WSJ,
All agree that the bursting of the housing
bubble caused the financial collapse of 2008. Most agree that the housing bubble
started in 1997. Less well understood is that this bubble was the result of
government policies that lowered mortgage-lending standards to increase home
ownership. One of the key players was the controversial liberal advocacy group,
Acorn (Association of Community Organizations for Reform Now).
The watershed moment was the 1992 Federal
Housing Enterprises Financial Safety and Soundness Act, also known as the GSE
Act. To comply with that law's "affordable housing" requirements,
Fannie Mae and Freddie Mac would acquire more than $6 trillion of single-family
loans over the next 16 years.
Congress's goal was to force these two
government-sponsored enterprises (GSEs) to purchase loans that had been
originated by banks—loans that were made under the pressure of another federal
law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and
moderate-income communities.
From 1977 to 1991, $9 billion in local CRA
lending commitments had been announced. CRA lending by large banks increased
dramatically after the affordable housing mandate was in place in 1993, growing
to $6 trillion today. As Ellen Seidman, director of the federal Office of
Thrift Supervision, said in a speech before the Greenlining Institute on Oct.
2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to
68% in 2001], I'm convinced, would not have been reached without CRA and its
close relative, the Fannie/Freddie requirements."
The 1992 GSE
Act was the fuse, and the trillions of dollars in subsequent CRA and GSE
affordable-housing loans would fuel the greatest housing bubble our nation has
ever seen. But who lit the fuse?
The previous year, as Allen Fishbein,
currently an adviser for consumer policy at the Federal Reserve, has noted,
Acorn and other community groups were informally deputized by then House
Banking Chairman Henry Gonzalez to draft statutory language setting the law's
affordable-housing mandates. Interim goals were set at 30% of the single-family
mortgages purchased by Fannie and Freddie, and the Department of Housing and
Urban Development has increased that percentage over time. The goal of the
community groups was to force Fannie and Freddie to loosen their underwriting
standards, in order to facilitate the purchase of loans made under the CRA.
Thus a provision was inserted into the law
whereby Congress signaled to the GSEs that they should accept down payments of
5% or less, ignore impaired credit if the blot was over one year old, and
otherwise loosen their lending guidelines.
The proposals of Acorn and other
affordable-housing advocacy groups were acceptable to Fannie. Fannie had been
planning to use the carrot of affordable-housing lending to maintain its hold
over Congress and stave off its efforts to impose a strong safety and soundness
regulator to oversee the company. (It was not until 2008 that a strong
regulator was created for Fannie and Freddie. A little over a month later both
GSEs were placed into conservatorship; they have requested a combined $112
billion in assistance from the federal government, and much more will be needed
over the next few years.)
The result of loosened credit standards and
a mandate to facilitate affordable-housing loans was a tsunami of high risk
lending that sank the GSEs, overwhelmed the housing finance system, and caused
an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other
investors and guarantors, and most tragically an expected 10 million or more
home foreclosures.
As a result of congressional and regulatory
actions, the percentage of conventional first mortgages (not guaranteed by the
Federal Housing Administration or the Veteran's Administration) used to
purchase a home with the borrower putting 5% or less down tripled from 9% in
1991 to 27% in 1995, eventually reaching 29% in 2007.
Fannie and Freddie acquired $1.2 trillion
of loans from banks and other lenders from 1993 to 2007. This amounted to 62%
of all such conventional home purchase loans with a down payment of 5% or less
that were originated nationwide over the same period.
Fannie and Freddie also acquired $2.2
trillion in subprime loans and private securities backed by subprime loans from
1997 to 2007. Acorn and the other advocacy groups succeeded at getting Congress
to mandate "innovative and flexible" lending practices such as higher
debt ratios and creative definitions of income. And the serious delinquency
rate on Fannie and Freddie's $1.5 trillion in high-risk loans was 10.3% as of
Sept. 30, 2009.
This is about seven times the delinquency
rate on the GSEs' traditional loans. Fifty percent of the high-risk loans are
estimated to be CRA loans, with much of the remainder useful to the GSEs in
meeting their affordable-housing goals.
The flood of CRA and affordable-housing
loans with loosened underwriting standards, combined with declining mortgage
interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive
increase in borrowing capacity and fueled a house price bubble of unprecedented
magnitude over the period 1997-2006.
Now this history may repeat itself as many
of the same community groups are pushing Congress to expand CRA to cover all
mortgage lenders, credit unions, insurance companies and others financial
industry segments. Are we about to set the stage for another catastrophe?
Mr. Pinto was the
chief credit officer at Fannie Mae from 1987 to 1989. He is currently a
consultant to the mortgage-finance industry.