Acorn and the Housing Bubble:~ The liberal pressure group helped Congress write the affordable housing rules that got us into trouble.
Last Post
The liberal pressure group helped Congress write the affordable
housing rules that got us into trouble.
WSJ OPINION JOURNAL
By EDWARD PINTO
All agree that the bursting of the housing bubble caused the financial
collapse of 2008. Most agree that the housing bubble started in 1997.
Less well understood is that this bubble was the result of government
policies that lowered mortgage-lending standards to increase home
ownership. One of the key players was the controversial liberal
advocacy group, Acorn (Association of Community Organizations for
Reform Now).
The watershed moment was the 1992 Federal Housing Enterprises
Financial Safety and Soundness Act, also known as the GSE Act. To
comply with that law's "affordable housing" requirements, Fannie Mae
and Freddie Mac would acquire more than $6 trillion of single-family
loans over the next 16 years.
Congress's goal was to force these two government-sponsored
enterprises (GSEs) to purchase loans that had been originated by banks—
loans that were made under the pressure of another federal law, the
1977 Community Reinvestment Act (CRA), to increase lending in low- and
moderate-income communities.
From 1977 to 1991, $9 billion in local CRA lending commitments had
been announced. CRA lending by large banks increased dramatically
after the affordable housing mandate was in place in 1993, growing to
$6 trillion today. As Ellen Seidman, director of the federal Office of
Thrift Supervision, said in a speech before the Greenlining Institute
on Oct. 2, 2001, "Our record home ownership rate [increasing from
64.2% in 1994 to 68% in 2001], I'm convinced, would not have been
reached without CRA and its close relative, the Fannie/Freddie
requirements."
The 1992 GSE Act was the fuse, and the trillions of dollars in
subsequent CRA and GSE affordable-housing loans would fuel the
greatest housing bubble our nation has ever seen. But who lit the
fuse?
The previous year, as Allen Fishbein, currently an adviser for
consumer policy at the Federal Reserve, has noted, Acorn and other
community groups were informally deputized by then House Banking
Chairman Henry Gonzalez to draft statutory language setting the law's
affordable-housing mandates. Interim goals were set at 30% of the
single-family mortgages purchased by Fannie and Freddie, and the
Department of Housing and Urban Development has increased that
percentage over time. The goal of the 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 a provision was inserted into the law whereby Congress signaled
to the GSEs that they should accept down payments of 5% or less,
ignore impaired credit if the blot was over one year old, and
otherwise loosen their lending guidelines.
The proposals of Acorn and other affordable-housing advocacy groups
were acceptable to Fannie. Fannie had been planning to use the carrot
of affordable-housing lending to maintain its hold over Congress and
stave off its efforts to impose a strong safety and soundness
regulator to oversee the company. (It was not until 2008 that a strong
regulator was created for Fannie and Freddie. A little over a month
later both GSEs were placed into conservatorship; they have requested
a combined $112 billion in assistance from the federal government, and
much more will be needed over the next few years.)
The result of loosened credit standards and a mandate to facilitate
affordable-housing loans was a tsunami of high risk lending that sank
the GSEs, overwhelmed the housing finance system, and caused an
expected $1 trillion in mortgage loan losses by the GSEs, banks, and
other investors and guarantors, and most tragically an expected 10
million or more home foreclosures.
As a result of congressional and regulatory actions, the percentage of
conventional first mortgages (not guaranteed by the Federal Housing
Administration or the Veteran's Administration) used to purchase a
home with the borrower putting 5% or less down tripled from 9% in 1991
to 27% in 1995, eventually reaching 29% in 2007.
Fannie and Freddie acquired $1.2 trillion of loans from banks and
other lenders from 1993 to 2007. This amounted to 62% of all such
conventional home purchase loans with a down payment of 5% or less
that were originated nationwide over the same period.
Fannie and Freddie also acquired $2.2 trillion in subprime loans and
private securities backed by subprime loans from 1997 to 2007. Acorn
and the other advocacy groups succeeded at getting Congress to mandate
"innovative and flexible" lending practices such as higher debt ratios
and creative definitions of income. And the serious delinquency rate
on Fannie and Freddie's $1.5 trillion in high-risk loans was 10.3% as
of Sept. 30, 2009.
This is about seven times the delinquency rate on the GSEs'
traditional loans. Fifty percent of the high-risk loans are estimated
to be CRA loans, with much of the remainder useful to the GSEs in
meeting their affordable-housing goals.
The flood of CRA and affordable-housing loans with loosened
underwriting standards, combined with declining mortgage interest rates
—to 5% in 2003 from 10% in early 1991—resulted in a massive increase
in borrowing capacity and fueled a house price bubble of unprecedented
magnitude over the period 1997-2006.
Now this history may repeat itself as many of the same community
groups are pushing Congress to expand CRA to cover all mortgage
lenders, credit unions, insurance companies and others financial
industry segments. Are we about to set the stage for another
catastrophe?
.o0o.
Mr. Pinto was the chief credit officer at Fannie Mae from 1987 to
1989. He is currently a consultant to the mortgage-finance industry.