The federal government is now expanding the affordable-housing mandates that helped spawn the mortgage crisis by goading mortgage giants Fannie Mae and Freddie Mac to buy up (and create a market for) risky mortgage loans. Edward Pinto explains in an article at Bloomberg News entitled “Subprime 2.0 Is Coming Soon to a Suburb Near You.”
Affordable-housing mandates adopted under the Clinton administration led to the mortgage meltdown, by encouraging lenders to lend money to people with poor credit even without any substantial down payment, and giving Fannie Mae and Freddie Mac a powerful incentive to buy up the resulting risky loans. But the Obama Administration has learned nothing from this. As Pinto notes, “in early September 2010,” it “finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout. . . these new goals almost exclusively relate to very low- and low- income borrowers. Meeting these goals will necessitate a return to dangerous minimal down-payment lending, along with other imprudent lending standards.” Moreover, over Republican objections, the Dodd-Frank financial “reform” bill, “signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage.”
(Dodd-Frank does nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” As Government-Sponsored Enterprises, Fannie and Freddie were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their risky mortgages started defaulting.)
In the long run, we will all pay a price for this foolish policy of getting rid of prudent lending standards. As Pinto notes, “Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble — surprise! — but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.”
Getting rid of prudent lending standards was partly the result of politically-correct claims that requiring a down payment or decent credit history was racially discriminatory. As economics professor Stan Liebowitz notes, in the 1990s, there was an “intentional loosening of underwriting standards—done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.” This preoccupation with race continues in the Obama administration today, where the Obama Administration’s HAMP program “requires lenders to guess the races of clients who refuse to classify themselves. Mortgage servicers are now expected to record the race of all their clients — including those expressly unwilling to provide one.” The federal government recently also took the position that it is racially discriminatory for employers to refuse to hire felons — even if the employer evenhandedly excludes all felons regardless of race.