Sunday, April 26, 2015

Is Another Financial Crisis On the Way?
...Here's the quick version. In 1992 Congress set "affordable housing" goals for Fannie Mae and its savings-and-loan counterpart, Freddie Mac (together known as the Government-Sponsored Enterprises, or GSEs). That year a manageable 30 percent of Fannie's portfolio qualified as "affordable housing." In 1997 the Department of Housing and Urban Development (HUD), as authorized by Congress, increased the required fraction to 42 percent. In 2001, under President George W. Bush, HUD increased the goal to 50 percent. In 2008 it upped the goal to 56 percent.

To find enough "nontraditional mortgages" to meet these increasing requirements, Fannie and Freddie bought increasingly lower-quality mortgage paper. Mortgages with three percent down payments sufficed for a while, but by 2000 the two GSEs were buying mortgages with zero down payments, credit rating scores below 660, and debt-to-income ratios as high as 38 percent. By 2008, half of the nation's home mortgages-32 million of them-were subprime, and 76 percent of those were owned by the GSEs....