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444 Dissenting Statement

it investigated to the fi nancial crisis. Th e majority’s report covers in detail many
elements of the economy before the fi nancial crisis that the authors did not like, but
generally failed to show how practices that had gone on for many years suddenly
caused a world-wide fi nancial crisis. In the end, the majority’s report turned out to
be a just so story about the fi nancial crisis, rather than a report on what caused the
fi nancial crisis.

What Caused the Financial Crisis?

George Santayana is oft en quoted for the aphorism that “Th ose who cannot
remember the past are condemned to repeat it.” Looking back on the fi nancial crisis,
we can see why the study of history is oft en so contentious and why revisionist
histories are so easy to construct. Th ere are always many factors that could have
caused an historical event; the diffi cult task is to discern which, among a welter of
possible causes, were the signifi cant ones—the ones without which history would
have been diff erent. Using this standard, I believe that the sine qua non of the
fi nancial crisis was U.S. government housing policy, which led to the creation of 27
million subprime and other risky loans—half of all mortgages in the United States—
which were ready to default as soon as the massive 1997-2007 housing bubble began
to defl ate. If the U.S. government had not chosen this policy path—fostering the
growth of a bubble of unprecedented size and an equally unprecedented number of
weak and high risk residential mortgages—the great fi nancial crisis of 2008 would
never have occurred.
Initiated by Congress in 1992 and pressed by HUD in both the Clinton and
George W. Bush Administrations, the U.S. government’s housing policy sought to
increase home ownership in the United States through an intensive eff ort to reduce
mortgage underwriting standards. In pursuit of this policy, HUD used (i) the
aff ordable housing requirements imposed by Congress in 1992 on the government-
sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, (ii) its control over the
policies of the Federal Housing Administration (FHA), and (iii) a “Best Practices
Initiative” for subprime lenders and mortgage banks, to encourage greater subprime
and other high risk lending. HUD’s key role in the growth of subprime and other
high risk mortgage lending is covered in detail in Part III.
Ultimately, all these entities, as well as insured banks covered by the CRA,
were compelled to compete for mortgage borrowers who were at or below the median
income in the areas in which they lived. Th is competition caused underwriting
standards to decline, increased the numbers of weak and high risk loans far beyond
what the market would produce without government infl uence, and contributed
importantly to the growth of the 1997-2007 housing bubble.
When the bubble began to defl ate in mid-2007, the low quality and high
risk loans engendered by government policies failed in unprecedented numbers.
Th e eff ect of these defaults was exacerbated by the fact that few if any investors—
including housing market analysts—understood at the time that Fannie Mae and
Freddie Mac had been acquiring large numbers of subprime and other high risk
loans in order to meet HUD’s aff ordable housing goals.
Alarmed by the unexpected delinquencies and defaults that began to appear
in mid-2007, investors fl ed the multi-trillion dollar market for mortgage-backed