Strengthening Constitutional Self-Government

No Left Turns

What caused this mess

Here’s Peter Wallison’s argument that the government was a key contributor because it pushed banks to weaken their standards for home loans. Wallison has been worried about Fannie Mae and Freddie Mac since the 1980s. This is not a new concern for him.

A sample

: The effort to reduce mortgage lending standards was led by the Department of Housing and Urban Development through the 1994 National Homeownership Strategy, published at the request of President Clinton. Among other things, it called for “financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments.” Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better-qualified borrowers.

Sure enough, according to data published by the Joint Center for Housing Studies of Harvard University, from 2001 through 2006, the share of all mortgage originations that were made up of conventional mortgages (that is, the 30-year fixed-rate mortgage that had always been the mainstay of the U.S. mortgage market) fell from 57.1 percent in 2001 to 33.1 percent in the fourth quarter of 2006. Correspondingly, sub-prime loans (those made to borrowers with blemished credit) rose from 7.2 percent to 18.8 percent, and Alt-A loans (those made to speculative buyers or without the usual underwriting standards) rose from 2.5 percent to 13.9 percent. Although it is difficult to prove cause and effect, it is highly likely that the lower lending standards required by the CRA influenced what banks and other lenders were willing to offer to borrowers in prime markets. Needless to say, most borrowers would prefer a mortgage with a low down payment requirement, allowing them to buy a larger home for the same initial investment.

The problem is summed up succinctly by Stan Liebowitz of the University of Texas at Dallas:

From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards--at the behest of community groups and "progressive" political forces.… For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage done by relaxed loan standards.

The point here is not that low-income borrowers received mortgage loans that they could not afford. That is probably true to some extent but cannot account for the large number of sub-prime and Alt-A loans that currently pollute the banking system. It was the spreading of these looser standards to the prime loan market that vastly increased the availability of credit for mortgages, the speculation in housing, and ultimately the bubble in housing prices. . . .

Fannie and Freddie used their affordable housing mission to avoid additional regulation by Congress, especially restrictions on the accumulation of mortgage portfolios (today totaling approximately $1.6 trillion) that accounted for most of their profits. The GSEs argued that if Congress constrained the size of their mortgage portfolios, they could not afford to adequately subsidize affordable housing. By 1997, Fannie was offering a 97 percent loan-to-value mortgage. By 2001, it was offering mortgages with no down payment at all. By 2007, Fannie and Freddie were required to show that 55 percent of their mortgage purchases were LMI loans and, within that goal, 38 percent of all purchases were to come from underserved areas (usually inner cities) and 25 percent were to be loans to low-income and very-low-income borrowers. Meeting these goals almost certainly required Fannie and Freddie to purchase loans with low down payments and other deficiencies that would mark them as sub-prime or Alt-A.


Discussions - 2 Comments

Yes. Americans loved this, didn't we? Conservatives loved the idea of an "ownership society"; I think everyone did, liberals, too. Owning a home, "private" ownership, is so very American.

I remember reading little articles by economists, from the early 80s on, I am sure, who said that this loose lending could cause the whole housing market to collapse. More than one compared the highly leveraged stock purchases of the 1920's (leading to the collapse of the Stock Market) to something similar in the contemporary real estate market.

Maybe this policy helped the economy chug along so busily for the last twenty or more years. People will work incredibly hard to keep their homes. I was always meeting women who worked outside of the home and didn't want to. They wanted to raise their children, but said they couldn't. They had to work to help pay their mortgages and the family's taxes. They lived in large, lovely, well-furnished homes that they never saw, did not enjoy, because they were busy working.

We raised six children in a three bedroom home. Yes, maybe we were crazy. I would not argue the point. Yet, I could stay home and actually raise my children, most thoroughly. Even the run-down house we bought cost more than it should have - government lending, easy credit, subsidized high home prices and made for a strong market in housing wherein supply/demand pressures kept pushing prices higher.

In all of this blab, and without time to prove any of it, I would suggest that this government policy distorted more than the lending market. The state of the American family has been affected by this policy.

I'd go further. In the longrun, this whole "progressive cycle" since FDR will turn out to be unsustainable. Yes, we have more homeownership, but people work their lives away to have that home. Women can now fulfill their ambitions, but our birthrate gives us the same prognosis as the panda. Yes, we can feel good about America as a "nation of immigrants," but the country is quickly becoming unrecognizable. Yes, we have a higher and higher standard of living, but that comes at an enormous cost in international dependency, debt, and economic de-evolution. Time to wake up, America.

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