“Before the adoption of the Federal Housing Enterprises Financial Safety and Soundness Act (the GSE Act) in 1992 and the imposition of the affordable-housing goals, the GSEs followed conservative underwriting practices. Mortgage defaults were usually well under 1 percent, and the homeownership rate in the United States hovered around 64 percent, where it had been for almost thirty years…

…High-risk lending was confined primarily to the FHA (an agency controlled by the Department of Housing and Urban Development (HUD) and to specialized subprime lenders. What caused the conservative standards to decline? The Financial Crisis Inquiry Commission (FCIC) and many private commentators blamed the irresponsibility of the private sector and Wall Street, as did Ben Bernanke. However, there is no difficulty finding the source of this decline in the GSE Act and HUD’s statements and policies during the 1990s and 2000s, both of which made clear that reduced underwriting standards was the underlying purpose of the affordable-housing goals. By the early 1990s, Fannie and Freddie had come to dominate the housing finance market. When they were compelled to reduce their underwriting standards, the lower standards….intended to assist low-income and minority borrowers….inevitably spread to the wider market.

The affordable-housing goals, the CRA, the FHA, the Best Practices Initiative, and the National Homeownership Strategy, operating together between 1995 and 2008, spread NTMs (nontraditional mortgages) throughout the financial system, degrading underwriting standards, built an enormous and unprecedented housing bubble, and ultimately precipitated a massive mortgage meltdown….The great irony here is that when affordable-housing goals were adopted by Congress, homes in the U.S. were among the most affordable in the world. In 1989, nearly 90 percent of U.S. housing markets were considered affordable, with homes costing only three times more than annual family incomes. However, by 2005, after the affordable-housing goals had worked their “revolution,” less than 33 percent of U.S. housing markets were deemed affordable under this standard, and 20 markets were deemed severely unaffordable.” Peter J. Wallison, “Hidden in Plain Sight, Chapter’s 5 and 6, HUD’s Central Role and The Decline in Underwriting Standards”

2000 Statement by HUD (from “Hidden in Plain Sight: Chapter 5 HUD’s Central Role”):

“Lower-income and minority families have made major gains in access to the mortgage market in the 1990s. A variety of reasons have accounted for these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting, and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable-housing goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable lending.”

HUD’s 2004 Statement on its “Revolution in Affordable Lending” (from “Hidden in Plain Sight: Chapter 5 HUD’s Central Role”):

“Over the past ten years, there has been a “revolution in affordable lending” that had extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this “revolution in affordable lending.” During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-downpayment products, and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants. HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and nonminority families.”

“The “revolution” turned out to be a monumental policy error It was a great experiment, and was perhaps entered with the view…expressed in the preceding statement….that new technology like automated underwriting would assure a safe result. But by now, it should be clear that loosening underwriting standards does not lead to a stable mortgage finance system.”, Peter J. Wallison

Statement in a 2005 Report Commissioned by HUD (from “Hidden in Plain Sight: Chapter 5 HUD’s Central Role”):

“More liberal mortgage financing has contributed to the increase in demand for housing. During the 1990s, lenders have been encouraged by HUD and banking regulators to increase lending to low-income and minority households. The Community Reinvestment Act (CRA), Home Mortgage Disclosure Act (HMDA), government-sponsored enterprises (GSE) housing goals and fair lending laws have strongly encouraged mortgage brokers and lenders to market to low-income and minority borrowers. Sometimes these borrowers are higher risk, with blemished credit histories and high debt or simply little savings for a down payment. Lenders have responded with low down payment products and automated underwriting, which has allowed them to more carefully determine the risk of the loan.”

Excerpt of “Hidden in Plain Sight, Chapter 5: HUD’s Central Role”, by Peter J. Wallison:

“Despite HUD’s unseemly effort to deny its own role in fostering the growth of subprime and other high-risk mortgage lending, there is strong….indeed irrefutable…..evidence that, beginning in the early 1990s, the department led an ultimately successful effort to lower underwriting standards in every area of the mortgage market where HUD could exert influence. With support in congressional legislation, HUD’s policy was launched in the Clinton administration and extended almost to the end of the Bush administration. It involved FHA, which was under HUD’s direct control; Fannie and Freddie Mac, which were subject to HUD’s affordable-housing regulations; a program called the Best Practices Initiative, which applied mostly to the mortgage banking industry; and another program, begun at the request of President Clinton, called the National Homeownership Strategy, which seems to have applied to the entire housing industry. In addition, although not subject to HUD’s jurisdiction, the new, tighter CRA regulations that became effective in 1995 gave community groups new leverage to obtain commitments for substantial amounts of CRA-qualifying mortgage when banks were applying for merger approvals.”

“Our homeownership strategy will not cost taxpayers one extra cent. It will not require legislation. It will not add more Federal programs or grow the Federal bureaucracy.”, President Bill Clinton, “Remark on the National Homeownership Strategy,”, June 5, 1995

Posted on April 10, 2015, in Postings. Bookmark the permalink. Leave a comment.

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