ACORN's role in the housing bubble

Edward Pinto:

All agree that the bursting of the housing bubble caused the financial collapse of 2008. Most agree that the housing bubble started in 1997. Less well understood is that this bubble was the result of government policies that lowered mortgage-lending standards to increase home ownership. One of the key players was the controversial liberal advocacy group, Acorn (Association of Community Organizations for Reform Now).

The watershed moment was the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act. To comply with that law's "affordable housing" requirements, Fannie Mae and Freddie Mac would acquire more than $6 trillion of single-family loans over the next 16 years.

Congress's goal was to force these two government-sponsored enterprises (GSEs) to purchase loans that had been originated by banks—loans that were made under the pressure of another federal law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and moderate-income communities.

From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements."

The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse?

The previous year, as Allen Fishbein, currently an adviser for consumer policy at the Federal Reserve, has noted, Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates. Interim goals were set at 30% of the single-family mortgages purchased by Fannie and Freddie, and the Department of Housing and Urban Development has increased that percentage over time. The goal of the community groups was to force Fannie and Freddie to loosen their underwriting standards, in order to facilitate the purchase of loans made under the CRA.

Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines.

The proposals of Acorn and other affordable-housing advocacy groups were acceptable to Fannie. Fannie had been planning to use the carrot of affordable-housing lending to maintain its hold over Congress and stave off its efforts to impose a strong safety and soundness regulator to oversee the company. (It was not until 2008 that a strong regulator was created for Fannie and Freddie. A little over a month later both GSEs were placed into conservatorship; they have requested a combined $112 billion in assistance from the federal government, and much more will be needed over the next few years.)

The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures.

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It is a history that Barney Franks and other liberals seem eager to ignore as they they to do it again. One other aspect of the bubble was the divorcing of the lending decision from the lenders. Loan brokers who were many times the real estate agent trying to close the deal got the "responsibility" for making the decision and then the loans were made by a party who sold them to resellers who sliced and diced them into pieces that were too difficult to unravel as the loans began to fail and the pools they were in were tainted to the point that they were not marketable.