Say Anything Blog

http://blog.heritage.org/wp-content/uploads/2009/07/7-7-09-housing-crisis-report.pdf

The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans. This intervention began with two government-backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses.

What were those advantages?

1)  Fannie and Freddie were charged by Congress with keeping the secondary mortgage market liquid
and increasing the availability of affordable housing. They enjoyed a $2.25 billion line of
credit from the U.S. Treasury.

2)As a business model, Fannie and Freddie would sell bonds in the debt markets at a relatively low cost and use the borrowed money to turn around and purchase mortgages from primary lenders like Countrywide Financial that dealt directly with customers seeking home loans. Oftentimes, they would then bundle many of these mortgages into securities and either sell them to investors, who paid Fannie and Freddie a fee to
guarantee payment in the event the mortgages defaulted.

3)  The Federal Government encouraged regulated banks to purchase GSE preferred stock by allowing them to hold 80 percent less capital against it compared to similar assets, providing a major subsidy to their purchase of what amounted to cheap borrowing by Fannie and Freddie.

4)Fannie Mae and Freddie Mac were also exempt from key regulatory and market oversight. For example, their congressional charters exempted them from oversight by the Securities and Exchange Commission (“SEC”): the GSEs are the only publicly-traded corporations exempt from SEC oversight.  The GSEs were also exempt from
market oversight of the quality of their mortgage-backed security issuances.

Why?

Fannie Mae and Freddie Mac answered
in a very direct way to the federal government and elected officials in a manner
reminiscent of the “crony capitalism” of countries such as Russia or China, which
preserve a large state-owned enterprise sector. Fannie and Freddie answered to the
Department of Housing and Urban Development (“HUD”), which set quotas for GSE
investment in affordable housing, as well as to Congress and the White House, which
sought to use them as vehicles to advance the politically popular goal of increasing the
national homeownership rate. This was done directly through legislation and regulation which mandated affordable housing lending and indirectly through political pressure
from politicians and advocacy groups.  This created incentives for Fannie and Freddie to
curry political favor with Congress and necessitated a massive lobbying effort which
GSE executives termed “political risk management.” As the New York Times
summarized it:
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. 

In 1992, Congress passed the Federal Housing Enterprises Financial Safety and
Soundness Act, which created an “affordable housing mission” for Fannie Mae and
Freddie Mac. This legislation directed HUD to establish three separate quotas requiring
the GSEs to set aside a certain percentage of their yearly mortgage purchases to loans
with affordable characteristics. These quotas were expressed as the minimum share of
mortgages that Fannie and Freddie purchased every year which had to be made to “low and moderate-income families … low-income families in low-income areas and very low-income families,” as well as borrowers in “central cities, rural areas, and other underserved areas.”

In 1994, Fannie Mae CEO Jim Johnson announced the company’s first affordable
housing initiative, the $1 trillion “Opening the Doors to Affordable Housing” program.
Johnson, a long-time friend of both President Clinton and Treasury Secretary Robert
Rubin, took the helm of Fannie in 1991 after a stint at Lehman Brothers. In an article
entitled “Fannie Mae’s Trillion-Dollar Giveaway,” written about this initial affordable
housing initiative, the Los Angeles-based Family Savings Bank criticized Fannie Mae’s
past practices for relying too heavily on borrowers’ income and debt levels when
underwriting loans. Although some would consider using such metrics to be prudent, the
article stated that these guidelines “must have been written sometime in the 1800s.” It
praised Mr. Johnson’s $1 trillion commitment because it would introduce “qualifying
flexibility,” for low-income borrowers, allowing them to reduce their down payments to
as little as 3 percent. The article cited “pressure from President Clinton’s administration,” as the primary influence on Fannie Mae’s decision to lower its lending
standards.

In 1995, Johnson seeded the Fannie Mae Foundation with $350 million of Fannie stock. The company used this foundation to spread millions of dollars around to politicallyconnected organizations like the Congressional Hispanic Caucus Institute.14 It also hired well-known academics to write papers that gave an aura of academic rigor to policy positions favorable to Fannie Mae.

Government actions distorted the housing market, yet advocates of affordable housing
policies, such as Congressman Barney Frank (D-MA), have asserted that those who criticize these policies seek to place blame for the financial crisis solely on borrowers of modest means. This misses the mark entirely. In fact, responsibility for the erosion of mortgage lending standards, which began with government affordable housing policy, rests squarely on the policy makers who advocated these ill-conceived policies in the first place.

Go read the whole thing.  Those are just the interesting quotes I found up until page 12.  There are 14 more pages. I wonder why I haven't seen this report anywhere?