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From the American Dream to … Bailout America: How the Government

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From the American Dream to … Bailout America: How the Government From the American dream to … bailout America: How the government loosened credit standards and led to the mortgage meltdown Compiled by Edward Pinto, American Enterprise Institute In the early 1990s, Fannie Mae‘s CEO Jim Johnson developed a plan to protect Fannie‘s lucrative charter privileges bestowed by Congress. Ply Congress with copious amounts of affordable housing and Fannie‘s privileges would be secure. It required ―transforming the housing finance system‖ by drastically loosening of loan underwriting standards. Fannie garnered support from community advocacy groups like ACORN and members of Congress. In 1995 President Clinton formalized Fannie‘s plan into the National Homeownership Strategy. President Clinton stated it ―will not cost the taxpayers one extra cent.‖ From 1992 onward, ―skin in the game‖ was progressively eliminated from housing finance. And it worked – Fannie‘s supporters in and outside Congress successfully protected Fannie‘s (and Freddie‘s) charter privileges against all comers – until the American Dream became Bailout America. TIMELINE Credit loosening Warning 1991 HUD Commission complains ―Fannie Mae and Freddie Mac‘s underwriting standards are oriented towards ‗plain vanilla‘ mortgage‖ [Read More] 1991 Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting [Read More] 1992 Countrywide and Fannie Mae join forces to originate ―flexibly underwritten loans‖ [Read More] 1992 Congress passes the inaptly named ―Federal Housing Enterprises Financial Safety and Soundness Act.‖ Rather than protecting taxpayers from having to bailout Fannie and Freddie, affordable housing mandates planted the seeds leading to future bailout [Read More] 1993 Fannie approves ACORN‘s loan program, allowing for ―downpayments of the lesser of $1000 or 3%.‖ 1994 Fannie Mae commits to transform housing finance system and plans $1T in lending to low and moderate income borrowers [Read More] 1994 Fannie's Trillion Dollar Giveaway [Read More] 1994 Fannie proceeds with 3% down loans over objection of chief credit officer [Read More] 1995 HUD‘s National Homeownership Strategy commits lending industry to weakened underwriting standards, including further reductions in downpayments [Read More] 1996 Fannie and Freddie are creating mega-liabilities with miniscule capital to support it [Read More] 1997 HUD study complains Fannie and Freddie‘s credit guidelines are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories [Read More] 1998 Flexible underwriting standards are nothing more than standards that lead to bad loans [Read More] 1999 Fannie eases credit to increase lending; increases risk of taxpayer bailout [Read More] 2000 FHA leads the way with looser lending standards [Read More] 2000 Fannie‘s CEO, Franklin Raines, announces new $2 trillion ―American Dream Commitment‖ on top of earlier $1 trillion commitment 2000 HUD imposes massive increases in Fannie and Freddie‘s affordable housing mandates, calls for deeper push into subprime [Read More] 2000 Franklin Raines, Fannie‘s CEO, calls for ‖bending financial markets to serve the families buying [newly built] homes [Read More] 2001 Easy credit creating bull market in housing [Read More] 2002 CEO of government sponsored Fannie Mae cites government agency FHA as its only competitor for public funding of housing [Read More] 2003 Countrywide‘s Mozilo calls for the elimination of downpayments, announces expansion of its ―House America‖ commitment to $600 billion [Read More] 2004 Having met $3 trillion in previous commitments, Fannie‘s CEO, Franklin Raines, announces plans to renew and expand ―American Dream Commitment [Read More] 2004 HUD trumpets ―revolution in affordable lending‖ [Read More] 2004 HUD rulemaking imposes massive increases in Fannie and Freddie‘s affordable housing mandates, calls for Fannie and Freddie to ―reach deeper into the subprime market‖ [Read More] 2004 Fannie‘s Franklin Raines tells national lender group: ―We have to push products and opportunities to people who have lesser credit quality [Read More] 2004 By the end of 2005 there could be a perfect storm of delinquencies [Read More] 2006 National Association of Realtors reports 46% and 19% of first-time buyers and repeat buyers respectively nationwide put down no money. NAR President Thomas Stevens isn‘t worried [Read More] 2010 HUD finds ―the sharp rise on mortgage delinquencies and foreclosures the result of rapid growth in loans with high risk of default [Read More] 2010 Financial Crisis Inquiry Commission ignores the government‘s efforts to promote flexible underwriting standards throughout the mortgage industry. During the