Tuesday, February 18, 2014

congress NOW trying to cover up congress THEN!

congress NOW trying to cover up congress THEN!


From "The Financial Crisis Inquiry Report", by the US GOVT.

In 1992, Congress enacted Title XIII of the Housing and Community 
Development Act of 1992
( the GSE Act), legislation intended to give low and 
Th e GSE Act, and its subsequent enforcement by HUD, set in motion a series of 
changes in the structure of the mortgage market in the U.S. and more particularly 
the gradual degrading of traditional mortgage underwriting standards. Accordingly, 
in this dissenting statement, I will refer to the subprime and Alt-A mortgages that 
were acquired because of the aff ordable housing AH goals, as well as other subprime 
and Alt-A mortgages, as non-traditional mortgages, or NTMs
Th e GSE Act was a radical departure from the original conception of the GSEs 
as managers of a secondary market in prime mortgages. Fannie Mae was established 
as a government agency in the New Deal era to buy mortgages from banks and other 
loan originators, providing them with new funds with which to make additional 
mortgages. In 1968, it was authorized to sell shares to the public and became a 
government-sponsored enterprise (GSE)9
—a shareholder-owned company with a 
government mission to maintain a liquid secondary market in mortgages. Freddie 
Mac was chartered by Congress as another GSE in 1970. Fannie and Freddie carried 
out this mission eff ectively until the early 1990s, and in the process established 
conservative lending standards for the mortgages they were willing to purchase, 
including such elements as downpayments of 10 to 20 percent, and minimum credit 
standards for borrowers.
Th e GSE Act, however, created a new “mission” for Fannie Mae and Freddie 
Mac—a responsibility to support aff ordable housing—and authorized HUD to 
establish and administer what was in eff ect a mortgage quota system in which a 
certain percentage of all Fannie and Freddie mortgage purchases had to be loans to 
low-and- moderate income (LMI) borrowers—defi ned as persons with income at or 
below the median income in a particular area or to borrowers living.

Over the next 15 years, HUD consistently enhanced and enlarged the AH 
goals. In the GSE Act, Congress had initially specifi ed that 30 percent of the GSEs’ 
mortgage purchases meet the AH goals. Th is was increased to 42 percent in 1995, 
and 50 percent in 2000. By 2008, the main LMI goal was 56 percent, and a special 
aff ordable subgoal had been added requiring that 27 percent of the loans acquired 
by the GSEs be made to borrowers who were at or below 80 percent of area median 
income (AMI). Table 10, page 510, shows that Fannie and Freddie met the goals in 
almost every year between 1996 and 2008.
Th ere is very little data available concerning Fannie and Freddie’s acquisitions 
of subprime and Alt-A loans in the early 1990s, so it is diffi cult to estimate the GSEs’ 
year-by-year acquisitions of these loans immediately aft er the AH goals went into 
eff ect. However, Pinto estimates the total value of these purchases at approximately 
$4.1 trillion (see Table 7, page 504). As shown in Table 1, page 456, on June 30, 
2008, immediately prior to the onset of the fi nancial crisis, the GSEs held or had 
guaranteed 12 million subprime and Alt-A loans. Th is was 37 percent of their total 
mortgage exposure of 32 million loans, which in turn was approximately 58 percent 
of the 55 million mortgages outstanding in the U.S. on that date. Fannie and Freddie, 
accordingly, were by far the dominant players in the U.S. mortgage market before 
the fi nancial crisis and their underwriting standards largely set the standards for the 
rest of the mortgage fi nancing industry.
Th e Community Reinvestment Act. In 1995, the regulations under the 
Community Reinvestment Act (CRA)10 were tightened. As initially adopted in 
1977, the CRA and its associated regulations required only that insured banks 
and S&Ls reach out to low-income borrowers in communities they served. Th e 
new regulations, made eff ective in 1995.

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