes a few similar statements by other administration officials and excerpts from warnings contained in Bush budget documents, the first statement by the president on the need for GSE reform is dated August 2007.

White House Deputy Press Secretary Tony Fratto argued that Bush’s efforts helped minorities and others by allowing many to get into homes. “It is good for the fabric of these communities,” Fratto said.

But Gyourko questioned the wisdom of promoting homeownership by young people and low-income earners in the first place, noting these groups need to be able to pick up and go where the jobs are. “Becoming a homeowner limits your mobility,” he said. And helping them into homes when they are not ready “encourages them to live where they are not going to get a lot of appreciation” in their home values.

Fratto noted the role of lenders in fostering the crisis. “We don’t believe in lenders not doing due diligence to see if those they’re giving to can meet their payments,” he said. “That they didn’t is part of the genesis of the financial crisis.”

Fratto said lenders failed to account for the risks that they were taking, which they could have done by making the loans costly enough to so that the loans that didn’t default paid for those that did.

“The biggest problem was no so much that loans were made to risky borrowers, but that the system failed to adequately price risk,” he said.

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