The Obama administration has released a “white paper” with proposals for the future of Fannie Mae and Freddie Mac, government-sponsored entities that were at the heart of the housing/mortgage crisis and last year accounted for 90 percent of new mortgages. It is short on details but proposes reducing government investment in housing while increasing government oversight of the mortgage market. This would include making underwriting standards stronger. But it was government “oversight” that weakened them in the first place.
When Obama on July 21, 2010, signed the 2,300-page “Dodd-Frank Wall Street Consumer Protection Act” governing banks and other financial institutions, he said it would provide “the strongest financial protection for consumers in the nation’s history.” But it did not apply to Fannie Mae or Freddie Mac. The current document on reforming Fannie and Freddie—nearly two years in the making—is just 31 pages long.
Obama said nothing about Congress having established Fannie and Freddie and authorizing them to securitize mortgages long before the Wall Street banks ever got into the act. Nothing was said about Fannie and Freddie being twice as leveraged as Bear Stearns, a global investment bank that was an early casualty of the financial crisis.
Nor was anything said about the government’s role in using the Community Reinvestment Act (CRA) to force banks to lower their underwriting standards to qualify low-income people for mortgages.
The three proposals in the white paper offer varying degrees of government involvement in housing and may include phasing out Fannie and Freddie. But the administration has said it is committed to ensuring Fannie and Freddie “have sufficient capital to perform under any guarantees now or in the future.” It also said it will still provide “targeted assistance” to low- and moderate-income home buyers and renters, same as before.
If the government wanted real reform, it would repeal the (CRA).
Rising Low-Income Mandate
Initially, the affordable-housing mandate was set at 30 percent of single-family mortgages purchased by Fannie and Freddie. In 1995, Clinton administration Housing and Urban Development Secretary Henry Cisneros set the mandate at 42 percent of their annual business volume.
His successor, Andrew Cuomo, upped that to 50 percent and directed the government-sponsored enterprises (GSEs) to buy mortgages from borrowers with “very low income.” Banks ended up making more and more “subprime” loans and agreeing to dangerously lax underwriting standards.
By 2007, HUD’s affordable-housing regulations required 55 percent of all GSE loans to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.
The credit bubble was now inflated to the bursting point. But when it burst, the banks received the blame. Obama was quick to decry the “fat-cat bankers on Wall Street,” the “greedy” and “irresponsible” lenders who pushed subprime mortgages on the poor and vulnerable who couldn’t afford them and now were losing their homes.
The question of whether the problems had been caused by government regulations never seemed to come up.
Room for More Abuses
Leaving the CRA statute as it is merely leaves the door open for future administrations to repeat abuses and again allocate credit for political purposes. Three statutes closely related to the CRA should also be repealed: the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), and the Fair Housing Act (FHA), all aimed at eliminating “discrimination” in lending.
The close relationship with these statutes arises from the near-automatic determination that if ECOA or FHA is violated, the institution is not serving its community. The Department of Housing and Urban Development (HUD) and the Justice Department complement the efforts of the bank and thrift agencies in enforcing the FHA and ECOA.
In the 1990s, Attorney General Janet Reno, along with her assistant Eric Holder, used faulty statistical methods, quotas, market share, “disparate impact analysis,” and other factors to bludgeon banks with accusations of racial discrimination. This left many banks intimidated and willing to acquiesce to cash settlements to avoid court trials and bad publicity.
Poor Results for Effort
Homeownership in the United States peaked at 69 percent at the top of the housing bubble and is now 67 percent. There are at least 14 countries that have higher ownership rates than the United States, including Hungary, Iceland, and Poland.
In the European Union, where most countries don’t offer tax breaks and subsidies as in the United States, homeownership was just shy of 75 percent in 2006, according to Eurostat. Homeownership in the United States increased by only 3.4 percentage points over the last 20 years, during the U.S. government’s greatest efforts to promote it. In the Netherlands and Italy, it increased by 12 percentage points between 1991 and 2008.
Employing government to achieve homeownership has led to the greatest economic contraction since the Great Depression. There is a housing glut that is not going to go away any time soon. Nor will Fannie and Freddie disappear soon. If they do, their functions will likely be replaced in large measure by a similar agency with a new name.
But if that occurs, particularly if the CRA and related laws are retained, it will extend the potential for politicians to employ them for social goals and vote-buying schemes.
Edmund Contoski (Edmund.cont[email protected]) is a Heartland Institute policy advisor and author of Makers and Takers: How Wealth and Progress Are Made and How They Are Taken Away or Prevented. (www.amlibpub.com).