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Housing markets without the benefit of hindsight

This is the first of a series of posts on oldish articles I’m digging up to look into the different ways that government intervened in housing markets, particularly in the encouragement of higher-risk loans. This first one is from a speech by Peter Wallison at AEI in June 2003. He argues that Fannie and Freddie are supposed to be helping low-income families get loans but are shirking because they are too concerned with their other mission of profitability:

As you will see in Jon Brown’s presentation, in city after city, Fannie Mae and Freddie Mac buy smaller percentages of the conventional
mortgages made in minority and low income areas than they buy in middle
income, generally white, areas. If we take this information seriously,
they are doing what is called red-lining-and illegal-when it is done by
banks. In your conference materials, we have included some
representative city maps which show the discrepancy between the Fannie
and Freddie purchases of conventional mortgages in minority and low
income communities and their purchases of similar mortgages in middle
income communities. This data is for the year 2000, and although we
hope it has improved somewhat since then, substantial changes in
percentages would be very difficult when the absolute numbers are this
large. Again, I want to emphasize that Brown is comparing apples and
apples-purchases of conventional mortgages, which meet Fannie and
Freddie’s criteria, in both minority and non-minority communities.

Yet, the GSEs announce each year that they met HUD’s standards for
making loans to low-income homebuyers, and Fannie advertises a
"trillion dollar" commitment for minority and low income housing which
they say they are pursuing successfully. How is this possible? As Jon
Brown will argue, it is the result of a deficiency in the way HUD’s
regulations are drafted. Incidentally, we invited representatives of
both HUD and Fannie Mae to participate in this conference but both
declined. We are happy that Peter Zorn of Freddie Mac has agreed to
comment on Jon Brown’s paper, and presumably he will provide a
different perspective on Brown’s data.

Now, I want to be clear about what the problem is. In reality,
Fannie and Freddie are not charged by statute with responsibility for
increasing minority housing. They were formed for the purpose solely of
creating more liquidity in the secondary mortgage market. The closest
thing to a mandate to promote minority or low income housing is a
requirement in their statutory charters that they "promote access to
mortgage credit throughout the nation…including underserved areas."

However, as previous conferences have shown, they are no longer
necessary for this original purpose. So, in time-honored fashion, they
have made up new missions for themselves. One of these new missions is
to reduce the interest rates on conventional mortgages. As the
Congressional Budget Office and others have confirmed, the GSEs
actually do this, reducing interest rates by about 25 basis points by
passing along a portion of the financing advantages they receive as a
result of their implicit government backing.

The other mission they claim is an implicit one, and is suggested
primarily through their advertising, which features African American
and other minority groups. Implicitly, they are claiming that they
deserve continued support because they are doing good-providing
financing to people who might not otherwise be able to get it. People
who wonder whether the government should be backing Fannie and Freddie
might think twice, or become supporters, when they believe that
government backing is being used for a worthwhile purpose. So, even
though Fannie and Freddie may not have a statutory mission to serve
minority and low income homebuyers, they have assumed this burden by
soliciting our continued support on the basis that they do.

In our last conference, a Census Bureau presentation showed that
reducing residential mortgage rates by 25 basis points did not put
people in homes. The problem for renters, it was pointed out, is not
that they can’t afford the monthly carrying charge of a home
mortgage-it’s that they don’t have the down payment. So we have already
raised a significant question about whether the GSEs are actually-as
they explicitly claim-putting people in homes by slightly reducing
mortgage interest rates.

In this conference, we will explore another aspect of the GSEs’
claims-the implicit claim that they are serving minority and low income
home buyers. Although they claim that they do this , the data Jon Brown
has assembled seems to show that they do not.

Jon Brown’s solution to this problem is better regulation. HUD
standards, he argues, should be tightened so that Fannie and Freddie
are actually required to do what they say they are doing.

This is one way to enforce a government mission on otherwise
recalcitrant companies. The problem, however, is that they will always
find ways to reinterpret and avoid the full impact of the rules, and as
we have seen the government-and particularly HUD-has not been
aggressive in creating or enforcing its rules in this area.

Another way to use government backing to benefit low income
homebuyers is what Congress did with respect to the Federal Home Loan
Banks. Rather than require the Banks to meet a standard for financing
minority or low income housing, Congress simply required that the Banks
contribute 10 percent of their profits to an Affordable Housing
Program. This amounted to more than $200 million in 2002 and $1.7
billion since 1992. A similar mandatory profit-sharing program for
Fannie and Freddie would be about double that for each company.

My solution, from the beginning, has been the opposite. I don’t
think it is possible for a single company to serve both its
shareholders and a government mission. So I would recommend
privatization, the elimination of Fannie and Freddie’s links to the
government. If we want a government program that will help minority and
low income homebuyers, it should be carried out by a government agency,
not companies that owe fiduciary duties to shareholders.