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UK Academic Points to Affordable Housing Ideology as Culprit for Crisis

When hearing about the different narratives on the housing crisis, oftentimes the private sector is largely blamed. During an event hosted by ""The American Enterprise Institute"":http://www.aei.org/ (AEI) Wednesday, a recently published book was discussed which highlights a different perspective on the story of the housing market crash.

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Oonagh McDonald, a UK-based academic, wrote the book titled ""Fannie Mae and Freddie Mac: Turning the American Dream Into A Nightmare"" and asserts that the failures in the housing industry started with ‘affordable housing ideology,' and was worsened by policy makers and the GSEs.

McDonald explained that during Bill Clinton's presidency, the ideology of affordable homeownership was acted upon through an amendment of the ""Community Reinvestment Act"":http://www.federalreserve.gov/communitydev/cra_about.htm. Through the amendment, banks would be able to receive a rating of 'outstanding' if they increased upon the number of loans provided to what was defined as low-income borrowers.

This led to the first step of allowing 8 million families to purchase their own homes in 2000, and in 2002, Bush hoped to provide another 5 million families an opportunity for homeowners by the end of the decade, explained McDonald in a ""Huffington Post blog"":http://www.huffingtonpost.co.uk/oonagh-mcdonald/fannie-mae-freddie-mac_b_1607984.html.

The ideological goal of providing affordable housing turned political and created a need to make sure Fannie Mae and Freddie Mac could provide enough money for banks to lend to low income groups. So, the GSEs purchased loans from banks, then repackaged them into mortgage-backed securities and sold them to investors.

""Politicians supported Fannie and Freddie as they thought this was the best way of making sure that the banks had the funds to lend and reducing the costs of mortgages for poor families. They refused to see the dangers of low deposits, low or non-existent credit scores and no or low documentation of incomes or incomes consisting of welfare payments. Fannie and Freddie were grossly mismanaged, weakly regulated, whilst senior executives made millions,"" wrote McDonald.

As a borrower's ability to afford a home was overlooked and subprime loans were increasingly issued, a problem began to grow as more securities made up of risky subprime loans were packaged and sold to investors.

But, McDonald said those in the industry overlooked the problem of subprime mortgages because they were blinded by affordable housing ideology.

One of the panelists at the AEI event, Josh Rosner of ""Graham Fisher & Co."":http://www.graham-fisher.com/, said Fannie and Freddie ""seasoned"" the market, but said that's not to say private labels are not to blame at all, and added ratings agencies were also wildly amiss in their ratings.

About Author: Esther Cho

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