Arnold Kling  

The Roots of the Freddie-Fannie Bailout

Government Dependency... The Anti-Hansonian Heuristic...

The Village Voice reports,

[Secretary of Housing Andrew] Cuomo's predecessor, Henry Cisneros [moved] the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible."

While many saw this demand for increasingly "flexible" loan terms and standards as a positive step for low-income and minority families, others warned that they could have potentially dangerous consequences. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory: "We have not been a major presence in the subprime market," he said, "but you can bet that under these goals, we will be." Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted.

Read the whole thing. Thanks to Cato's David Boaz for emailing me the link.

The conventional wisdom is that government regulators were too passive and subservient to free-market ideology while the housing bubble was inflating and the subprime mortgage fad was spreading. The Voice article tells a different story, in which government officials were anything but passive, and mortgage markets were not exactly free from tampering.

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COMMENTS (4 to date)
Michael writes:

This was published in the Village Voice!!! Not reading the post and seeing VV in the headline I would of thought the piece would of blamed "evil capitalism" for the crisis.

Brad Hutchings writes:

What an interesting article from an interesting source! "Affordable housing" is such a quaint bleeding heart notion in that proponents don't want to use fundamental market methods (i.e. supply and demand) to achieve the goal. Instead, we get complicated systems that are open to gaming by anyone with a plan. I would bet that if Cuomo had made opposite decisions on a random selection of half the rules he issued, they still would have been gamed by lenders and brokers and we'd be in a similar mess. And of course, in the end, housing isn't more affordable, and the declining value is the problem!

Gary Rogers writes:

This is where we need a tough Attorney General that will prosecute crooks like this. Through irresponsible and misguided policies, Andrew Cuomo and others like him have nearly brought down the financial system of the United States.

Oh, that's right, Andrew Cuomo is busy prosecuting securities dealers for promising what they could not deliver. Talk about the fox in charge of the hen house!

Steve Sailer writes:

For a year now, I've been pointing out that the mortgage meltdown is partly related to the Establishment's long campaign to loosen traditional standards of creditworthiness for lower income and minority households. This national priority gave the get-rich quick artists in the business world the perfect excuse for doing what they'd always wanted to do: take the money and run and let the taxpayers and savers pay for the clean-up.

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