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SECURITIZATION AND DERIVATIVES
housing for low and moderate income families, but with reasonable economic return
to the corporation.” In , HUD tried to implement the law and, after a barrage of
criticism from the GSEs and the mortgage and real estate industries, issued a weak
regulation encouraging affordable housing. In the Federal Housing Enterprises
Financial Safety and Soundness Act, Congress extended HUD’s authority to set af-
fordable housing goals for Fannie and Freddie. Congress also changed the language to
say that in the pursuit of affordable housing, “a reasonable economic return . . . may
be less than the return earned on other activities.” The law required HUD to consider
“the need to maintain the sound financial condition of the enterprises.” The act now
ordered HUD to set goals for Fannie and Freddie to buy loans for low- and moderate-
income housing, special affordable housing, and housing in central cities, rural areas,
and other underserved areas. Congress instructed HUD to periodically set a goal for
each category as a percentage of the GSEs’ mortgage purchases.
In , President Bill Clinton announced an initiative to boost homeownership
from . to . of families by , and one component raised the affordable
housing goals at the GSEs. Between and , almost . million households
entered the ranks of homeowners, nearly twice as many as in the previous two years.
“But we have to do a lot better,” Clinton said. “This is the new way home for the
American middle class. We have got to raise incomes in this country. We have got to
increase security for people who are doing the right thing, and we have got to make
people believe that they can have some permanence and stability in their lives even as
they deal with all the changing forces that are out there in this global economy.” The
push to expand homeownership continued under President George W. Bush, who,
for example, introduced a “Zero Down Payment Initiative” that under certain cir-
cumstances could remove the down payment rule for first-time home buyers with
FHA-insured mortgages.
In describing the GSEs’ affordable housing loans, Andrew Cuomo, secretary of
Housing and Urban Development from to and now governor of New
York, told the FCIC, “Affordability means many things. There were moderate income
loans. These were teachers, these were firefighters, these were municipal employees,
these were people with jobs who paid mortgages. These were not subprime, preda-
tory loans at all.”
Fannie and Freddie were now crucial to the housing market, but their dual mis-
sions—promoting mortgage lending while maximizing returns to shareholders—
were problematic. Former Fannie CEO Daniel Mudd told the FCIC that “the GSE
structure required the companies to maintain a fine balance between financial goals
and what we call the mission goals . . . the root cause of the GSEs’ troubles lies with
their business model.” Former Freddie CEO Richard Syron concurred: “I don’t
think it’s a good business model.”
Fannie and Freddie accumulated political clout because they depended on federal
subsidies and an implicit government guarantee, and because they had to deal with
regulators, affordable housing goals, and capital standards imposed by Congress and
HUD. From to , the two reported spending more than million on lob-
bying, and their employees and political action committees contributed million
