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The House That George Romney Built

nytimes.comMay 12, 2012

By Louis Hymen

As Mitt Romney casts around for big ideas to solve the continuing financial crisis, he would do well to remember the experiences of his father, George C. Romney: as the secretary for housing and urban development during the Nixon administration, he oversaw the emergence of the mortgage-backed security industry — and its first devastating policy failure.

The idea of the mortgage-backed security actually began under a Democrat, Lyndon B. Johnson, who saw it as a neat solution to the credit crunch of 1966. Banks had been losing depositors’ savings steadily through the 1960s to the higher-yielding securities market. In the summer of 1966, this gradual shift accelerated into a crisis, after the Fed unexpectedly raised rates but barred banks from raising their own rates on deposits.

Banks suddenly began to hemorrhage millions of dollars in deposits. Without deposits, banks could not lend for mortgages, and the housing industry ground to a halt, panicking builders and lenders around the country.

Johnson and other policy makers saw mortgage financing as a way to solve two problems at once: decoupling mortgage investment from deposits would help banks while making more money available for inner-city homeownership. The combined need for mortgage financing and mortgage access enabled the passage of Johnson’s National Housing Act of 1968, which created both the first mortgage-backed securities and the first subprime loans. In turn, Ginnie Mae, overseen by the Department of Housing and Urban Development, bought these mortgages, and in tandem with Fannie Mae, repackaged them as mortgage-backed securities for sale to investors.

Richard M. Nixon came to office in 1969, so it was left to a Republican administration, and Mr. Romney, to preside over the first mortgage-backed security sale in 1970, which they enthusiastically embraced. “This event,” Mr. Romney said, “marks a revolutionary step forward in our efforts to increase the funds available for mortgage financing.” But in an eerie prefiguring of the 2000s, the subprime lending program soon fell apart as predatory lenders and unscrupulous house flippers defrauded first-time buyers. The government found itself insuring mortgages on houses that could never be resold. After first denying the problems, Mr. Romney was ultimately forced to freeze the program in 1971. Yet even as the lending program ended, the mortgage-backed security sector blossomed, at least for higher-quality, middle-class homes. Securitization worked as an instrument to connect local demand and global capital.

Bypassing traditional bank deposits allowed money to come from almost anywhere: small-town banks, union pensions and European investors could all buy American mortgages. Lending on houses, at least for middle-class housing, became easier than ever before.

And that was the problem. While Mr. Romney may have stopped the fraud, he didn’t address the flip side of the urban crisis: the millions invested in mortgages was money not invested in business.

Small-business loans, however, still relied on those dwindling deposits and could not be securitized. Big corporations and small homeowners could rely on the surging global capital markets, while small business found itself crowded out.

Put differently, policy makers in the late 1960s and early ’70s confused the cause of prosperity (good jobs) with its symptom (homeownership). And for 40 years, we kept doing the same — finding new ways to funnel money into housing, while doing little to put it into small-business growth.

One solution would be to begin securitizing small-business debt, which would provide a safe and profitable outlet for all that capital that corporations and banks are nervously hoarding right now. Unlike houses, small businesses will produce growth, which will benefit not only the owners and the lenders, but all of us.

Mitt Romney, the other Republican candidates and President Obama should consider the lessons of George Romney and remember that it’s not enough just to stop what’s not working. We also have to figure out what really works.

Louis Hyman, an assistant professor of history at the Industrial and Labor Relations School at Cornell, is the author of “Borrow: The American Way of Debt.”

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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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