“By their own admission, Fannie executives loosened their mortgage standards to regain market share (the profit motive), as well as to meet government housing mandates (the government-policy motive).” —James Hagerty, “The Fateful History of Fannie Mae,” p.195
Housing shortages and mortgage solutions are not new; their presence in Hammurabi’s Code suggests resurgence. In America, the first commercial bank lent in 1781. “It’s a Wonderful Life” gloriously illustrates pooled income from communities, which bought houses in 3-5 year “balloon mortgages” through building and loans. A total of 44% of Americans owned homes by 1940, often without indoor plumbing. A brief study of American mortgage lending reveals the story of greed and social engineering, which places homeowners well before renters in wealth.
Teddy and Franklin Roosevelt initiated our country’s legislative commitment to affordability. FDR’s Alphabet Soup brought the Federal Housing Administration in 1934 to increase construction hiring with subsidized lending. Japanese bombing somehow led to the 1944 Servicemen’s Readjustment Act, which generated zero-down-payment low-interest VA loans. Congress created HUD’s 1937 forerunner along with Fannie Mae in 1938 (and Freddie Mac in 1970) to buy up mortgage-backed securities from banks, stabilizing mortgage markets with subsidized housing.
Truman’s Housing Act redeveloped slums to give “a suitable living environment for every American family…” But Eisenhower promoted private mortgage refinancing in a ratcheting regulatory cycle. By 1960, 62% owned homes and Stanford’s Daniel Fetter credited not public housing but “rising real incomes” and “favorable tax treatment of owner-occupied housing…”
Mortgage lending once segregated Richmond and East Palo Alto with subdivisions earmarked with FHA connivance against “inharmonious racial groups.” When minority population strains to breaking points, some homeowners boldly sell without prejudice. Blockbusting realtors and mortgage brokers then scare more homeowners to sell as profits abound and prices decline. Stabilization comes with Apartheid racial conformity. After 1964, the Supreme Court and HUD opposed race-based housing that still divides us.
Bipartisan sympathy generated equity-based lending. Reverse mortgages supposedly started in 1961 when a small bank owner helped a widow retain her home, then Ronald Reagan signed a reverse mortgage bill and HUD insured HECM reverse mortgages through FHA. In 2001, HUD instituted mandatory HECM counseling and 2005 rules aided HECM refinancing. Clinton favored a “National Homeownership Strategy” and then Bush tried “…helping five and a half million black and Hispanic families buy homes before the end of the decade,” (Hagerty, p.118).
So new flexible mortgages reduced income and down payment requirements to as low as 3% and even to make interest only loans Fannie then let payments be “…covered by gifts (from a family member or charity, for instance), grants (from a housing agency) or unsecured loans (from nonprofits, government agencies or mortgage lenders),” (Hagerty p.96-7).
Corporate compensation encouraged risk taking. “The percentage of subprime borrowers,” writes Hagerty, “who didn’t fully document their income increased from about 17 percent in early 2000 to 44 percent in 2006, according to First American CoreLogic.” The damage would be limited had Fannie refused to repurchase subprime loans, but by 2007 those constituted 29% of its business, (Hagerty, p.185).
The Big Short dramatically shows that the crash of lenders, banks and brokerages inevitably followed balloon payment demands on homeowners which destroyed half their real estate wealth. “Nearly 1.0 million households lost their homes to foreclosure or related actions in 2008, up from 430,000 in 2007,” (Hagerty, p.195). Then crisis hit Lehman Brothers and Bear Stearns as unemployment increased. But, “As the world’s biggest debtor,” wrote Hagerty, “the United States could not afford to lose creditors’ faith in its ability and willingness to repay even the debts of quasi-government entities like Fannie and Freddie.”
So taxpayers bailed out failing institutions before passing new Dodd-Frank regulations that tightened qualifications for the loans you receive today. It even created the Trump-contested Consumer Financial Protection Bureau to reduce deceptive loan sales.
With divided accountability, I can’t recommend buying Fannie or Freddie shares but won’t steer people away from mortgage security backed loans. Hedging strategies or betting against government with derivatives are the investors’ best defense against recessions. Congress’ Housing Bill ignores Fannie and Freddie, but again demonstrates bipartisan commitment to housing affordability likely to revive mortgage lending.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. This Mortgage Loan Originator (NMLS #2565162) serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
