The federal government’s push to make housing more affordable played a huge part in pushing the U.S. financial system to the brink of disaster last year.
That’s the conclusion of a report by Rep. Darrell Issa (R-CA), ranking member on the House Committee on Oversight and Government Reform.
The report, released in July, places the blame squarely on Federal Reserve policy and actions that led to relaxed lending standards, lower down payments, more subprime lending, and people getting home loans they couldn’t pay back.
But opposing members of Congress and those in the housing and lending industries say plenty of other causes were at fault, too.
Cozy with Fannie, Freddie
An Issa spokesman said problems arose because of the cozy relationship between politicians and the government-sponsored enterprises Fannie Mae and Freddie Mac, which buy mortgage loans from banks.
“A flaw was created, where the lines between the politics and the economics of the GSEs [Fannie and Freddie] were not clear,” said Frederick Hill, spokesman for the Republican staff of the Oversight and Government Reform Committee. “Political goals led to the erosion of mortgage lending standards.”
Federal policies pushed Fannie and Freddie to relax credit standards, the report said, and those entities fought efforts to increase oversight of their activities.
A Freddie spokesman said his firm wouldn’t comment on the report. A Fannie spokeswoman couldn’t be reached.
Still Neglecting Affordability
The nation needs to reexamine its goals for home ownership, Hill said.
“There was a broad effort made to immediately get people into houses,” Hill said. “What got left out was getting them into houses they could afford.”
Rep. Barney Frank (D-MA) strongly disagrees with Issa’s report. Frank has backed policies to extend homeownership beyond what the market encourages and has introduced legislation for new regulations on the lending system.
“We view it as a Republican, right-wing attack to shed blame for their handling of the economy from 2001 to 2008,” said Steven Adamske, spokesman for the House Financial Services Committee, of which Frank is chairman.
Lack of regulation, rather than government policy, was the problem, Adamske said. Half of the people who were in subprime loans in recent years didn’t need to be, he said. But mortgage companies pushed them into those products, he claimed, and no regulations stopped them.
Changes that need to be made are in the works, Adamske said. A federal consumer protection agency and a regulator to guard against systemic risk are being championed in Congress.
“These kinds of preventive efforts will help ensure that this kind of problem won’t happen again,” Adamske said.
Meanwhile, the National Association of Realtors said it had warned the U.S. housing lending system was in trouble.
“We [the NAR] adopted responsible lending principles in ’05,” said Jeff Lischer, an NAR spokesman. “It was like a canary in a coal mine, warning people about the impending crisis.”
Lenders Under Fire
The NAR pointed to causes of the crisis other than government policies, including predatory lending that resulted in loans to people who couldn’t pay them back. The organization backs the anti-predatory-lending bill Frank recently introduced and which passed the House.
The American Bankers Association says making more money available for home loans and managing risk more closely will help. It backs a strong secondary mortgage market and boosting the amount of money available for home loans.
Issa’s report, however, advocates against promoting homeownership people can’t afford.
“Failing to learn the mistakes of our overleveraged binge on mortgage debt will almost certainly doom the country to repeating the same mistakes again and again,” Issa wrote in the report.
Steve Watkins ([email protected]) writes from Cincinnati.