Affordable equals "subprime"

by Russ Roberts on September 19, 2008

in Government Intervention

This piece from the Washington Post does use hindsight. But it has real numbers and it shows Fannie and Freddie’s role (and HUD’s) in creating the debacle. A little more Bill Clinton below the fold:

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own
homes, the agency required that two government-chartered mortgage
finance firms purchase far more "affordable" loans made to these
borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions
as mistakes that contributed to an escalation of subprime lending that
is roiling the U.S. economy.

The agency neglected to examine whether borrowers could make the
payments on the loans that Freddie and Fannie classified as affordable.
From 2004 to 2006, the two purchased $434 billion in securities backed
by subprime loans, creating a market for more such lending. Subprime
loans are targeted toward borrowers with poor credit, and they
generally carry higher interest rates than conventional loans.

Further down the page, some facts and some politics. Lovely:

Fannie and Freddie finance about 40 percent of all U.S. mortgages, with
$5.3 trillion in outstanding debt. Owned by private shareholders but
chartered by Congress, they are exempt from state and local taxes and
receive an estimated $6.5 billion-a-year federal subsidy because they
can borrow money more cheaply than other investors. In return, they are
expected to serve "public purposes," including helping to make home
buying more affordable.

HUD officials dispute allegations that the agency encouraged abusive
lending and sloppy underwriting standards that became the hallmark of
the subprime industry. Spokesman Brian Sullivan said the agency and
Congress wanted to increase homeownership among underserved families
and could not have predicted that subprime lending would dominate the
market so quickly.

"Congress and HUD policy folks were trying to do a good thing," he said, "and it worked."

Since HUD became their regulator in 1992, Fannie and Freddie each
year are supposed to buy a portion of "affordable" mortgages made to
underserved borrowers. Every four years, HUD reviews the goals to adapt
to market changes.

In 1995, President Bill Clinton’s HUD agreed to let Fannie and
Freddie get affordable-housing credit for buying subprime securities
that included loans to low-income borrowers. The idea was that subprime
lending benefited many borrowers who did not qualify for conventional
loans. HUD expected that Freddie and Fannie would impose their high
lending standards on subprime lenders.


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