Federal affordable housing mandates have done little or nothing to raise homeownership rates, but they did contribute to a devastating financial crisis in 2008 by encouraging risky lending.
Yet the Federal Housing Finance Agency is doubling down on failure by ratcheting up those mandates. Its head, Mel Watt, was appointed by the President in 2013, even though the policies he promoted in Congress helped cause the financial crisis, and he has continued to promote lower lending standards in his current position.
Bloomberg News reports:
Mortgage lending to low-income families would increase slightly under a plan by Federal Housing Finance Agency Director Mel Watt. . .Mortgage purchases by Fannie Mae and Freddie Mac for low-income, single-family homes will be targeted at 24 percent of the companies’ business through 2017, the FHFA said Wednesday. That’s one percentage point higher than last year’s level. . . The biggest change . . .was to increase lending in low-income areas to 14 percent of Fannie Mae and Freddie Mac’s book of business for 2015 through 2017 from 11 percent last year. That goal applies to mortgages made in areas where incomes are low as defined by the U.S. Census Bureau. . . . free-market advocates say the FHFA’s goals, which have been in place since 1992, helped create the bubble by encouraging Fannie Mae and Freddie Mac to buy risky mortgages. They say increasing the goal numbers will fuel a decline in lending standards.
As housing policy expert (and former Fannie Mae executive) Ed Pinto notes,
The Federal Housing Finance Agency (FHFA) doubled down on past policy failures when it mandated Fannie and Freddie to meet new expanded affordable housing goals. For more than 50 years, U.S. housing policy has relied on looser and looser mortgage lending standards in a misguided effort to promote broader home ownership and accomplish wealth accumulation, particularly for low-income households. For nearly half that time, Fannie Mae and Freddie Mac have been required to meet low-income housing mandates. These misguided efforts have achieved neither goal—the U.S. home ownership rate is no higher today than it was in the early 1960s and low-income households (those in the 20th to 40th percentile of the income distribution) had a median net worth of only $22,400 in 2013, the lowest inflation-adjusted amount in any of the Fed surveys dating back to 1989.
Simple economics explains why FHFA’s affordable housing mandates are doomed to failure. Research as far back as the 1950s has shown the liberalization of credit terms creates demand pressure that easily becomes capitalized into higher prices when undertaken in a seller’s market.
As Einstein noted, insanity is defined as doing the same thing over and over again and expecting a different result.
A 2011 book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, Reckless Endangerment, chronicled how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Years after the crisis, financial analysts concluded that federal agencies and the Government-Sponsored Enterprises (GSE’s) played a larger role in causing the financial crisis than previously thought. Ed Pinto, who worked at Fannie Mae before it began buying up risky mortgages, has also described its key role in buying up and promoting risky sub-prime mortgages, which Fannie Mae did on a large scale, despite having a capital cushion that was tiny compared to private banks, resulting in its later insolvency and massive taxpayer bailout.
The two government-backed mortgage giants, Fannie Mae and Freddie Mac, bought up risky sub-prime mortgages partly in order to satisfy government affordable-housing mandates, as even the progressive Village Voice found in its investigative reporting. Even Fannie Mae’s 2006 10-K form with the SEC noted the role of HUD’s affordable-housing mandates as a factor in its purchase of mortgages it would once have avoided as too risky:
We have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis added]
Despite the enormous harm caused by these mandates in helping spawn the financial crisis, they did little or nothing to increase homeownership rates over the long run, as a Wall Street Journal article explains. Indeed, homeownership rates are higher in countries like Chile and Italy that have nothing like Fannie or Freddie, even though Chile is much poorer than the U.S., and Italy is much more crowded.
As Government-Sponsored Enterprises, Fannie and Freddie were not subject to the sort of capital requirements that apply to private entities, so they did not have enough reserves to cover their losses when their mortgages started defaulting. As a result, the FHFA placed them in conservatorship in September 2008.