Peter Wallison On The Role The Government Played In The Financial Crisis

See DI S S E N T from the MA J O R I T Y R E P O RT of the F I NA N C I A L CR I S I S INQU I RY CO M M I S S I O N. Wallison works at The American Enterprise Institute. Here are some key excerpts:

"In 1992, Congress enacted Title XIII of the Housing and Community Development Act of 19923 ( the GSE Act), legislation intended to give low- and moderate-income borrowers better access to mortgage credit through Fannie Mae and Freddie Mac. This effort, probably stimulated by a desire to increase home ownership, ultimately became a set of regulations that required Fannie and Freddie to reduce the mortgage underwriting standards they used when acquiring loans from originators. As the Senate Committee report said at the time: “The purpose of [the affordable housing] goals is to facilitate the development in both Fannie Mae and Freddie Mac of an ongoing business effort that will be fully integrated in their products, cultures and day-to-day operations to service the mortgage finance needs of low-and-moderate income persons, racial minorities and inner-city residents.”"

"The GSE Act, however, created a new “mission” for Fannie Mae and Freddie Mac—a responsibility to support affordable housing—and authorized HUD to establish and administer what was in effect a mortgage quota system in which a certain percentage of all Fannie and Freddie mortgage purchases had to be loans to low- and moderate-income (LMI) borrowers—defined as persons with income at or below the median income in a particular area—or to borrowers living in certain low-income communities."

"In the GSE Act, Congress had initially specified that 30 percent of the GSEs’ mortgage purchases meet the AH goals. This was increased to 42 percent in 1995 and 50 percent in 2000."

"Pinto estimates the total value of these purchases at approximately $4.1 trillion. [as of] June 30, 2008, immediately prior to the onset of the financial crisis, the GSEs held or had guaranteed 12 million subprime and Alt-A loans. This was 37 percent of their total mortgage exposure of 32 million loans, which, in turn, was approximately 58 percent of the 55 million mortgages outstanding in the United States on that date. Fannie and Freddie, accordingly, were by far the dominant players in the U.S. mortgage market before the financial crisis,"

"In 1994, HUD added another group to this list when it set up a Best Practices Initiative, to which 117 members of the Mortgage Bankers Association eventually adhered. As shown later, this program was explicitly intended to encourage a reduction in underwriting standards so as to increase access by low-income borrowers to mortgage credit."

"it appears that Congress set out deliberately in the GSE Act not only to change the culture of the GSEs, but also to set up a mechanism that would reduce traditional underwriting standards over time, so that home ownership would be more accessible to LMI borrowers."

"For example, the legislation directed the GSEs to study “the implications of implementing underwriting standards that—(A) establish a downpayment requirement for mortgagors of 5 percent or less;11 (B) allow the use of cash on hand as a source of downpayments; and (C) approve borrowers who have a credit history of delinquencies if the borrower can demonstrate a satisfactory credit history for at least the 12-month period ending on the date of the application for the mortgage.”"

"By 2008, the result of these government programs was an unprecedented number of subprime and other high-risk mortgages in the U.S. financial system. ... government agencies, or private institutions acting under government direction, either held or had guaranteed 19.2 million of the NTM loans that were outstanding at that point. By contrast, about 7.8 million NTMs had been distributed to investors through the issuance of private mortgage-backed securities, or PMBS"