Here are some excerpts from my June 22 article in Taki's Magazine on "The Diversity Recession:"
In 1992, Congress passed the Government Sponsored Enterprises bill, which set ”targets” (i.e., quotas) for Fannie Mae and Freddie Mac, which are quasi-governmental publicly-traded for-profit thing-a-ma-bobs, to encourage ”affordable” and ”underserved” (more or less minority) home loans.
Both the Clinton and Bush departments of Housing and Urban Development raised the quotas repeatedly. For example, initially, the Clinton Administration required 21% of these quasi-governmental mortgages must go to ”underserved areas” (which are officially defined as ”low-income census tracts or in low- or middle-income census tracts with high minority populations"), but the quota for 2008 established by the Bush Administration is 39 percent.
Reuters reported October 13, 1999:
"The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups. ”We need to push into these underserved markets as much as we can,’ said David Glenn, president and chief operating officer of Freddie Mac. …
"In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.
"The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.
"Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets."
Now, even the head of Freddie Mac has protested that the quotas have become ”perverse.” On March 12, 2008, Bloomberg News reported:
"Freddie Mac Chief Executive Officer Richard Syron said he’s urging changes in federal rules that enabled too many low- and moderate-income Americans to buy houses they can’t afford. It’s ”perverse’ that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged ”to put people into homes that they end up losing,’ Syron said at a meeting with analysts and investors in New York."
Ironically, Syron helped get us into this mess when he was head of the Boston Fed. His Freddie Mac biography boasts, ”Syron also was sponsor of a landmark study on racial discrimination in mortgage lending …”
… Straightforward tax-and-spend programs were out of favor in the 1990s, but lean-on-lenders for the benefit of your political constituents is always in season.
For instance, an article entitled ”Fannie Mae Bending Financial System to Create Homeowners, Says Raines” reported in 2000:
"Yet home ownership is unevenly distributed in society, [Fannie Mae head Franklin] Raines said. He quoted the famous pronouncement by W.E.B. Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th century is the problem of the color line. Du Bois also observed that the size and arrangement of people’s homes is an index of their condition…"In the early days of the movement, he said, there was a significant commitment of government funds. … Now, said Raines, more money is being invested in community development through private mechanisms, including Fannie Mae, which works through mainstream lenders to reach out to underserved communities.
"During the 1990s, Fannie Mae pledged $1 trillion in capital over seven years to boost home ownership among underserved populations. Last spring, said Raines, the commitment was completed ahead of schedule, and Fannie Mae pledged a further $2 trillion to assist 18 million families during the next decade." [More]
A trillion here, a trillion there, pretty soon you are talking about real money.
Bill Burnham explains how Fannie Mae and its supposed competitor Freddie Mac work here. Essentially, they figured out in the 1980s that they had a license to print money, as long as Congress didn't take it away:
Fannie Mae’s only significant problem thus became that the supply of mortgage securities would prove insufficient to fund its projected earnings growth (which was well above the projected growth in mortgage debt). As a result Fannie began a series of largely successful political campaigns to increase the volume of mortgage securities available to fund their habit. Theoretically, the easiest way to increase the supply of mortgage securities was to get the federal government to increase the size limit of mortgages that Fannie could buy and guarantee, but this was a very difficult political fight for Fannie to win because commercial and investment banks dominated the so-called ”jumbo” mortgage market and, already smarting from Fannie’s dominance of the so-called ”conforming” market, they had drawn a line in the sand in the jumbo market and committed most their lobbying resources to keeping Fannie’s size limit as low as possible.Fannie Mae's "grassroots" allies are all over the political spectrum, including the far left. Barack Obama's friends at ACORN are in deep with Fannie Mae.
