Opinion
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How ACORN destroyed the housing market
By: Mark Hemingway
Commentary Staff Writer
11/13/09 2:39 PM EST
Over at the Wall Street Journal, there's a very interesting article that connects the dots between ACORN, the mortgage-lending-standard-destroying Community Reinvestment Act legislation, Fannie Mae and the eventual inflation and collapse of the housing bubble in last decade:
As Allen Fishbein, currently an adviser for consumer policy at the Federal Reserve, has noted, Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates. Interim goals were set at 30% of the single-family mortgages purchased by Fannie and Freddie, and the Department of Housing and Urban Development has increased that percentage over time. The goal of the community groups was to force Fannie and Freddie to loosen their underwriting standards, in order to facilitate the purchase of loans made under the CRA.
Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines.
And rather than fight the attempt to force them into making obviously risky loans, Fannie Mae rolled over because they saw an opportunity to protect their own corrupt hide:Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines.
The proposals of Acorn and other affordable-housing advocacy groups were acceptable to Fannie. Fannie had been planning to use the carrot of affordable-housing lending to maintain its hold over Congress and stave off its efforts to impose a strong safety and soundness regulator to oversee the company. (It was not until 2008 that a strong regulator was created for Fannie and Freddie. A little over a month later both GSEs were placed into conservatorship; they have requested a combined $112 billion in assistance from the federal government, and much more will be needed over the next few years.)
The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures.
The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures.
Liberal commentators have been twisting themselves into pretzels ever since the housing collapse. They refuse to believe liberal activist groups' well-intentioned attempt to extend huge taxpayer-subsidized mortgage loans to those who can't afford them did not contribute to the collapse of housing market and Government Sponsored Entity bailout fiasco and blame either simple greed, Wall Street antics or some combination thereof. (To be fair, there were a number of contributing factors to the housing bubble but the problems of politically-motivated attempts to undercut mortgage standards shouldn't be underestimated. Further, while liberals and Democrats favorite housing scapegoat is Wall Street, they rarely acknowledge that the haphazard slicing and dicing of mortgage securities was an attempt to to cover the risk brought on after lending standards were gutted by congress.) But the narrative laid out in today's Wall Street Journal is pretty clear and convincing, especially since it was authored by Edward Pinto, a former chief credit officer at Fannie Mae.
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