Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.

Homeownership: Still the American Dream?

June 12, 2010

Joe Nocera in today’s NYTimes has a thoughtful piece on homeownership and the role of mortgage financing, and Fannie Mae and Freddie Mac in particular, in the mortgage meltdown.   He cites a recent speech by FDIC Chair Sheila Bair in which she concludes that the federal policy preoccupation with homeownership went too far, helped fuel the bubble and led too many people into homes they could not afford.  He summarizes the wide variety of programs—some, like the mortgage interest deduction—and concludes that not only did these policies propel rising homeownership rates in both Republican and Democratic Administrations, but also abetted the rise of subprime lenders. 

Interestingly, Nocera rejects the arguments of conservatives—and long-time opponents of the GSEs—like Peter Wallison at AEI that the housing goals imposed on Fannie and Freddie are a leading cause of the crisis.  

Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.‘s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”

But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals - which the G.S.E.‘s easily gamed - were not the main reason. Rather, it was the rise of the subprime lenders - and their ability to get even their worst loans securitized by Wall Street -that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.

Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged.Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.

Nocera goes on to point out the aggressive and sometimes abusive practices employed by the subprime lending industry to generate the leads and loan originations that fueled their fee-driven culture.

Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers - they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!

It’s refreshing to see someone like Nocera cut through all the partisan and ideological yadda-yadda that has dominated discussions about Fannie and Freddie.  There’s no doubt they screwed up.  But their final, fatal flaw wasn’t trying too hard to meet the housing goals imposed by Congress.  It was in mistaking themselves for Wall Street investment firms rather than specially chartered entities with a mission to provide stable, safe financing for everyday folks.


Add your comment

comments powered by Disqus

Page 1 of 1 pages

Blog Archive »