Introduction
It took just 13 years to wreck the American mortgage market. Politicians did not, of course, intend to create havoc in the financial markets. Nor was it immediately obvious to them that they would bring about the collapse of the housing market. The “affordable housing” ideology, which permeated every aspect of the market, meant that they and many other players failed to see the risks involved in jettisoning proper underwriting standards, despite warnings. It was easy to ignore warnings when the housing market was booming and prices continued to increase until mid-2006, when they began to fall, and the decline continued in 2007. It was then that policymakers began to realize that the situation was serious and getting worse. The final collapse of the market may have appeared to be sudden, but it was heading in that direction over the years between 1995 and 2008. It was brought about by the decisions taken by politicians and many other players in a complex market. Understanding the way in which the housing market developed over those years and the impact of the “affordable housing” ideology is a key part of preventing another occurrence.
Increasing Home Ownership
The apparently benevolent intention was to ensure that home ownership would be extended to include poor families and minorities so that they could enjoy the “rewards of family life and see their work rewarded.” Following a 1992 study produced by the Boston Federal Reserve Bank, in which the authors concluded that the data showed substantially higher denial rates for black and Hispanic applicants—as well as a decline in home ownership amongst Hispanics—it was seen as vital to extend home ownership to minorities. Despite the fact that the study was subject to intense criticism, it had a far-reaching political impact. This, and the desire to reduce public spending on housing, led to President Clinton’s announcement of the National Home Ownership Strategy in June 1995.
That strategy involved amending the Community Reinvestment Act in 1995 so that lenders would be obliged to meet the goals set for them by the Housing and Urban Development Department. Banks would be rated according to their records in lending
to low-income families, and the “extensive use of innovative or flexible lending practices,” which were supposed to be used in a “safe and sound” manner, although no one seemed to worry about that. When the Riegle-Neal Act was implemented in 1994, allowing interstate banking, banks had to have an “outstanding” recommendation for such lending activities from the regulators before mergers and acquisitions could go ahead.
The then Secretary for Housing, Henry Gabriel Cisneros, set the targets for lending to low and moderate income groups, very low income groups, and those living in underserved areas. It was difficult to ignore those goals, which were defined in terms of the percentage of loans, which Fannie and Freddie were required to purchase from lenders. By 2008, the target set by Secretary for Housing Alphonso Jackson was 57% for low to moderate income families, but by then Fannie and Freddie had to be bailed out.
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