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Free fall: How government policies brought down the housing market
...The affordable housing goals imposed on Fannie Mae and Freddie Mac in 1992 were the major contributors to both the deterioration in underwriting standards between 1992 and 2008 and the growth of an unprecedented ten-year housing bubble that suppressed delinquencies and stimulated the growth of a private securitization market for subprime loans. But other government policies are also to blame for the deterioration in the US housing market, including the thirty-year fixed-rate mortgage, the mortgage interest tax deduction, the right to refinance without penalty, and the Community Reinvestment Act. Until Fannie and Freddie’s market dominance and the government’s role in the housing finance system are substantially reduced or eliminated, the United States will continue to have an inferior and unstable housing market....

...In 1995, expanding the idea in the Best Practices Initiative, HUD issued a policy statement titled “The National Homeownership Strategy: Partners in the American Dream.” The first paragraph of chapter 1 leaves no doubt about what HUD had set out to do: “The purpose of the National Homeownership Strategy is to achieve an all-time high level of homeownership in America within the next 6 years through an unprecedented collaboration of public and private housing industry organizations.” The paper then made clear that reducing down payments would increase homeownership: “Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership should work collaboratively to reduce homebuyer downpayment requirements. Mortgage financing with high loan-to-value ratios should generally be associated with enhanced homebuyer counseling and, where available, supplemental sources of downpayment assistance.”

HUD’s policy was successful. In 1989, only 1 in 230 homebuyers bought a home with a down payment of 3 percent or less, but by 2003, 1 in 7 buyers was providing a down payment at that level and by 2007, the number was less than 1 in 3.10 The program’s contribution to the reduction in home equity and the subsequent increase in leverage is obvious....

...In 1993, for example, shortly after the goals were adopted, the FHA began to increase the percentage of its loans that involved down payments of less than 3 percent; these went from 13 percent in 1992 to 28 percent in 1996. From there, they rose sharply to more than 50 percent in 2000, coinciding with another increase in the AH goals. After that, the FHA’s percentage of these risky loans began to decrease as the GSEs—which were off-budget enterprises—took on more of the risky loans necessary to meet the increasing AH goals....

...Thus, although there were strong incentives for making CRA-type loans, the actual numbers and their delinquency rates are hard to find. However, in its 10-K annual report to the Securities and Exchange Commission for 2009, Bank of America made one of the few bank references to CRA loan quality: “At December 31, 2009, our CRA portfolio comprised six percent of the total residential mortgage balances, but comprised 17 percent of nonperforming residential mortgage loans. This portfolio also comprised 20 percent of residential net charge-offs during 2009.”...