Governor candidates’ views of mortgage crisis examined
BRAD SHANNON
In their first debate, gubernatorial candidates Republican Rob McKenna and Democrat Jay Inslee had an exchange over the causes of the mortgage crisis that helped trigger the Great Recession.
The claims: McKenna: “Congressman, when you were in Congress, under both Democratic and Republican administrations, you voted for a series of bills that contributed to the housing crisis in America. When a ... bipartisan group of (attorneys general) and I teamed up to reach a settlement with some of America’s largest banks to clean up that mess and brought $25 billion of relief, we were cleaning up after the consequences of that measure – of those measures that you voted for. My question is if you were in Congress today or you could do it over, would you vote for bills that would make it possible for people with poor credit to obtain mortgages with no money down?”
The rebuttal: Inslee never answered the question but quickly turned the tables on McKenna. Inslee said he had been one of few members of Congress in the late 1990s to vote against repeal of the Glass-Steagall Act, which had kept commercial and investment banking separated since the Great Depression. Inslee implicates that law’s demise in the financial downturn that hit breakneck speed in 2008-09.
The Inslee campaign cites claims by Nobel-winning economist and former Clinton economic adviser Joseph Stiglitz, who in a 2008 news report said deregulation in 1999 including repeal of Glass-Steagall helped promote “high-risk gambling mentality.”
The facts: When asked to back up the allegation, McKenna’s campaign spokesman Charles McCray initially listed five votes by Inslee that contributed to the crisis – two in 2006, two in 2007 and the last one in 2010, well after the financial crisis began.
None of the votes were on legislation that ultimately passed both chambers.
Of the 2006 votes, one was a vote in favor of an amendment that would have extended grants to low-income people to cover down-payment and closing costs, according to the McKenna campaign.
The other was a vote on the underlying bill – Expanding the American Homeownership Act – which all nine members of the Washington House delegation voted in favor of.
Library of Congress records show the bill would have extended the permissible mortgage term from 35 years to 40 years for loans through the Federal Housing Administration and repealed the 3 percent minimum down payment. It also would have let the federal Housing and Urban Development secretary determine the cash down requirement based on the likelihood of a loan default.
Two of the other votes were in 2007 – the first of which was a new amendment to the same Expanding Homeownership bill. Inslee voted against the amendment to require FHA to base mortgage-insurance premiums on risks posed by a borrower.
Inslee later voted for the underlying bill, which passed the full House with eight of nine Washington House members in favor (Doc Hastings, R-Pasco, voted no).
The final vote would have let HUD increase the premiums for mortgage insurance but made “the charging of them discretionary instead of mandatory.” But again, the bill failed to pass the Senate.
Even if Inslee’s votes had loosened lending standards, experts such as Glenn Crellin, associate director of the Runstad Center for Real Estate Studies at the University of Washington, said the national real estate collapse was due to more than one factor.
One factor was borrowers who went into high-risk loans and had low chances of repayment – particularly when loans offered at exceptionally low “teaser” rates adjusted within a few years to much higher interest rates. But another was the repackaging of risky loans and reselling them on the secondary market where buyers were not made aware of the risks.
Alan Hess, a professor of finance and business economics at the UW’s Foster School of Business who has specialized in the study of financial systems internationally and in the United States, agrees.
What exactly went wrong is still a subject of much academic debate, Hess says, and “we haven’t yet decided on the answer.”
Hess said questions over lending standards – “how relaxed were they and to what extent did that relaxation lead to the crisis” – is still being debated among academics “every single step along the way.”
On Inslee’s claim that deregulation was the problem, Hess said the jury is out. He said case studies of bonds issued by banks that would have been outlawed by the Glass-Steagall Act of the Great Depression era actually outperformed similar instruments that would not have been outlawed.
Bottom line: Contrary to McKenna’s claims that Inslee’s votes added to the crisis, none of the cited bills that passed the House ever passed the Senate to become law.
If the point was that Inslee voted for bills or backed policies that could have loosened loan standards, McKenna appears to be able to back up his assertion. But that’s not what he said at the debate, when he accused Inslee of making a mess that he and other attorneys general had to later clean up.
It is less clearcut – and still a matter for debate – whether Inslee can say he had the foresight to avoid such a financial disaster.
bshannon@theolympian.com
