There was a time when HUD was not so modest. 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."Even later;
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."
And reach deeper they did, eventually owning almost three-fourths of all those non-traditional home loans. Which is why, when a Wall Street firm name Lehman Bros.--heavily invested in those mortgages via mortgage backed bonds--folded, a financial panic ensued. One we haven't yet recovered from.
When it became obvious that government policy was at fault, even Barney Frank—at the time the chairman of the House Financial Services Committee and a principal backer of the affordable-housing goals—confessed that the policy had been misguided. On Larry Kudlow's CNBC show in 2010, Mr. Frank said: "I hope by next year we'll have abolished Fannie and Freddie. It was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it."
Where's Andrew Cuomo now? Oh yeah, he's New York's problem.
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