Tag: subprime lending

Oh, Where’d I Put Those Facts?

A few days ago the New York Times offered the following explanation for why public college and university students graduate with less debt than people attending for-profit schools:

[F]or-profit schools sometimes encourage students to borrow privately from the school, rather than from federal programs, which often have lower rates and loan forbearance for those who fall ill or become jobless.

Of course! Evil “subprime” education has teamed up with evil subprime lending to form the Dastardly Legion of Subprime Higher Ed!

Or maybe not. It could also be that the Old Grey Lady is losing her memory a bit and forgot about the, oh, $75 billion or so that public colleges get directly from state and local taxpayers to keep their prices down. 

Darn those meddling facts.

Fannie, Freddie: Late to the Party?

Debates over the causes of the financial crisis sometimes center on whether Fannie Mae and Freddie Mac were “late to the party” in terms of subprime lending.  As it relates to the recent crisis, I address this question elsewhere

The GSEs and their apologists do claim to have been big contributors to one party: the expansion of homeownership in the United States.  Yet the facts suggest otherwise.

The chart below compares the GSE’s market-share, in terms of home mortgage lending (as reported in the Fed’s Flow of Funds data), with the national homeownership rate (as reported in the Decennial Census). 

The chart makes readily apparent that the largest increases in homeownership occurred before the GSEs played much of a role, if any, in the mortgage market.  For instance, by 1970, the homeownership rate had reached 62.3, yet the GSE market-share was just above 6%.  Even a decade after Fannie was “privatized,” the GSE market-share was still under 20%.

The real growth in GSE activity occurred during the 1980s, particularly the later half.  The reason?  The implosion of the savings and loan industry.  It seems we simply substituted several thousand mismanaged and under-capitalized thrifts for two large mismanaged and under-capitalized thrifts.  Interestingly enough, as the GSEs were doubling their market-share in the 1980s the homeownership rate actually fell.  By the time the GSEs had reached a market-share of 50%, the U.S. homeownership rate had already come close to the rate we see today, of 66%.

The data clearly show that we became a nation of homeowners with little assistance from Fannie and Freddie.  Not only did they join that party late, they simply took the place of the last group to ruin the party:  the S&Ls.

Wednesday Links

Cisneros Rewriting HUD History

In a recent speech to real estate interests, former Clinton HUD secretary Henry Cisneros preposterously claimed that the recent housing meltdown “occurred not out of a governmental push, but out of a hijacking of the homeownership process by some unscrupulous interests.”

The only criticisms Cisneros could muster for the government’s housing policies over the past 20 years were that regulations weren’t tough enough and it should have focused more on rental subsidies.

The reality is that Cisneros-era HUD regulations and policies directly contributed to the housing bubble and subsequent burst as a Cato essay on HUD scandals illustrates:

  • Cisneros’s HUD pursued legal action against mortgage lenders who supposedly declined higher percentages of loans for minorities than whites. As a result of such political pressure, lenders begin lowering their lending standards.
  • On Cisneros’s watch, the Community Reinvestment Act was used to pressure lenders into making more loans to moderate-income borrowers by allowing regulators to deny merger approvals for banks with low CRA ratings. The result was that banks began issuing more loans to otherwise uncreditworthy borrowers, while purchasing more CRA mortgage-backed securities. More importantly, these lax standards quickly spread to prime and subprime mortgage markets.
  • The Clinton administration’s National Homeownership Strategy, prepared under Cisneros’s direction, advocated “financing strategies, fueled by creativity and resources of the public and private sectors, to help homebuyers that lack cash to buy a home or income to make the payments.” In other words, his policies encouraged the behavior that he now calls “unscrupulous.”
  • Cisneros’s HUD also put Fannie Mae and Freddie Mac under constant pressure to facilitate more lending to “underserved” markets. It was under Cisneros’s direction that HUD agreed to allow Fannie and Freddie credit toward its “affordable housing” targets by buying subprime mortgages. Fannie and Freddie are now under government conservatorship and will cost taxpayers hundreds of billions of dollars.

Cisneros now serves as the executive chairman of an institutional investment company focused on urban real estate. Might that explain why Cisneros is now a fan of subsidizing rental housing?

“Unscrupulous” would be a good word to describe the millions of dollars Cisneros has made in the real estate industry following his exit from government.

From the Cato essay:

In 2001, Cisneros joined the board of Fannie Mae’s biggest client: the now notorious Countrywide Financial, the company that was center stage in the subprime lending scandals of recent years. When the housing bubble was inflating, Countrywide and KB took full advantage of the liberalized lending standards fueled by Cisneros’s HUD. In addition to the money he received as a KB director, Cisneros’s company, in which he held a 65 percent stake, received $1.24 million in consulting fees from KB in 2002.

When Cisneros stepped down from Countrywide’s board in 2007, he called it a “well-managed company” and said that he had “enormous confidence” in its leadership. Clearly, those statements were baloney—Cisneros was trying to escape before the crash. Just days before his resignation, Countrywide announced a $1.2 billion loss, and reported that a third of its borrowers were late on mortgage payments. According to SEC records, Cisneros’s position at Countrywide had earned him a $360,000 salary in 2006 and $5 million in stock sales since 2001.

New HUD Same as Old

U.S. Department of Housing and Urban Development Secretary Shaun Donovan recently gave a speech in New York in which he spoke of a “new direction in housing.” If there’s one constant with cabinet secretaries, it’s that they all promise that their department will be new and improved. The following are a few of Donovan’s lines that deserve comment.

The Federal Housing Administration is providing another critical bridge to economic stability…And with nearly half of first-time buyers using FHA loans, it is clear that the FHA has been central to recovery.

Thanks to his predecessor, Alphonso Jackson, who was “absolutely emphatic about winning back our share of the market,” the FHA’s willingness to pick up the subprime lending slack when the housing bubble burst has opened the door for a potentially huge taxpayer bailout. In fact, the government hasn’t just come to dominate the housing finance market – it practically is the housing finance market. Thus, there are plenty of doubts as to whether the housing “recovery” Donovan speaks of is sustainable without the government crutch.

In crisis comes enormous opportunity for change – as Rahm Emanuel says, ‘a crisis is a terrible thing to waste.’ Ensuring we don’t starts with getting the government back into the business of building and preserving affordable housing. Homeownership is incredibly important. But if this crisis has taught us anything, it’s that it is long past time we had a balanced, comprehensive national housing policy – one that supports homeownership, but also provides affordable rental opportunities, and ensures nobody falls through the cracks.

Like his boss, Donovan’s use of the word “change” is just a euphemism for bigger government. His contention that the government needs to get “back” into affordable housing is laughable. When did it leave?

This crisis has illustrated that only the Federal government has the scale and mechanisms to deal effectively with some of the forces that caused it.

It was the federal government’s “scale and mechanisms” that helped cause the crisis! Only powerful institutions with national “scale” such as the Federal Reserve, Fannie and Freddie, and HUD had the power and potential to create such a nation-wide bubble, bust, and recession. Donovan wants the arsonist to put out the fire.

The Federal government can be a key partner in helping communities foster the kinds of synergies between housing, education, public safety, and health you’ve helped nurture at the neighborhood level.

Words like “synergy”, “nurture”, and “foster” are vacuous bureaucratic rhetoric. They are supposed to imply that the federal government can turn decaying urban centers into utopias with gobs of taxpayer money and bureaucratic meddling. That’s just bunk.

In my recent paper on three decades of scandals, mismanagement, and policy failures at HUD, I show that little has changed at HUD other than the individuals occupying the throne. The history of Shaun Donovan’s tenure is yet to be written, but his speech makes me pessimistic.