Affordable Housing Goal Cut to Prevent New Housing Bubble

The agency that now runs Fannie Mae and Freddie Mac will reign in Fannie and Freddie's affordable housing goals. The announcement comes as a subtle admission that affordable housing legislation created instability and imprudence in the mortgage lending industry.

A recent statement made by a top federal official undermines an assumption that's been pushed by politicians for years: that it's wise federal policy to make home ownership more affordable for everyone.

Affordable housing movement fallout

In 2008, mortgage companies Fannie Mae and Freddie Mac were supposed to direct 56 percent of their mortgage purchases and guarantees to low- to moderate-income borrowers. Both companies fell short of that goal.

In previous years, Fannie Mae and Freddie Mac had met their affordable housing goals by throwing financial support behind subprime and Alt-A mortgages. Prior to the housing bust, the number of subprime and Alt-A mortgages ballooned to as much as 40 percent of all U.S. mortgages outstanding. The amazingly high default rates of those loans have since wreaked havoc on our financial system. Fannie Mae and Freddie Mac lost a cumulative $109 billion last year. And the banking industry posted an aggregate net loss in the fourth quarter.

At a recent industry event, Federal Housing Finance Agency (FHFA) Director James Lockhart indicated that Fannie and Freddie's 2008 affordable housing goals were simply too aggressive. Lockhart said that the 2009 targets would be reduced so that Fannie and Freddie could focus on operating prudently. Lockhart didn't reveal what the new affordable housing goals would be. Presumably, a return to sustainable operations for both companies requires a different vision, one that caters to borrowers with the financial wherewithal to make their mortgage payments.

Political ballyhoo

Lockhart's comments support the contention that politicians have largely misunderstood the economic validity of affordable housing legislation.  

The affordable housing movement gained steam in the 1990s. Politicians acted on it by modifying the Community Reinvestment Act (CRA) to encourage lenders to provide mortgage funding in low-income neighborhoods. Lawmakers also rallied behind Fannie Mae and Freddie Mac to act as agents of change, buying up or guaranteeing subprime and Alt-A mortgages from lenders. Lenders responded by making more of the lower quality loans.  

Despite the problems with Fannie and Freddie, some lawmakers still deny that affordable housing quotas played a role in the current financial crisis. Democratic Congressman Barney Frank, one of the strongest backers of affordable housing, has recently voiced his support for a proposal that would expand the CRA to include credit unions and other non-bank institutions. The NCUA and other credit union associations are vehemently opposed to the mandate.

It's interesting that this proposal would surface just as Lockhart announces a clampdown on Fannie and Freddie's affordable housing activities. Apparently, lawmakers will continue to pursue the affordable housing agenda-even if Lockhart won't allow Fannie and Freddie to play ball.