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Posted at 11:03 AM ET, 01/26/2011

Commission member dissents on financial crisis report, says housing policy caused meltdown

By Zack Goldfarb

A report by a panel charged with investigating the financial crisis offers a scathing critique of Wall Street, federal regulators and the Federal Reserve, whose negligence, a majority of the commissioners say, caused the financial meltdown of 2007-2009.

But one member of the Financial Crisis Inquiry Commission, Peter Wallison, has written a lengthy dissent to the majority's report, arguing that government housing policy drove the crisis.

The majority's report is due to be released Thursday morning, but excerpts began leaking out Tuesday night and were first reported in the New York Times. The report lays blame on many actors -- mortgage lenders, banks, regulators -- on Wall Street, in Washington and around the country.

Wallison, repeating an explanation he has been advocating for years, wrote that mortgage giants Fannie Mae and Freddie Mac fueled the subprime bust when they purchased huge numbers of bad mortgages. He also criticized the U.S. Department of Housing and Urban Development, which he said followed an imprudent path of pushing low-income people into housing they could not afford.

"I believe that the sine qua non of the financial 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 deflate," Wallison wrote.

He added that "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 financial crisis of 2008 would never have occurred."

Wallison is a former White House and Treasury counsel in the Reagan administration and is co-director of the American Enterprise Institute's program on financial policy studies

He has issued a separate dissent from that of the other Republican commissioners on the panel. Last month, they issued a list of questions and answers about the crisis that also blamed federal housing policy.

Specifically, they wrote, the Clinton and Bush administrations turned mortgage finance companies Fannie Mae and Freddie Mac, chartered by Congress to expand homeownership, into "two enormous monoline hedge funds" whose "only option available was to invest in mortgages of increasingly lower quality and higher risk to the taxpayer."

By Zack Goldfarb  | January 26, 2011; 11:03 AM ET
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