In a story this morning, the Washington Post picks up a meme circulating amongst conservative thinkers, and gives it front page treatment:
"In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.
Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.
How much did it contribute? What percentage of total mortgage lending was related to the U.S. Department of Housing and Urban Development policies?
The article notes that a "very high concentration of these loans [are] in low-income and African American neighborhoods" — how does this relate to the massive waves of foreclosures in Florida, Southern California and Las Vegas ?
What is so odd about the article is that the headline and first few paragraphs bely what comes after:
In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers’ qualifications.
HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.
That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number. In 2001, HUD researchers warned of high foreclosure rates among subprime loans.
Did HUD add to the problem — or were they ahead of the curve in warning about them?
Numerous conservative commentators previously have sought to blame the credit crisis and housing collapse in part on the Community Reinvestment Act, a relatively small program that had nothing to do with the abdication of good lending practices amongst financial institutions. Now, we see an attempt to paint HUD as the villain.
My problem with this meme is one of context: It ignores the reality of lending practices that had nothing to do with either the CRA or HUD at all. For example, the following loan types are independent of HUD, and were the primary cause of the current foreclosure wave and the root of the current credit crisis.
• No Income, no job, and no assets loans (NINJA)
• 100% Loan-to-Value (LTV) Mortgages
• Piggyback Mortgages (simultaneous 1st & 2nd mortgages)
• No Documentation, No Income Verification (LIAR loans)
• 0% down payments
• ARM Mortgages with high resets
• Negative Amortization Mortgages
• Interest Only, No Principal Repayment Mortgages
The current housing and credit crises was caused by many factors, but the primary ones have to be the Greenspan Federal Reserve which had abdicated its regulatory responsibility to supervise banks, and a banking industry which forgot what lending standards were for. The securitization process, corrupt ratings agencies, and a lack of Wall Street due diligence are the next level. A false belief that Housing Prices never decline also gets some blame. At the real estate level, Appraisal fraud, buyer foolishness, and financial ignorance also contributed.
But HUD as a primary cause of the crisis? Puh-leeze!
The cognitive dissonance caused by the current Market failure — that’s right, I wrote Market failure — is leading to some revisionist history, and wild flailing about, in a futile attempt to ignore reality.
I’ll have more on this failure of Markets later . . .
How HUD Mortgage Policy Fed The Crisis
Carol D. Leonnig
Washington Post Staff, June 10, 2008; A01