Edward Pinto on Housing Market Reform

In a Wall Street Journal op-ed, Pinto argues that real reform isn’t where today’s photo-op disguised as a “Conference on the Future of Housing Finance” is going:

The Future of Housing Finance
We’ll never get a rational mortgage system until the government’s affordable housing mandates are ended.

… A consensus is building around a three-part grand bargain:

• An explicit federal guarantee of a large portion of the mortgage-backed securities created to finance American’s home mortgages;
• A tax on these securities to fund low-income housing initiatives; and
• A requirement that issuers of securities meet affordable housing mandates.

This is a dead end for two reasons. First, while supporters of an explicit federal guarantee tell us it will never be called upon, Americans have read this book before and know how it ends.

The second is much less well known but equally deadly: the central role in the recent real estate collapse that was played by the federal affordable housing policy created by Congress and implemented since the 1990s by HUD and banking regulators.

In 1991, the Senate Committee on Banking, Housing, and Urban Affairs was advised by community groups such as Acorn that “Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting.”

Congress made this advice the law of the land when it passed the inaptly named Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act of 1992). This law imposed affordable housing mandates on Fannie Mae and Freddie Mac.

Thus, beginning in 1993, regulators started to abandon the common sense underwriting principles of adequate down payments, good credit, and an ability to handle the mortgage debt.

… Compounding HUD’s forced abandonment of underwriting standards was a not-unrelated move to increased leverage by financial institutions and securities issuers. They were endeavoring to compete with Fannie and Freddie’s minimal capital requirements. The GSEs only needed $900 in capital behind a $200,000 mortgage—many of which had no borrower down payment. Lack of skin in the game promoted systemic risk on both Main Street and Wall Street.

… While the road to housing hell may have been paved by the government, the road back will be built by the private sector.

Pinto’s key historical point is that Wall Street became a negative influence only after the GSEs’ special status and the mandates imposed on them ruined the competitive landscape. Fan, Fred, and Congress’s determination to that they be run like candy stores handing out discount goodies instead of as real businesses set the stage for all that followed.

It should never be forgotten that while Fan and Fred handed out the goodies, it systematically misrepresented the quality of the mortgages underlying the securitized bonds it issued — for 15 years, to the tune of hundreds of billions and probably trillions of dollars. This problem gravely compounded what was already known about loosened lending standards.

Sadly, many Republicans who should have known better went along with much of this, because “affordable housing” sound so nice and consequence-free. But it should never, ever be forgotten that it was Democratic cronies like Franklin Raines — who not coincidentally walked away with millions himself — either sanctioned the systematic fraud perpetrated on bond rating agencies and investors, or conceivably were so detached from day-to-day operations that they let it happen.

The federal government should not even be in the home-lending business. The fact that it has been in the housing business and in the hands of a combination of allegedly high-minded and definitely not high-minded “progressives” explains why we are where we are. We should be undertaking the long and difficult process of extricating the government from the home-lending business. Instead, what the photo-op disguised as a “conference” will promote is heavy federal involvement into perpetuity. Down this road lies eternal housing hell.