Subprime Redux: While few were paying attention last week, Fannie Mae and Freddie Mac regulator Mel Watt quietly reinstated the risky “affordable housing” quotas that helped cause the financial crisis. Here we go again.
The federal housing mandates created the housing bubble by forcing the mortgage giants to buy subprime home loans, something that Watt promoted while in Congress.
Increasing the goal numbers, as Watt is doing again for “low-income, high-minority areas,” fueled a national decline in lending standards and led to Fannie and Freddie’s bankruptcy. Yet now the administration is doubling down on that disaster.
To meet its goals for purchasing those low-quality loans, Fannie and Freddie are lowering their standards again. As Einstein said, insanity is doing the same thing over and over again, and expecting different results.
So what is the rationale of Watt, whom President Obama last year appointed head of the Federal Housing Finance Agency (FHFA) overseeing Fannie and Freddie, and essentially the entire mortgage industry that they dominate?
According to the final rule raising the FHFA’s affordable housing goals, Watt thinks Fannie and Freddie must do more to expand credit for communities hit hardest by the subprime crisis. He says that hiking their benchmarks for lending in low-income minority areas will help boost sagging minority homeownership rates and close what has become a yawning gap in overall wealth between minority and white communities.
“FHFA Director Watt noted that the problem of low wealth is particularly acute for communities of color,” the 156-page regulation states.
It adds that the wider wealth gap has “stripped” minorities of resources necessary to re-qualify for home loans: “Another challenge to affordability is the relatively limited resources that many prospective households have available for making down payments.”
Watt already has eased Fannie and Freddie’s purchase guidelines to allow for just 3% down payments, though the size of a down payment is a reliable indicator of whether a borrower will repay — and though slashing down-payment requirements led to an explosion of defaults in the last mortgage bust. Thanks to government pressure, Fannie and Freddie booked roughly half the bad loans that wrecked the economy.
Watt would have set the mortgage goals higher, except that banks are keeping more and more low-income and very low-income borrowers’ mortgages in their portfolios. As a result, the banks don’t sell the mortgages to any entity on the secondary market, making it harder for Fannie or Freddie to meet goals set much higher.
Why are lenders holding these loans? Because of the Community Reinvestment Act, another crisis culprit.
“Lenders are originating these loans to comply with the Community Reinvestment Act but prefer to hold them in portfolio to protect against the risk that (Fannie and Freddie) require the lenders to repurchase the loans, which they may consider somewhat likely to default,” the FHFA says.
“Likely to default”? No kidding. Yet Obama officials have insisted that CRA loans are “sound” and had nothing to do with the mortgage bust.
The new housing mandates, which extend through 2017 and remain after Obama leaves, include a boost in the share of low-income housing units that Fannie and Freddie must buy. By the end of 2017, Fannie and Freddie must each buy at least 360,000 low- and very low-income apartment units annually to please regulators.
The tougher apartment mandate is designed to encourage the development of low-income housing “outside of areas with high concentrations of minority and low-income residents.” This plan dovetails with HUD’s own new regulation, Affirmatively Furthering Fair Housing, which forces suburbs to ease zoning restrictions on Section 8 and other subsidized housing.
History shows that loosening credit terms creates artificial demand pressures that pump housing prices higher and higher, leading to feral booms and painful busts. Obama and his race-mongering social engineers are dooming the nation to repeat history.
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