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454 Dissenting Statement

Over the next 15 years, HUD consistently enhanced and enlarged the AH
goals. In the GSE Act, Congress had initially specifi ed that 30 percent of the GSEs’
mortgage purchases meet the AH goals. Th is was increased to 42 percent in 1995,
and 50 percent in 2000. By 2008, the main LMI goal was 56 percent, and a special
aff ordable subgoal had been added requiring that 27 percent of the loans acquired
by the GSEs be made to borrowers who were at or below 80 percent of area median
income (AMI). Table 10, page 510, shows that Fannie and Freddie met the goals in
almost every year between 1996 and 2008.
Th ere is very little data available concerning Fannie and Freddie’s acquisitions
of subprime and Alt-A loans in the early 1990s, so it is diffi cult to estimate the GSEs’
year-by-year acquisitions of these loans immediately aft er the AH goals went into
eff ect. However, Pinto estimates the total value of these purchases at approximately
$4.1 trillion (see Table 7, page 504). As shown in Table 1, page 456, on June 30,
2008, immediately prior to the onset of the fi nancial crisis, the GSEs held or had
guaranteed 12 million subprime and Alt-A loans. Th is was 37 percent of their total
mortgage exposure of 32 million loans, which in turn was approximately 58 percent
of the 55 million mortgages outstanding in the U.S. on that date. Fannie and Freddie,
accordingly, were by far the dominant players in the U.S. mortgage market before
the fi nancial crisis and their underwriting standards largely set the standards for the
rest of the mortgage fi nancing industry.
Th e Community Reinvestment Act. In 1995, the regulations under the
10
Community Reinvestment Act (CRA) were tightened. As initially adopted in
1977, the CRA and its associated regulations required only that insured banks
and S&Ls reach out to low-income borrowers in communities they served. Th e
new regulations, made eff ective in 1995, for the fi rst time required insured banks
and S&Ls to demonstrate that they were actually making loans in low-income
11
communities and to low-income borrowers. A qualifying CRA loan was one made
to a borrower at or below 80 percent of the AMI, and thus was similar to the loans
that Fannie and Freddie were required to buy under HUD’s AH goals.
In 2007, the National Community Reinvestment Coalition (NCRC), an
umbrella organization for community activist organizations, reported that between
1997 and 2007 banks that were seeking regulatory approval for mergers committed
12
in agreements with community groups to make over $4.5 trillion in CRA loans.
A substantial portion of these commitments appear to have been converted into
mortgage loans, and thus would have contributed substantially to the number
of subprime and other high risk loans outstanding in 2008. For this reason, they
deserved Commission investigation and analysis. Unfortunately, as outlined in Part
III, this was not done.
Accordingly, the GSE Act put Fannie and Freddie, FHA, and the banks
that were seeking CRA loans into competition for the same mortgages—loans to
borrowers at or below the applicable AMI.
HUD’s Best Practices Initiative. In 1994, HUD added another group to this list
when it set up a “Best Practices Initiative,” to which 117 members of the Mortgage
10 Pub.L. 95-128, Title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12
U.S.C. § 2901 et seq.
11 http://www.fdic.gov/regulations/laws/rules/2000-6500.html.
12 See http://www.community-wealth.org/_pdfs/articles-publications/cdfi s/report-silver-brown.pdf.