boom low delinquency rates reduce losses, making loans appear less risky to investors. The government‘s encouragement of weakened loan standards promoted a race to the bottom and led to the origination of unprecedented quantities of risky loans 2011 Reforming US housing finance [Read More] In the news 2008 The Washington Post | Fannie‘s Perilous Pursuit of Subprime Loans 2008 The New York Times | Mortgage Giant Overstated the Size of Its Capital Base 2008 The Washington Post | Treasury to Rescue Fannie and Freddie 2008 The New York Times | $700 Billion Bailout Plan Wins Approval 2009 The New York Times | Adding Up the Government‘s Total Bailout Tab 2009 USA Today | Congress Passes $787B Economic Stimulus Bill 2010 CBS News | Docs Show Countrywide‘s Cozy Ties to Fannie Mae 2010 Bloomberg | Fannie, Freddie May Draw $363 Billion, FHFA Says 2011 San Francisco Chronicle | Human Nature Often at Odds with DC-Backed Loans 2011 The Wall Street Journal | The End of Fannie Mae 2011 The Washington Post | What a Plan to Replace Fannie and Freddie Should Include From the American Dream to … Bailout America Supplemental Material AEI | From the American Dream to … Bailout America 1 1. In the early 1990s, Fannie Mae’s CEO Jim Johnson developed a plan to protect Fannie’s lucrative charter privileges bestowed by Congress. Ply Congress with copious amounts of affordable housing and Fannie’s privileges would be secure. It required “transforming the housing finance system” by drastically loosening of loan underwriting standards. Fannie garnered support from community advocacy groups like ACORN and members of Congress. In 1995 President Clinton formalized Fannie’s plan into the National Homeownership Strategy. President Clinton stated it “will not cost the taxpayers one extra cent.” ACORN and others were anxious to cash in on millions of dollars from affordable housing initiatives. Members of Congress were eager to take credit for the trillions of dollars in new lending from loosened standards, receive copious campaign contributions, placate groups like ACORN, and in return were willing to protect Fannie and Freddie’s charter privileges against all comers. Fannie used its power over the mortgage market to gain the support of lenders like Countrywide. By 1995 Johnson’s plan was embodied in the “National Homeownership Strategy” and extolled by President Clinton: i “And I can say without knowing that I'm overstating it, that if we succeed in doing this, if we succeed in making that number happen, it will be one of the most important things that this administration has ever done, and we're going to do it [raise the homeownership rate to a record 67.5% by 2000+ without spending more tax money.” He then added for emphasis: “Our home ownership strategy will not cost the taxpayers one extra cent. It will not require legislation. It will not add more Federal programs or grow Federal bureaucracy.” Over the next 16 years underwriting standards across the nation were progressively loosened. At the same time Fannie Mae and Freddie Mac’s charters withstood all efforts to be reined in. During boom periods low delinquency rates reduce losses and tend to promote a progressive weakening of lending standards. The governments push for weaker standards was akin to dynamiting the housing finance system. Financial and economic collapse ensued turning the American dream into the American nightmare. Why transform the housing finance system? From 1957-1997 the US experienced fairly stable housing prices, with no nationwide price decline in inflation adjusted dollars. There were two bubbles—around 1979 and 1989—which resulted in only regional losses. Up until 1992 the housing finance market had three generally distinct components: 1. the prime market dominated by Fannie, Freddie, thrifts, and banks (80% share), 2. the government subprime (FHA) market focusing on low downpayment home purchase loans to borrowers with high debt ratios and more marginal credit (10% share), and 3. a private subprime market focusing on loans with moderate to high equity levels (20+%) for cash out refinance and home purchases to borrowers with high debt ratios and more marginal credit (10% share). Once Fannie and Freddie were required, in 1992, to buy affordable housing loans, the market began to change in radical ways. Mortgage underwriting standards deteriorated significantly as the GSEs first moved to compete with FHA and then private subprime. This competition was driven by the fact that FHA and private subprime loans were rich in the types of affordable housing loans the GSEs were now being forced to acquire. An immense bubble began to grow in 1997, extending through 2006 during which time loan quality standards declined dramatically. The financial crash of 2008 resulted from the collapse of
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