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522 Dissenting Statement

143
equal to or greater than 97 percent rose suddenly from 4.4 percent to 17.1 percent.
Again, FHA, under the control of HUD, appears to be off ering competition to the
GSEs that would lead them to reduce their underwriting standards. Since FHA is a
government agency, its actions cannot be explained by a profi t motive. Instead, it
seems clear that FHA reduced its lending standards as part of a HUD policy to lead
Fannie and Freddie in the same direction.
Th e result of Fannie’s competition with FHA in high LTV lending is shown in
the following fi gure, which compares the respective shares of FHA and Fannie in the
category of loans with LTVs equal to or greater than 97 percent, including Fannie
loans with a combined LTV equal to or greater than 97 percent.

Figure 7.

Whether a conscious policy of HUD or not, competition between the GSEs
and FHA ensued immediately aft er the GSEs were given their aff ordable housing
mission in 1992. Th e fact that FHA, an agency controlled by HUD, substantially
increased the LTVs it would accept in 1991 (just before the GSEs were given their
aff ordable housing mission) and again in 1999 (just before the GSEs were required
to increase their aff ordable housing eff orts) is further evidence that HUD was
coordinating these policies in the interest of creating competition between FHA
and the GSEs. Th e eff ect was to drive down underwriting standards, which HUD
had repeatedly described as its goal.

5. Enlisting Mortgage Bankers and Subprime
Lenders in Affordable Housing
In 1994, HUD began a program to enlist other members of the mortgage
fi nancing community in the eff ort to reduce underwriting standards. In that year,

143 GAO, “Federal Housing Administration: Decline in Agency’s Market Share Was Associated with
Product and Process Developments of Other Mortgage Market Participants,” GAO-07-645, June 2007,
pp. 42 and 44.