Crisis recasts the villain

As I reflect on the current financial debacle, I think back to the mid-1990s, when the big story was the push by federal officials to increase home ownership.

It sounded like a good thing. It would turn tenants into stakeholders in their communities. For folks of modest means, growing equity could fund small businesses and send children to college.

Certainly, one of the great success stories of the 20th century was rising home ownership. After the Great Depression, we were turning into a nation of renters. The home ownership rate had fallen to about 43 percent. By 1980, it was at more than 64 percent. But then it stalled; the folks in charge of housing policy felt we could do better.

The federal government leaned heavily on banks to loosen up lending and eliminate "red-lining," the withholding of mortgages from entire neighborhoods. Down payments were reduced. Mortgages were available with low initial interest rates. The government and the big mortgage purchasers -- Fannie Mae and Freddie Mac -- pushed hard to streamline the underwriting process. The goal: faster and fairer.

Washington evidently felt the whole business was being run by the likes of Henry F. Potter from "It's a Wonderful Life," dyspeptic and penurious bankers who saw deadbeats everywhere. Give them mortgages? Bah!

"What does that get us?" bellowed Lionel Barrymore as Potter. "A discontented, lazy rabble instead of a thrifty working class." The feds wanted lenders to be more like Frank Capra's virtuous hero, George Bailey, head of the struggling "Building & Loan" in Bedford Falls that Potter despised.

Of course, Henry Potter fretted about the rabble because when he was making loans in the old days, he had to worry whether people could make the payments. He would have recoiled at the evolving world of lending, in which mortgages were approved and then shipped off wholesale to Fannie and Freddie and other mammoth financial institutions around the world, to be sliced and diced into exotic, highly profitable securities.

Main Street lenders could channel George Bailey because they weren't on the hook if the loans went bad.

By 2005, the home ownership rate had risen to 69 percent, about 5 percentage points more than in 1990. And then everything began to unravel as the housing bubble collapsed and the loans went bad.

Undoubtedly, there were some honest folks in that last 5 percent who were hoodwinked into loans they couldn't afford because some lenders told them values would keep soaring and they'd be able to refinance when their teaser rates reset way, way up.

But we will probably learn in the days ahead that there were many others who fibbed their way through mortgage applications that got little or no scrutiny. And then there were the speculators who were trolling for hot investments they could flip.

Come Christmas, "It's a Wonderful Life" will be broadcast again, only this time, maybe we'll realize that Henry Potter got a bad rap. He and the old-school bankers didn't bring Wall Street to its knees with toxic waste packaged as sound mortgages. We put the Potters out to pasture years ago because we thought they were denying folks the American Dream, and now we're going to pay billions for the Capra- esque housing blockbuster that has played out in recent years. It turned out to be a slasher flick.

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