Affordable Housing Goals

Did affordable housing goals for Fannie and Freddie play any role in the subprime crisis?

No.

In 1992 Congress established the “affordable housing goals,” which were numerical targets for the share of Fannie- and Freddie-backed lending that went to low-income and minority borrowers. For years conservative analysts have falsely pointed to these goals as a catalyst for the housing crisis, claiming they pushed Fannie and Freddie to take on unprecedented levels of risk, creating a bubble and a bust in the subprime housing market that sparked the financial catastrophe.

That’s simply not true. A recent study from the Federal Reserve Bank of St. Louis found that the affordable housing goals had no observable impact on the volume, price, or default rates of subprime loans during the crisis, even after controlling for the loan size, loan type, borrower characteristics, and other factors. Federal Reserve Economist Neil Bhutta reached a similar conclusion in 2009, finding that the affordable housing goals had a negligible effect on Fannie and Freddie lending during the housing bubble.

That shouldn’t come as a surprise. Fannie and Freddie did not securitize any loans that met the industry definition of “subprime,” and the loans in their riskier securities—commonly identified as “subprime-like” or “subprime equivalent”—experienced delinquency rates that mirrored the prime market. The Alt-A loans that drove their losses were typically made to higher-income households and thus did not qualify for the affordable housing goals. While Fannie and Freddie did hold some subprime mortgage-backed securities in their investment portfolios—many of which qualified for the affordable housing goals—these investments lagged behind the rest of the market and made up only a tiny fraction of total subprime lending during the housing bubble.

As Americans Struggle to Climb Economic Ladder, Corker-Warner GSE Reform Effort Falls Badly Short

John Taylor, President and CEO of the National Community Reinvestment Coalition

This is a perilous time for opportunity in America. The housing crisis, which stemmed from a terrible confluence of malfeasant lending, Wall Street machinations, and regulatory negligence, has wiped out an enormous amount of community wealth. Millions have lost their homes, and millions more have been badly set back because of that crisis. And now our leaders' commitment to homeownership as an essential engine of economic mobility and opportunity for working people, and affordable housing at large, appears to be wavering. It is absolutely critical that our policymakers and leaders do not take the wrong lesson from this disastrous period in American finance. One persistent problem is that the housing crisis, which originated on Wall Street, continues to be wrongly blamed on Main Street, and poor people in particular. A series of ugly myths underlie that notion.

One of those ugly myths is that the affordable housing goals at Fannie Mae and Freddie Mac played a role in the housing crisis. The affordable housing goals require the GSEs to dedicate a certain percentage of their business to loans that support homeownership and rental housing for working class families. Some will try to tell you that those goals drove Fannie Mae and Freddie Mac to make bad purchases. This is plainly and demonstrably false. The truth is, controlling for risk characteristics, there is zero difference in performance between loans that meet the GSE affordable housing goals, and other loans in the Fannie Mae/Freddie Mac portfolios. That means that those who might try to tell you that affordable housing goals caused the crisis, or even played a role, are flat out lying. The truth is that the affordable housing goals play a valuable role in ensuring that the market serves creditworthy low-and moderate-income, rural, and minority borrowers with conventional loans. 

And yet, the legislative high water mark for GSE reform thus far, the Corker-Warner GSE reform bill, contains no affirmative obligation to create access for creditworthy low- and moderate-income, rural or minority families to conventional home loans. The bill jettisons the notion that the secondary market system should be there to help serve those families. In doing so, it tacitly bows to these falsehoods about the GSE affordable housing goals. It would take the bad premise that the affordable housing goals caused the crisis and essentially codify it in law. And law based on myth is bad law.

The affordable housing goals generated $267 billion in affordable loans in 2012. In 2011, they generated $196 billion. In the Corker-Warner bill, the goals are eliminated right away, and nothing is put in their place to create an affirmative obligation for the market to serve a broad set of qualified borrowers. 

The bill does provide some funding for affordable housing by assessing a fee on securitizations, but it contains no obligation on the part of the market to serve populations it has historically unfairly ignored. Even the funding mechanism it does include, which allocates the fees collected to the National Housing Trust Fund, the Capital Magnet Fund, and a Market Access Fund, has fatal flaws in the Corker-Warner bill. First of all, in 2011, the fees would have produced only $456 million at a minimum, and only $913 million at a maximum. Even more troubling, in the first five years after enactment of the bill, the fees do not have to be collected at all. In order to allow the funds to build up, the money generated by the fees might not be disbursed for another five years after that. That means there is a potential for ten years to go by without any public benefit at all. That alone should make the bill completely unacceptable. 

There are many other deep flaws to the bill, including creating an arbitrary and unnecessary 5% downpayment requirement and 43% debt-to-income ratio limit for a mortgage to be eligible for a guarantee. These requirements would needlessly cut out a broad group of qualified borrowers. 

Lawmakers and others need to understand that that endorsing this bill in its current form is endorsing a deterioration of opportunity. The fact that Corker-Warner has any traction at all is deeply troubling. Congress needs to do much better in charting out the future of mortgage finance in the United States. Throwing out our societal commitment to affordable housing and homeownership opportunities for responsible borrowers would be a grave mistake.

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