Corporate Lobbying and the Supbrime Crisis

So whose fault was it anyway?

God knows there's plenty of blame to go around from greedy businessmen, to irresponsible borrowers, to regulators sleep at the wheel, to a misguided government effort to increase homeownership rates. Now add to that a familiar enemy, the lobbying system, suggests a new working paper from University of Chicago's Atif Mian, Amir Sufi, and Francesco Trebbi.

The researchers looked at how special interests, in this case mortgage companies, spread their money around during the mortgage credit expansion of the early part of this decade. They find that mortgage lobbying from the likes of Fannie Mae, Freddie Mac, and the Mortgage Bankers Association outpaced non-mortgage lobbying in districts with a lot of subprime borrowers:

While the results don't show a direct link between campaign contributions and the move by the government to increase the affordable housing mandate or the lack of lending oversight,

they suggest that special interests recognized a role for the U.S. Congress in the mortgage expansion and directed their efforts towards representatives more likely to gain electorally from it. While the evidence is circumstantial, it is consistent with the view that special interest politics played a role in sustaining (or at least not hindering) the mortgage credit expansion.

The researchers next tried to see if they could find a more direct link between contributions and actual laws that were considered. They turned to the Responsible Lending Act of 2005 which was widely supported by the mortgage industry and opposed by consumer advocacy groups.

The bill had 39 co-sponsors and the researchers find that

mortgage industry campaign contributions predict cosponsorship on the RLA, which is widely believed to be a pro-mortgage industry piece of legislation. These findings demonstrate that mortgage industry campaign contributions have a direct effect on politicians considering regulation on the subprime mortgage market.

But again the evidence is circumstantial. The Responsible Lending Act never actually made it to a House roll call vote because one of the Congressmen who introduced the bill was implicated in the Jack Abramoff scandal.

Finally, the researchers also looked at how elected officials voted on the legislation passed this summer that rescued Fannie Mae and Freddie Mac, provided $300 billion in mortgage guarantees, and gave tax credits to first-time homebuyers. They found that regardless of a politician's ideology, if he or she represented a district with high mortgage default rates, then he or she was much more likely to vote for the bill's passage.

The overall conclusion seems to be that politicians are motivated by money and the threat of losing their job. Who knew?

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