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The New York Sun


About the Next Crisis

July 29, 2008

By Howard Husock

The bipartisan-backed housing bill that has allowed for government backing of mortgage giants Fannie Mae and Freddie Mac is said to bring with it a tough new regulator with expanded oversight powers. In addition to making sure that Fannie and Freddie have the reserves they need, the regulator, in order to assure the soundness of these government-sponsored enterprises, also will have to be tough on another institution: the very Congress which has passed the housing bailout bill.

A close look at the Department of Housing and Urban Development's current regulation of secondary mortgage firms makes clear that Congress has encouraged Fannie and Freddie to purchase exactly the sort of questionable loans which are now shaking the housing market and financial system to its core.

At issue here are what HUD calls its "affordable housing goals and subgoals" for Fannie Mae and Freddie Mac. Authorized by Congress itself—ironically, in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992—these goals strongly promote the purchase of home mortgages for social and political reasons, not because of the underlying soundness of the loans. For this new regime, the political strings that have been attached to these allegedly autonomous businesses must be cut.

For the 2005-2008 period, HUD directed Fannie and Freddie to meet "subgoal performance figures" such that 45% of homebuyers whose mortgages they purchased would be of "low and moderate income," 32% would come from "central cities, rural areas and other underserved areas," and 22% of purchased mortgages qualified as "special affordable"—meaning, those made to "very-low-income families or families living in low-income neighborhoods."

In other words, the government tells these ostensibly private firms how to conduct business. These government rules allocate credit for non-business reasons and allows purchases of loans for reasons other than the credit-worthiness of borrowers.

How are such affordable housing goals to be achieved? As recently as April of this year, Fannie Mae said it would use those government-written rules. Fannie actually boasted of "mortgage products and options" which included "reduced requirements for down payment and closing costs; choices for borrowers with less-than-perfect credit; and flexibility to provide loans to home buyers with no traditional credit history." The effects were not minor.

In 2005, HUD reported that Fannie and Freddie financed some 3.8 million owner-occupied or rental units occupied by low-and-moderate-income families, 1.7 million occupied by "special affordable families," and 3 million in "housing units located in underserved neighborhoods."

The political pressure to meet these goals was serious. Republicans and Democrats have bought into the idea that government has a central role in making sure that housing is "affordable." The HUD Secretary of the Bush administration, Alphonso Jackson, said of the affordable housing goals in 2004: "Although the nation is experiencing a record high homeownership rate of 68.6 percent, there is still more to be done. These government-sponsored enterprises can and must further use their power in the marketplace to ensure that more low-income and minority families get on the path to homeownership."

Not that the government sponsored enterprises strongly objected. Wrapping themselves in the flag of housing affordability—and providing mortgage financing for projects throughout the country—was part of their insurance policy, protecting them against aggressive oversight and the remote risk of privatization. It was—and remains—a policy predicated on what has now turned out to be a false assumption—guaranteed profitability that could support political redistribution of a portion of the net income.

There were some who warned that this scheme would prove unsustainable. In pointing out that it is difficult and, indeed, arbitrary to estimate the appropriate size of the market for mortgages classified as "affordable" in any given year, the National Association of Realtors, in protesting increases in the affordable housing goals, observed in July 2004: "As great as they are, the uncertainties involved in measuring past performance are dwarfed by the uncertainties involved in predicting performance in future years which, in the end, must serve as the basis for establishing the GSE goals. ... Increases in housing prices have exceeded income growth in the past few years, interest rates are on the rise, and rental markets are soft. And ... the credit scores of renters have declined significantly over time, reducing the number of qualified borrowers."

We are now living with the consequences of those actions. To avoid such future fiascos, the time is right for Congress, if it must act to save Fannie Mae and Freddie Mac, to abolish its ill-advised controls as to what mortgages they should buy. If they are to be businesses, chartered to provided liquidity for the housing capital market, let them operate as such. A tougher credit standard protects those who work hard and play by the rules.

Eliminating the "affordable housing goals" will mean that the frugal and thrifty of modest means—now victimized by living amongst vacant, foreclosed homes, once mortgaged without appropriate underwriting—will actually be amongst the beneficiaries. Of course, absent such social goals, one can be forgiven for wondering why the federal government should provide backing for Fannie Mae and Freddie Mac—but that's a question for another day.

Original Source:



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