Cuomo and the housing crisis

Buffalo News:

Andrew Cuomo promised to "transform the lives of millions of families across our country" when as HUD secretary he announced his historic plan to increase home ownership.

Eleven years later, many experts think that much-heralded transformation played a role in the devastating subprime mortgage meltdown and the worst economic downturn since the Great Depression.

"They should have known the risks were large," said Edward J. Pinto, former chief credit officer at Fannie Mae. "Cuomo was pushing mortgage bankers to make loans and basically saying you have to offer a loan to everybody."

Pinto argues that Cuomo, now running for governor of New York, helped create the framework for the subprime crisis by pushing unrealistic and irresponsible affordable housing goals as head of the U.S. Department of Housing and Urban Development.

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The debate over Cuomo's culpability in the subprime crisis has its roots in his eight-year record at HUD, most notably his role in:

• New requirements that Fannie Mae and Freddie Mac, two of the nation's largest finance companies, expand their purchase of mortgages held by low- and moderate-income homebuyers.

• A reform that allowed Fannie and Freddie to receive affordable-housing credit for buying private subprime mortgage-backed securities.

• Increased loan ceilings and looser underwriting standards at the Federal Housing Administration.

• President Bill Clinton's National Homeownership Strategy, an unprecedented private-public partnership that made financing more available and flexible.

Of all the initiatives endorsed by Cuomo, first as assistant HUD secretary and later as the agency's top guy, none is as controversial as the affordable housing goals he imposed on Fannie and Freddie with the blessing of the White House and Congress.

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"He definitely played a role," said Arnold Kling, a former economist at Freddie Mac who wrote about the subprime crisis on behalf of the Cato Institute, a conservative think tank. "Clearly, he decided to make a name for himself by trying to push the envelope."

Why was it so bad, so unwise to expand homeownership opportunities for lower-income families?

Kling says the government's mandated new goals put pressure on Fannie and Freddie to adopt looser lending standards and, in the end, buy the type of risky loans it historically had avoided.

"It promoted housing speculation, not homeownership," Kling said, "and the effect on neighborhoods has been devastating."

Experts say the pressure to buy more-affordable housing loans resulted in new mortgage products, most notably low- or no-money down loans that brought more homebuyers into the market and ultimately created higher home prices.

"He put the kindling on the fire," said Russ Roberts, an economics professor at George Mason University in Fairfax, Va. "What the requirements on Freddie and Fannie did was to push up the price of housing and that made it possible to lend money to people with no money down."

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There is much more including some Bush bashing.

For sometime I have pointed out the part that Cuomo and Clinton played in the financial crisis as a result of their requirement that lenders make loans to people who could not afford them. This was compounded by making Fannie and Freddie buy many of these mortgages which were then monetized by Wall Street. While the Democrats would like to demonize Wall Street, if the loans had not been made to people who could not afford them in the first place, there would have been nothing wrong with the derivatives created by the bankers. The problems with the derivatives sprang from the false assumption that the underlying mortgage represented a good loan on a house worth more than the value of the loan.