Sensible Reforms Needed to Shield Housing Finance from Wall Street's Malfeasance

As the Administration prepares to address the role that Fannie Mae and Freddie Mac will play in the housing market going forward, we should remember that homeownership is not a four-letter word.

Before Wall Street ravaged our economy by aggressively marketing bad loans and stuffing them into financial products that they sold to investors and then bet against, homeownership was one way the middle class could build equity, and lower-income families could move into the middle class.

Today this pathway to greater prosperity is in jeopardy because some in Congress and, unfortunately, in the Administration believe federal homeownership policies, not Wall Street profits, forced the private sector to make six-figure mortgage loans to anyone that could breathe.

Lending to low-to-moderate income people has been done responsibly in the past, most notably when the federal government has been involved either through the GSEs' affordable housing goals, the Community Reinvestment Act's lending requirements or the Federal Housing Administration.

Before we undo what's worked in the past, let's not forget several important facts that most economists do not dispute:

In September 2008, Henry Paulson's Treasury Department took over Fannie and Freddie because they knew the private market would collapse soon, and the government would need to step in and rescue the nation's private mortgage finance system.

It is this rescue that drives the current Fannie and Freddie's losses, as well as risky loans made by the GSEs after 2005 that had nothing to do with their affordable housing goals.

Fannie and Freddie made a bad situation worse but greedy lenders, greedy investment banks, and greedy (and incompetent) rating agencies caused the subprime crisis. Federal regulators allowed it to happen.

The lack of regulation under the Bush Administration resulted in Fannie and Freddie doubling their risky loan purchases from 25% in 2002 to 51% in 2006, according to data from the Financial Crisis Inquiry Commission.

The GSEs' interest-only loans jumped from 2% pre-2004 to 15% in 2007.

Loans with less than 10% down payment soared from 7% to 19% in the same time frame.

Exploding ARM loans increase from 8% in 2004 to 17% in 2005.

Fannie and Freddie's desire to enjoy profit margins as great as Wall Street's drove this increase, not its affordable housing goals. 55% of loans made under the affordable housing goals had down payments of 20% or more according to a HUD study.

Finally and most importantly, there is nothing wrong with renting. At the same time, we should not help wealthy investors get richer by preventing qualified lower and middle class borrowers from building equity in homes.

Community and consumer groups always have supported affordable rental programs. In fact, we fought efforts to eliminate such programs in the past by the same conservatives who now want to undo the GSEs' affordable housing goals, restrict FHA and eliminate the Community Reinvestment Act's federal requirements.

Let's fix what's broken and leave alone what works. Let's not allow political agendas that have been around since the Ronald Reagan years to undo all housing programs.

We support bringing them the GSEs 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.

Also, 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.

If the Obama Administration is serious about protecting the average American, then Fannie and Freddie must have a public role in the financial markets and not ever be allowed to join Wall Street in whatever financial shenanigans it has in store for us in the future. It's a cliche, but it's the right one: Don't throw out the baby with the bath water.