One of the topics likely to come before the next Congress is what to do about the crippled mortgage giants Fannie Mae and Freddie Mac, whose reckless behavior contributed so much to the meltdown of 2008.
The financial hole dug by these two “government-sponsored enterprises” is so deep many experts aren’t sure how much filling it in it will cost. Estimates run in the hundreds of billions.
Given that, one would hope members of Congress have learned the primary lesson of ’08: that home ownership is no longer the surest route to personal prosperity.
Apparently, the lesson still hasn’t taken in some quarters, judging by a meeting in late October between The Star’s Editorial Board and U.S. Rep. Emanuel Cleaver, a Missouri Democrat.
The discussion began with Cleaver announcing his priorities for the coming year, assuming his bid for re-election was successful (it was). One thing he wanted to do was make the Community Reinvestment Act “more impactful,” as he put it. The CRA requires banks to meet the needs of borrowers in all parts of the communities they serve, including low- and moderate-income neighborhoods.
That led to a discussion of Fannie and Freddie, both of which have placed heavy emphasis on extending credit to low-income borrowers. I asked whether Cleaver thought housing policy, and Fannie and Freddie in particular, had gone too far in pushing home ownership. His reply was jaw-dropping.
“There’s no evidence that anyone told Fannie and Freddie to make bad loans,” he said.
Where to begin? First, while some people, like Cleaver, commonly talk about Fan and Fred “making loans,” the two agencies don’t do that.
They borrow at cheap rates, which they can do because of their government connection. Then they use the proceeds to buy mortgages made by others, which they guarantee against default. They keep those mortgages on their own accounts or package them into bonds for sale into the market.
As for Cleaver’s absurd notion that “no one” told Fan and Fred to “make” bad loans, the agencies were pressured from all sides to do just that.
In 1999, to take one example, The New York Times reported on a Fannie Mae pilot program to extend home mortgages to “individuals whose credit is generally not good enough to qualify for conventional loans.”
Fannie, The Times noted, was responding to pressure from the Clinton administration to make the change. Banks, thrifts and mortgage companies had all urged Fannie Mae to “make more loans to so-called subprime borrowers,” as The Times put it.
As former Fannie Mae chief credit officer Ed Pinto wrote in a lengthy study published in August, “Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie and Freddie Mac and much of the rest of the mortgage industry by the early 2000s.”
Down payment requirements plummeted to 3 percent. The subprime purchases by Fan and Fred edged the agencies farther out on the risk curve. With their cheap financing and gargantuan purchasing power, they vastly expanded this once-small sector. Fan and Fred could pick the low-hanging fruit in the dubious-loan categories, forcing private lenders in that sector to assume even more risk.
By the end of the 1990s, the Department of Housing and Urban Development required that low-income loans make up at least half of Fannie and Freddie’s portfolios. The Bush administration saw that and raised it to 56 percent.
After the Editorial Board meeting, Cleaver’s office sent me a five-page memo defending the CRA, even though it hadn’t been the main focus of the discussion. Basically the memo argued that CRA wasn’t culpable in the meltdown. It pointed out that some of the worst actors, like subprime champ Countrywide, weren’t even covered by the CRA.
But the CRA can’t be so easily absolved. As Pinto, the former Fannie Mae official, explained in a telephone interview, Fannie and Freddie were required to “affirmatively” support bank CRA lending. Countrywide was among lenders participating in a CRA-like program that pledged hundreds of billions in such loans.
Tens of thousands of families have been financially ruined because of this debacle, much of it fostered by government policy.
A substantial proportion of those families are the low-income borrowers Cleaver apparently seeks to aid. It’s not clear what he means about making the CRA “more impactful,” but let’s hope he doesn’t mean pushing more credit on people who can’t afford it.