The expansion
described by Bernanke, "required the govern-
Association of Community Organizations for
ment-sponsored enterprises, Fannie Mae and
Reform Now) began actively pressuring banks
in risky
Freddie Mac, to devote a large percentage of
to make loans under the threat that otherwise
mortgages to
their activities to meeting affordable housing
they would register complaints in order to
goals."8 Russell Roberts has cited some rele-
underqualified
deny the bank valuable approvals.
vant numbers in the Wall Street Journal:
In response to the new CRA rules, some
borrowers was
banks joined into partnerships with commu-
an imprudence
Beginning in 1992, Congress pushed
nity groups to distribute millions in mortgage
Fannie Mae and Freddie Mac to increase
money to low-income borrowers previously
fostered by
their purchases of mortgages going to
considered noncreditworthy. Other banks
the federal
low- and moderate-income borrowers.
took advantage of the newly authorized option
government.
For 1996, the Department of Housing
to boost their CRA rating by purchasing spe-
and Urban Development (HUD) gave
cial "CRA mortgage-backed securities," that is,
Fannie and Freddie an explicit target--
packages of disproportionately nonprime
42 percent of their mortgage financing
loans certified as meeting CRA criteria and
had to go to borrowers with income
securitized by Freddie Mac. No doubt a small
below the median in their area. The tar-
share of the total current crop of bad mort-
get increased to 50 percent in 2000 and
gages has come from CRA loans. But for the
52 percent in 2005.
share of the increase in defaults that has come
For 1996, HUD required that 12 per-
from the CRA-qualifying borrowers (who
cent of all mortgage purchases by Fannie
would otherwise have been turned down for
and Freddie be "special affordable" loans,
lack of creditworthiness) rather than from, say,
typically to borrowers with income less
would-be condo-flippers on the outskirts of
than 60% of their area's median income.
Las Vegas--the CRA bears responsibility.
That number was increased to 20% in
Defaults and foreclosures are, of course, a
2000 and 22% in 2005. The 2008 goal
drag on real estate values in poor neighbor-
was to be 28%. Between 2000 and 2005,
hoods just as in others. Federal Reserve
Fannie and Freddie met those goals every
Chairman Ben Bernanke aptly commented in
year, funding hundreds of billions of dol-
a 2007 speech that "recent problems in mort-
lars worth of loans, many of them sub-
gage markets illustrate that an underlying
prime and adjustable-rate loans, and
assumption of the CRA--that more lending
made to borrowers who bought houses
equals better outcomes for local communities
may not always hold."6 (If only Alan Greenspan
with less than 10% down.9
had recognized that such a warning applies to
Wayne Barrett of The Village Voice has likewise
credit markets generally and the nation as a
drawn attention to how Andrew Cuomo, as
whole, he might not have artificially expanded
total credit so vigorously. We can only hope
Secretary of HUD between 1997 and 2001,
that Ben Bernanke will keep his own general-
actively pushed Fannie Mae and Freddie Mac
ized warning in mind henceforth.)
into backing the enormous expansion of the
Meanwhile, beginning in 1993, officials in
nonprime mortgage market. In the short run,
the Department of Housing and Urban Devel-
Fannie Mae and Freddie Mac found that their
opment began bringing legal actions against
new flexible lending lines were profitable, and
mortgage bankers that declined a higher per-
they continued to expand their purchases of
centage of minority applicants than white
nonprime mortgages under the rising goals
set by subsequent HUD Secretaries.10
applicants. To avoid legal trouble, lenders be-
gan relaxing their down-payment and income
The hyperexpansion of Fannie Mae and
qualifications.7
Freddie Mac was made possible by their implic-
Congress and HUD also pressured Fannie
it backing from the U.S. Treasury. To fund their
Mae and Freddie Mac. A 1992 law, as
enormous growth, Fannie Mae and Freddie
6