Government Housing Policy: The Sine Qua Non of the Financial Crisis


Government Housing Policy: The Sine Qua Non of the Financial Crisis

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The mortgage meltdown and ensuing financial crisis were the result of an unprecedented accumulation of weak and risky Non-Traditional Mortgages (NTMs). By mid-2008 about one-half of outstanding all loans were NTMs.  NTMs are those with low or no downpayments, increased debt ratios, impaired credit, reduced loan amortization, and other changes in underwriting standards as compared to traditional loan standards that were commonplace in the early 1990s. The early 1990s is the appropriate benchmark since shortly thereafter government policies required the broad-based introduction of “flexible underwriting standards.”

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the GSE Act) and HUD’s 1995 National Homeownership Strategy launched a classic race to the bottom based on credit flexibilities. HUD assured broad compliance by drafting virtually the entire mortgage industry. Most significant was the policy to largely eliminate downpayments for targeted borrowers. As the government demanded more and more such lending, particularly those with incomes below 80 percent of median and special target groups, virtually the entire industry responded by moving further and further down the demand curve and out the risk curve. FHA, Fannie, Freddie, banks, subprime lenders, Alt-A lenders, first-time buyers, repeat buyers, and cash-out refinance borrowers all became much more highly leveraged. Moral hazard became rampant as downpayments and initial equity disappeared throughout much of the housing finance system.


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About the Author


Edward J.
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
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    Name: Emily Rapp
    Phone: 202-419-5212

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