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market for most mortgages in the U.S. Th e new FHFA rule does not require the
GSEs to purchase more qualifying loans than the percentage of the total market that
these loans constitute. 137
Th is does not solve all the major problems with the AH goals. In the sense
that the goals enable the government to direct where a private company extends
credit, they are inherently a form of government credit allocation. More signifi cantly,
the competition among the GSEs, FHA and the banks that are required under the
CRA to fi nd and acquire the same kind of loans will continue to cause the same
underpricing of risk on these loans that eventually brought about the mortgage
meltdown and the fi nancial crisis. Th is is discussed in the next section and the
section on the CRA.

4. Competition Between the GSEs and FHA
for Subprime and Alt-A Mortgages

One of the important facts about HUD’s management of the AH goals
was that it placed Fannie and Freddie in direct competition with FHA, an agency
within HUD. Th is was already noted in some of the Fannie documents cited above.
Fannie treated this as a confl ict of interest at HUD, but there is a strong case that
this competition is exactly what HUD and Congress wanted. It is important to
recall the context in which the GSE Act was enacted in 1992. In 1990, Congress had
138
enacted the Federal Credit Reform Act. One of its purposes was to capture in the
government’s budget the risks to the government associated with loan guarantees,
and in eff ect it placed a loose budgetary limit on FHA guarantees. For those in
Congress and at HUD who favored increased mortgage lending to low income
borrowers and underserved communities, this consequence of the FCRA may have
been troubling. What had previously been a free way to extend support to groups
who were not otherwise eligible for conventional mortgages—which generally
required a 20 percent downpayment and the indicia of willingness and ability to
pay—now appeared to be potentially restricted. Requiring the GSEs to take up the
mantle of aff ordable housing would have looked at the time like a solution, since
Fannie and Freddie had unlimited access to funds in the private markets and were
off -budget entities.
Looked at from this perspective, it would make sense for Congress and HUD
to place the GSEs and FHA in competition, just as it made sense to put Fannie and
Freddie in competition with one another for aff ordable loans. With all three entities
competing for the same kinds of loans, and with HUD’s control of both FHA’s
lending standards and the GSEs’ aff ordable housing requirements, underwriting
requirements would inevitably be reduced. HUD’s explicit and frequently expressed
interest in reducing mortgage underwriting standards, as a means of making
mortgage credit available to low income borrowers, provides ample evidence of
HUD’s motives for creating this competition.
137 Federal Housing Finance Agency, 2010-2011 Enterprise Housing Goals; Enterprise Book-Entry
Procedures; Final Rule, 12 CFR Parts 1249 and 1282, Federal Register, September 14, 2010, p.55892.
138 Title V of the Congressional Budget Act of 1990. Under the FCRA, HUD must estimate the annual
cost of FHA’s credit subsidy for budget purposes. Th e credit subsidy is the net of its estimated receipts
reduced by its estimated payments.