Moral Hazard vs. Mo’ Money While Fannie still fought to increase its size limits, it quickly found another, much more politically palatable, way to increase the pool of mortgages it could buy: it dropped underwriting standards under the guise of increasing ”home ownership” and ”affordability”. Traditionally, Fannie had required the mortgages it purchased to be so-called 80/20 mortgages wherein the borrower puts at least a 20% down payment on the mortgage. This was a requirement because residential mortgages in the US are a ”no-recourse” loan in which the borrow can generally ”walk away” from the loan with no recourse to the lender other than seizing the house and reporting the default to a credit agency. A 20% down payment was generally thought to be enough to dramatically limit the moral hazard of borrowers ”walking away” because housing values would have to decline 20%+ for the borrower to be underwater and even then the borrower would still face the prospect of losing their own sunk capital which makes walking away even more difficult from a psychological perspective
The problem with a 20% down payment is for many people it was very hard to come up with that big a down payment and thus it limited the total size of the mortgage market which in turn limited the volume of mortgage securities that Fannie Mae could purchase for its golden goose. While the obvious solution to this problem is just to lower the down payment requirement, Fannie couldn’t do this unilaterally because the government unit that regulated it would see such cuts as needlessly raising Fannie Mae’s risk profile. Far more politically astute that that, Fannie Mae began a campaign to increase ”home ownership” and ”affordability”. It created a home ownership ”foundation” which opened offices in almost every congressional district and promptly set about mobilizing all the local advocates for ”affordable” housing to put pressure on their elected representatives to let Fannie Mae offer ”affordable housing programs”. Of course, ”affordable housing problems” was just a euphemism for allowing Fannie Mae to lower its underwriting standards so that more mortgages could be created and the golden goose could thus kick out more golden eggs.
This proved to be a highly effective political coalition for Fannie Mae. Not only did they build a huge network of grass roots political supporters through their ”foundation”, but politicians saw political advantages in supporting the programs because it cast them in the role of trying to help families buy a new home (as opposed to lowering underwriting standards to help a giant corporation keep up its earnings growth by taking a free ride on the US government’s guarantee). Even commercial banks and investment banks signed on to the program because it at least resulted in higher origination fees and an expanded credit market, even if most of the assets ultimately went to Fannie Mae and Freddie Mac.
Paul Jackson at Housing Wire writes:
It wasn’t that long ago, after all, that nearly everyone was swept up in ”the Ownership Society” – with the White House issuing press release after press release challenging lenders to loosen their credit standards and make riskier loans to minorities in the name of ”expanding homeownership.” Consumer groups often even partnered with lenders to make riskier loans to the very minority groups they’re now indignantly suing lenders for lending to.
Let’s take a trip down memory lane, shall we? Consider this press release from Citigroup in September of 2004, which finds ACORN and Citi happily holding hands and pushing ”the goals of both organizations to promote homeownership in low- and moderate-income neighborhoods, especially in immigrant communities.”
From the press statement:”With this agreement, ACORN will be able to expand our mission of strengthening communities by helping low- and moderate-income families, including new immigrants to this country, become homeowners,” said Maude Hurd, National President of ACORN.It’s not as if Citi and ACORN were the only ones jumping deep into subprime lending together, either. Economic policy research at the time centered on how lenders were denying loans to those with poor credit, often minorities; consider the following conclusion from a September 1999 study:The Urban Institute report issued today says that ”not all Americans enjoy equal access to the benefits of homeownership, in part because of unequal access to capital.””Fair lending” essentially became synonymous with a universal lowering of credit standards – and as lenders loosened credit standards, community groups cheered, and the White House lauded the commitment to ”expanding homeownership.”
Legislatively, President Bush went so far as to propose eliminating down payment requirements altogether. In a September 2004 press statement, administration officials touted a so-called ”Zero-Downpayment Initiative” that would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.
Even when we had clear data suggesting that lending to people who couldn’t afford their loans would likely end up badly, we ignored it. Consider this story from April 2004, which noted a Fannie Mae study that found that 49 percent of English-language Hispanics, 46 percent of Spanish-language Hispanics, and 42 percent of African Americans cited ”credit concerns” as the primary reason they had not yet bought a home.
Instead of realizing that borrowers’ concerns over their credit and finances might actually be valid, we – and that means everyone, from lenders to legislators, to community and consumer groups – decided to convince them otherwise, out of the belief that being part of the ”Ownership Society” trumped small-minded credit concerns. There was a bigger experiment in social progress at stake, after all.
We unfortunately now know all too well how well pursuing ”greater access to credit and capital” turned out, not only for ACORN and Citi, but for nearly every lender and consumer group out there that bought into the strange and wonderful ethic of ”the Ownership Society.” None more than Countrywide Financial.