A few economists warned in the 1980s that our government's involvement in
the housing market would produce catastrophic results. They were concerned
housing bubbles would be created by government policies that lowered the
mortgage-lending standards to increase home ownership.
They were right: in 1992 a bill was passed, known as the GSE Act. And, to
comply with that law's "affordable housing" requirements, Fannie Mae and
Freddie Mac, government banks that provide cash to the mortgage industry,
acquired more than $6 trillion of single-family loans over the next 16
years.
Congress didn't stop there. They forced Fannie Mae and Freddie Mac to
purchase loans that had been originated by another federal law, the 1977
Community Reinvestment Act, to increase lending to low-and moderate-income
communities. Subsequently, the goal of various community groups was to force
Fannie and Freddie to loosen their underwriting standards, in order to
facilitate the purchase of loans made under the CRA.
Thus, provisions were inserted whereby Congress signaled to the Fannie
Mae and Freddie Mac that they should accept down payments of 5 percent or
less, and ignore credit problems of borrowers if they were more than a year
in the past.
The beat goes on. Fannie Mae and Freddie Mac, two powerful government
banks, both received $111 billion in federal aid last year to stay afloat.
It gets worse. Without Fannie and Freddie's certification of millions of
bad loans as safe, many domestic and foreign banks wouldn't have bought
them.
Rep. Barney Frank, D-Mass, the chairman of the House Financial Services
Committee, and once the chief defender of Fannie and Freddie against more
federal oversight, is now calling for Congress to eliminate both Fannie Mae
and Freddie Mac. The two guarantee almost 31 million U.S. home loans, about
half of all the mortgages in America, and establish a new system to provide
money for U.S. home loans.
I raise these indelicate points to ask what happens next. As economic
writer Patrick Cox points out, the American household factor faces a
difficult period of financial retrenchment in the wake of a major collapse
in home prices, overextended debt positions for many, and high unemployment.
The Obama administration wants to study the issue some more and make
recommendations in 2011 about what to do with Fannie and Freddie. Without
question, the flood of CRA and affordable-housing loans with loosened
underwriting standards, combined with declining mortgage interest rates,
resulted in a massive increase in borrowing capacity and fueled a housing
price bubble of historic proportions over the period between 1997 and 2006.
The question that needs to be asked: Shouldn't the Obama administration
call for new legislation that will tighten underwriting standards for Fannie
and Freddie mortgages?
The result of loosened credit standards and the push to facilitate
affordable-housing loans created high risk lending that overwhelmed the
housing finance system and caused an expected $1 trillion in mortgage loan
losses by Fannie Mae and Freddie Mac, banks, and other investors and
guarantors.
We must ask the Obama administration and Congress not to repeat stupid
mistakes from the past and implement a gradual process where the
government's role in the mortgage markets is diminished and the lending
standards are tightened.
Lois Lindstrom is a journalist who
resides in both Florida and Virginia. Contact her at
lois@loislindstrom.com
