One thing I have learned over the years is that every decision has consequences. If I choose to spend my entire savings on a new car and then the air conditioner breaks, I have to live with the consequence of spending all my savings on the new car and will have to figure out a way to pay to fix my air conditioner. Unfortunately, those in elected office don’t seem to face the same consequences for their decisions.
Case in point: HUD quotas and government-sponsored agencies (GSEs). HUD quotas and GSEs drove the housing crisis. From The Financial Crisis on Trial (WSJ):
For the first time in a government report, the complaint has made it clear that the two government-sponsored enterprises (GSEs) played a major role in creating the demand for low-quality mortgages before the 2008 financial crisis. More importantly, the SEC is saying that Fannie and Freddieâ€”the largest buyers and securitizers of subprime and other low-quality mortgagesâ€”hid the size of their purchases from the market. Through these alleged acts of securities fraud, they did not just mislead investors; they deprived analysts, risk managers, rating agencies and even financial regulators of vital data about market risks that could have prevented the crisis.
The GSEs began acquiring large numbers of subprime and other low-quality loans in the mid-1990s, as they tried to comply with the government’s affordable-housing requirementsâ€”quotas for mortgage purchases imposed by the Department of Housing and Urban Development (HUD) under legislation enacted by Congress in 1992.
These quotas initially required that, of all the loans bought by Fannie and Freddie in any year, 30% had to have been made to borrowers earning at or below the median income in their communities. The quotas, however, would increaseâ€”they rose to 40% in 1996, 50% in 2000, and 55% in 2007. HUD also added and raised quotas for “special affordable” loans that were to be made to borrowers with low or very low incomes (in some cases a mere 60% of the area median income).
In other words, the government essentially created the demand for subprime mortgages and then when everything imploded, they hauled in all the evil bankers for questioning. This is typical.
Please note that I am not taking the bankers’ side on this. I am not saying that bankers and loan originators were not greedy. What I am saying is that HUD’s desire for affordable housing was the match that lit the fire.