When it comes to reporting on the 2008 financial crisis, many journalists are experts at ignoring the elephant in the room: the government’s role in spawning the crisis through perverse mandates and incentives. Peter Wallison, who predicted years earlier that mortgage giants Fannie Mae and Freddie Mac would run into trouble, highlights this in The Wall Street Journal. As he observes, on “the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days.” But ”any discussion of the government’s central role in the disaster is neatly avoided. This historical airbrushing is something of a feat, given the facts.”
As he points out, “At the time of Lehman’s failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.” But the media barely mentions this, as if ”the vast majority of the subprime mortgages that the” government-sponsored mortgage giants “bought didn’t exist.” For example, they ignore the key role of the federal Department of Housing and Urban Development in causing the mortgage crisis:
In 1992, Congress adopted the ironically named Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act, giving HUD the authority to administer the legislation’s affordable housing goals. The law required Fannie Mae and Freddie Mac, when they acquired mortgages from lenders, to meet a quota of loans to borrowers who were at or below the median income where they lived. At first, the quota was 30%, but HUD was authorized to raise the quota and over time it did, eventually requiring a quota of 56%. In those heady days, HUD was pleased with its work.
In 2000, for example, when then-HUD Secretary Andrew Cuomo was raising the quota to 50%, the agency actually sounded boastful about its role. Describing the gains in homeownership that had been made by low- and moderate-income families, HUD noted: “most industry observers believe that one factor behind these gains has been improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable housing.” Credit scores or down payments were not relevant; only income and minority status would satisfy the goals.
HUD was still at it in 2004, stating that “Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create.”
That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.
But then Lehman folded, and suddenly the government [changed its tune]. Instead, in 2010, the new HUD secretary, Shawn Donovan, told the House Financial Services Committee: “Seeing their market share decline [between 2004 and 2006] as a result of a change of demand, the GSEs made the decision to widen their focus from safer prime loans and begin chasing the non-prime market, loosening longstanding underwriting and risk management standards along the way.”
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