The seeds of the mortgage meltdown were planted during Bill Clinton's presidency.
Under Clinton's Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in "credit-deprived" areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting. If banks didn't comply with these rules, regulators reined in their ability to expand lending and deposits.
These new HUD rules lowered down payments from the traditional 20 percent to 3 percent by 1995 and zero down-payments by 2000. What's more, in the Clinton push to issue home loans to lower income borrowers, Fannie Mae and Freddie Mac made a common practice to virtually end credit documentation, low credit scores were disregarded, and income and job history was also thrown aside. The phrase "subprime" became commonplace. What an understatement.
Next, the Clinton administration's rules ordered the taxpayer-backed Fannie and Freddie to expand their quotas of risky loans from 30 percent of portfolio to 50 percent as part of a big push to expand home ownership.
Fannie and Freddie were securitizing these home loans and offering 100 percent taxpayer guarantees of repayment. So now taxpayers were on the hook for these risky, low down-payment loans.
Tragically, when prices fell, lower-income folks who really could not afford these mortgages under normal credit standards, suffered massive foreclosures and personal bankruptcies. So many will never get credit again. It's a perfect example of liberals using government allegedly to help the poor, but the ultimate consequences were disastrous for them.
Additionally, ultra-easy money from the Fed also played a key role. Rates were held too low for too long in 2002-2005, which created asset price bubbles in housing, commodities, gold, oil, and elsewhere. When the Fed finally tightened, prices collapsed. So did mortgage collateral (homes) and mortgage bonds that depended on the collateral.
Many bond packages were written to please Fannie and Freddie, based on the fantastical idea that home prices would never fall. Fannie and Freddie, by the way, cost the taxpayers $187 billion.
Just to make this story worse, Senator Hillary Clinton and Senator Barack Obama voted to filibuster a Republican effort to roll back Fannie and Freddie. But on top of all this, while Hillary was propping up Fannie and Freddie, she was taking contributions from their foundations.