Exhibit A: How could FHA have contributed to the housing bust?
This was a common refrain made by some members of the Financial Services Committees at the February 12 hearing featuring FHA Commissioner Carol Galante. I won’t dwell on the obvious contributions of FHA/HUD, such as a decades’ long history of promoting ever-increasing borrower leverage or its role as affordable housing (AH) mandate regulator for Fannie Mae and Freddie Mac (the GSEs) or as the designer of the National Homeownership strategy, with its central plank of doing away with down payments, or as perpetrator of the ironically named “Best Practices Initiative” which had Angelo Mozilo’s Countrywide as the star pupil.
Instead, an enlightening window into FHA/HUD’s leadership in the race to the bottom is provided by a January 2000 press release by Quicken Loans. It came with this headline:
Quicken Loans First To Offer FHA Home Mortgages Nationally On The Internet
With HUD’s approval, Intuit expands home ownership nationwide, offering consumers widest variety of home loan options
The 2000 press release describes the state of FHA loan standards at a critical juncture in this orchestrated race to the bottom:
Exhibit B: No, Marco Rubio, government did not cause the housing crisis
In his response to the State of the Union, Sen. Marco Rubio said: “This idea – that our problems were caused by a government that was too small – it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.”
For obvious reasons, this argument is very popular on the right, but there’s precious little to back it up. The core claim can be a bit slippery, but it tends to go something like this: the existence and affordability goals of Fannie Mae and Freddie Mac (the GSEs) and the Community Reinvestment Act (CRA) were a major reason we had a subprime-driven housing bubble and then a crash. The only problem? Pretty much all the evidence on the housing crisis shows that that’s not true.
I wrote an early opinion here:
In the old English crime novels, the butler was always the prime suspect. In the present crisis, the “butler” is deregulation, assisted by other sleazy characters such as “cheap money”, “Asian savings”, “excessive liberalism and laissez-faire” and, according to presidential candidate John McCain, “wild greed” manifested in rampant speculative activities that created the house price bubble.
Furthermore, given that the residential market has a high “social” content, we cannot refrain from considering the role played by the government and if we are able to put government at the base of the problem, the cause of the crisis cannot be excessive liberalism, quite the contrary!
To give the whole thing some ‘flavour’, there is the (in)famous 1992 Boston Fed study on mortgage lending discrimination sponsored by its president Richard Syron who later ended up CEO of Freddie Mac!
Including the additional information on applicant and property characteristics reduces the disparity between minority and white denials from the originally reported ratio of 2.7 to 1 to roughly 1.6 to I.
But these factors do not wholly eliminate the disparity, since the adjusted ratio implies that even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites. This discrepancy means that minority applicants with the same economic and property characteristics as white applicants would experience a denial rate of 17 percent rather than the actual white denial rate of 11 percent. Thus, in the end, a statistically significant gap remains, which is associated with race.
Richard F. Syron
President from 1/1/1989 to 3/31/1994
Richard Francis Syron was born in Boston on October 25, 1943. He graduated from Boston College in 1966 and received his Ph.D. in economics from Tufts University in 1971. Syron worked at the Boston Fed at two separate times: (1) From 1974 to 1985, he served as an economist, officer, and economic advisor in the Boston Fed’s research department; and (2) he returned to the Bank in 1989 to serve as President for five years. During the intervening years, he held positions at the U.S. Treasury; served as assistant to Federal Reserve Chairman Paul Volcker; and served as President of the Federal Home Loan Bank of Boston. As President of the Boston Fed, Syron was active in public policy debates. He sponsored a landmark study on racial discrimination in mortgage lending and played a key role in the restructuring of New England’s banking system following the strains of the 1980s and early 1990s. Syron left the Boston Fed in 1994 to become chairman and chief executive officer of the American Stock Exchange. He led this exchange through its 1999 merger into the National Association of Securities Dealers, the operator of NASDAQ. Syron then became president, chief executive officer, and later chairman of the board of Thermo Electron Corporation, a Waltham, Massachusetts, maker of high-tech instruments. In 2003, he was named chairman and chief executive officer of the Federal Home Loan Mortgage Corporation (Freddie Mac).