Five Years Later: Don’t Mention the Feds
19th September 2013
Perhaps you haven’t noticed, but since the 2008 meltdown, the government’s housing specialist, the Department of Housing and Urban Development, has not been active in the debate over housing policy. That might seem odd, but given the department’s role in the mortgage meltdown, it’s no wonder the agency would prefer to stay out of the limelight.
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But then Lehman folded, and suddenly the government went silent on HUD’s great work. Instead, in 2010, the new HUD secretary, Shawn Donovan, told the House Financial Services Committee: “Seeing their market share decline [between 2004 and 2006] as a result of a change of demand, the GSEs made the decision to widen their focus from safer prime loans and begin chasing the non-prime market, loosening longstanding underwriting and risk management standards along the way.” In other words, as Fannie and Freddie plunged headlong into the subprime abyss, HUD was just a bystander.
There is no doubt what really happened. Between 1997 and 2007, HUD’s affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.