Bad policy behind subprime crisis

Robert L. Meuser Albemarle County
Published: November 4, 2008

I regret that the recent letter “Deregulation precisely the economic problem” (The Daily Progress, Oct. 20) contains several inaccuracies and misunderstandings that, given the importance of the matter, warrant correction.
Fannie and Freddie did not enter “into this unregulated market for collateralized debt obligations” since 2000, but rather created the market for mortgage-backed securities in the 1970s.
Mortgage-backed securities were sound investments until the surge in subprime mortgage lending. Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, HUD set numeric affordable housing goals (enforced by monetary penalties) for Fannie and Freddie – essentially, quotas – for loans to moderate-, low- and very low-income borrowers and to underserved areas. These quotas in effect compelled Fannie and Freddie to buy (and thus create a market for) subprime loans.
Fannie and Freddie did not move into the “risky business of buying mortgage-backed securities” simply “to please investors.” Rather, Fannie and Freddie were motivated to buy subprime mortgage-backed securities to meet their affordable housing quotas.
Let the Office of Federal Housing Enterprises Oversight, the HUD office charged with supervision of Fannie and Freddie, sum up for itself (as of June 2000): “In the 1990s, the government encouraged originators to engage in greater lending to low-income and minority families and other populations that typically have been underserved by the housing finance system [i.e., subprime lending]. The Federal bank regulators promoted that objective by issuing a revised regulation to implement the Community Reinvestment Act (CRA) in 1995. The objective was also furthered by the activities and new programs that Fannie Mae and Freddie Mac initiated to comply with the affordable housing goals … to implement the 1992 Act” (2000 Report to Congress of the Office of Federal Housing Enterprises Oversight, p. 12).
When, in 2005, Congress failed to enact proposed regulatory reforms, opponents specifically argued that tighter supervision and underwriting standards for Fannie and Freddie would mean “less … in terms of affordable housing” (the New York Times, Sept. 11, 2003). This subprime mortgage crisis was precipitated ultimately by bad policy, not deregulation.