"The political economy of the subprime mortgage credit expansion"

Here's a 2010 article by economists Atif Mian, Amir Sufi, and Francesco Trebbi on how Congresscritters voted in 2002-2007 on Housing Bubble-related bills:

The global financial crisis has its origins in the failings of the US housing market – and, some believe, those of the US government. ... Indeed, government intervention is often well intentioned and justified by economic theory. But once governments are involved in the financial sector, the incentives for individuals to try to manipulate government policy and politicians’ votes can be irresistible. The results can be disastrous. ...

The expansion of subprime lending coincided with key US government policies, often with cross-party backing, that reduced regulation of subprime lenders and increased mortgage support for low-income households.

Among the most prominent was the affordable housing mandate imposed by the Department of Housing and Urban Development. The mandate required that mortgage providers and guarantors Freddie Mac and Fannie Mae purchase a larger fraction of mortgages that serve low- and moderate-income borrowers....

Beginning in 2002, mortgage industry campaign contributions increasingly targeted US representatives from districts with a large fraction of subprime borrowers. To measure constituent interest we use zip code level data on consumer credit. Combining this with electoral data, we then compare this with campaign contributions, lobbying expenditure, and eventually congressional voting data.

During the expansion years, we find that both mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behaviour on housing-related legislation. In 1997 and 1998, the fraction of subprime borrowers in a representative’s district significantly predicts the representative’s votes on only 30% of roll calls. By 2003 the fraction increases to 70%.

As the solid line in Figure 2 shows, beginning with the 107th Congress in 2002, there is a sharp relative increase in mortgage campaign contributions to high subprime share districts, while there is no such pattern for non-mortgage contributions. Our results suggest that a one standard deviation increase in the subprime share as of 1998 – before the expansion – leads to a relative increase in the growth rate of mortgage industry campaign contributions of 81%.

Taken together, our results suggest that constituent interests, measured with the fraction of subprime borrowers in a given Congressional district before the subprime mortgage expansion, and special interests, measured with campaign contributions from the mortgage industry, both helped to shape government policies that encouraged the rapid growth of subprime mortgage credit.

In the final section of the study, we examine voting and co-sponsorship patterns on six bills for which competing interests are well defined, these are:

• The American Dream Downpayment Act of 2003, which aimed to increase homeownership among low-income communities by providing downpayment and closing cost assistance;
• the Ney-Kanjorski Responsible Lending Act of 2005, which would have preempted state regulations on predatory lending;
• the Prohibit Predatory Lending Act of 2005, which would have placed more stringent controls on subprime lenders;
• the Mortgage Reform and Predatory Lending Act of 2007, which was a revised version of the Prohibit Predatory Lending Act that eventually passed the House (but failed in the Senate);
• and the Federal Housing Finance Reform Acts of 2005 and 2007, which sought to tighten regulation of Freddie Mac and Fannie Mae.

...  Focusing on the trade-off between ideology and economic incentives, we find that conservative politicians are less responsive to both constituent and special interests. This suggests that politicians, through ideology, might be able to commit against intervention even during severe crises.

This suggests that, say, Senator Rand Paul will be less likely to go along to get along on the next trillion dollar scam.

My published articles are archived at iSteve.com -- Steve Sailer