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When Economic Policy Became Social Policy
...In 1992, Congress gave Fannie and Freddie a “mission” to promote affordable housing, and directed them to study a few very new ideas to accomplish this goal: “establish a downpayment requirement for mortgagors of 5 percent or less; allow the use of cash on hand as a source of downpayments; and approve borrowers who have a credit history of delinquencies if the borrower can demonstrate a satisfactory credit history for at least the [most recent] 12-month period.”

The Department of Housing and Urban Development (HUD) took this for what it was—a direction to support affordable housing by reducing underwriting standards—and throughout the 1990s and 2000s it relentlessly raised affordable housing requirements for Fannie and Freddie, requiring them to buy increasing numbers of subprime and other risky mortgages. In 2004, as it raised goals again, HUD made its purposes clear with this statement: “Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market … rely on subprime lenders for access to mortgage financing. If the GSEs [government-sponsored enterprises, i.e., Fannie and Freddie] reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create.” Fannie and Freddie, with little choice in the matter, did exactly this, eventually bringing them to insolvency in 2008....

...When in 1992 Congress dragooned Fannie and Freddie into lowering their underwriting standards, it confused the economic goal of creating a viable national mortgage market for good quality mortgages with the social policy of increasing home ownership by making mortgage credit available to low-income borrowers. The added benefit for Congress was that it could achieve the social goal without budgetary consequences; the operations of Fannie and Freddie were and still are off-budget....