Favoritism for Fannie, Doubtful Loans Cited

Favoritism for Fannie, Doubtful Loans Cited
August 31, 2009

Rep. Darrell Issa (R-CA) released a 26-page report July 7, “The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008.”

Among his key findings:

* Congress allowed Fannie Mae and Freddie Mac to operate with less capital than their rivals in the private sector. The government-sponsored firms, which grew to control three-fourths of the secondary market for prime mortgage loans, leveraged themselves at levels topping 70 to 1, according to the report.

* Congress and federal agencies pressured Fannie and Freddie to relax lending standards, mainly on down payment size and borrower credit quality, in the early 1990s.

* In 1995, the Clinton administration developed a national strategy to push home ownership rates to all-time highs by the end of the century. It called for lower down payment requirements and more flexible lending criteria, though the number of mortgages that included down payments of less than 10 percent already had risen from 7 percent of all mortgages in 1989 to 29 percent by 1994.

* Shrinking down payments and increasing leverage allowed buyers to purchase more home than they could afford, fueling the housing bubble. Home prices had averaged four times Americans’ income for 30 years. Then, from 2000 to 2005, that ratio doubled to 8 to 1.

* Wall Street firms began specializing in putting together and investing in the lowest-rated parts of the mortgage market.

— Steve Watkins

For more information ...

“The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008”: http://republicans.oversight.house.gov/media/pdfs/20090707HousingCrisisReport.pdf