In the 1990s, the National Community Reinvestment Coalition took a position that very few groups dared to take. We criticized Fannie Mae and Freddie Mac for not doing enough with their financial success to help traditionally underserved people, many of whom qualified for mortgages but had been prevented from entering the housing market, in many instances, simply because of the color of their skin. Given this criticism, it is highly ironic that NCRC would find itself once again in the minority, defending the GSEs, now abhorred by many of the same institutions and individuals who once adored them.
In the mid to late 90s, we never favored eliminating the GSEs. Our beef was with the weak enforcement of existing regulations by the weak regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) which then became the Federal Housing Finance Agency (FHFA) in 2008, which consistently and inexplicably found that Fannie and Freddie met their affordable housing goals 95 percent of the time. In fact, Fannie and Freddie's goals were too weak; they lacked adequate goals for minority borrowers, and the regulators gave them too much credit to loans made to white, middle and upper income borrowers that counted toward their affordable housing goals.
Even so, when Fannie and Freddie securitized loans for low-to-moderate income families and minorities in the 90s, it was almost always prime loans and always safe and sound loans. In fact, in 1994 and 1995 we saw a 50 percent increase in home origination loans to African-Americans in each of those years! An astounding success story, and it was with 100 percent prime loans. During this time we proved beyond a shadow of a doubt that lending to low-income people, or minorities, is not high risk. To say otherwise is a fiction, period. Working families and lower income families are among the best credit risks in America. They work hard, pay their bills, and play by the same rules as everyone else.
Fast forward to the early 2000s to the adoption of a risk-based pricing policy that would have Fannie and Freddie entering the world of subprime and AltA securitization. Once again, NCRC stood in front of a moving train that would later crash when the housing bubble burst. We argued to anyone who would listen (and not many did) that charging poor people higher costs to be in the homeownership arena was not fair to them nor was it good housing policy. Our position was that the system of mortgage finance under the GSEs had always spread the costs of risk evenly among all income classes, so why change and charge the poor more and the rich less? I personally remember having tough conversations with Fannie officials on this very point. I did not convince them. I realized then that the pressure to enter the subprime world must have been unbearable after Fannie and Freddie had lost nearly a trillion dollars of market share in three short years, from 2001 to 2003.
It is also highly ironic that had the leadership at Fannie and Freddie listened to us, we would not be all trying to figure what the reinvention model should be for Fannie and Freddie going forward, and their shareholders would actually have stock that had some value.
Which leads me to my final point. What to do with the GSEs? As mentioned, NCRC has traditionally been critical of and challenged Fannie and Freddie to do better in serving low-income populations. We were never on the long list of sycophantic institutions that thought the GSEs walked on water and should have been impervious to criticism. For this reason, NCRC's answer to this question should be of interest to Congress and other housing and economic policy experts.
We support bringing them back to their former public-private status, but with some key changes. First, insure that a capable oversight body, with enforcement authority, is in place to guard against future exorbitant risk taking and to require adequate capital reserves. Second, prohibit the GSEs from entering high-risk securitizations; their oversight agency can determine the types of loans that have questionable and too risky underwriting criteria. Third, make sure that their affordable housing goals really benefit those who, but for the efforts of the GSEs, would be left out of the housing market. Require that loans to low-to-moderate income populations are prime, fixed rates with none of the predatory terms that got borrowers of all income levels - low, moderate and even upper income people -- into trouble. Finally, limit the total market share that each GSE can capture.
Lost in the conversation about what to do about Fannie and Freddie is the fact that they were highly profitable and successful enterprises for most of their history. They were perennial Fortune 100 companies and the envy of the corporate world, frequently listed as one of the top best places to work in America. Shareholder value and profitability were the norm for most of the GSEs' history. Had they not followed Wall Street and the private banking sector into the subprime abyss, they would, in my humble opinion, not be currently under the management of the federal government.
Finally, consider the importance of those Fannie and Freddie affordable housing goals and what will happen to them should the GSEs disappear. Is anyone under the illusion that the private banking sector will take up the slack created if we no longer have the affordable housing goals requirements of Fannie and Freddie? Or, should blue-collar borrowers only get their loans from the government? Our problem is we accept the notion that the private sector obligation to always maximize profit and increase shareholder return will leave behind those Americans struggling to work their way up the economic ladder. It doesn't have to be that way.
The GSEs were a great example of the private sector and the government working together to insure a strong and vibrant system of housing finance. Reliance alone on a government funded affordable housing program will wax and wane with each election. A financially inclusive society and economy cannot prevail without the clear and meaningful participation of the privately held and managed financial services sector.
In the future, regulators simply need to do their jobs if and when Fannie, Freddie, banks and other financial institutions make moves that indicate their greediness is outpacing their obligations to act as responsible businesses. Because the ultimate tragedy of the financial crisis would be to cut off credit to deserving, low-income families on the pretense that they are less capable of paying their obligations. That would be the cruelest irony of all and worse, in none of our interests.