It’s unusual for Barney Frank to create confusion. The outspoken chairman of the House Financial Services Committee usually doesn’t waffle about his positions—or what he thinks about other’s ideas—and he’s intelligent enough to see inconsistencies in his views.
So, as I waited to be interviewed on a TV show last August, I was surprised and pleased to hear Mr. Frank concede that he had erred: “I hope by next year we’ll have abolished Fannie and Freddie” he said, referring to the two government sponsored enterprises (GSEs), “... it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” Then he added, “I had been too sanguine about Fannie and Freddie.”
I have been a long-term critic of Fannie and Freddie, and Congressman Frank had been their principal supporter in Congress. Not only did he now seem to be withdrawing his support, but he was doing it for the right reason. He had finally recognized, it appeared, that forcing Fannie and Freddie to make loans to people who could not really afford to repay them was not good either for the taxpayers (who will probably have to pay $400 billion to bail out Fannie and Freddie) or to the borrowers themselves.
Indeed, until that startling TV moment, it seemed that Barney Frank would never slacken in his effort to use Fannie Mae and Freddie Mac as a source of financing for loans to low income borrowers.
Beginning in 1992 and continuing through 2007, Fannie and Freddie were required to meet affordable housing goals established by the Department of Housing and Urban Development. For most of these years, Frank was the staunchest defender of this policy.
An “affordable” housing mortgage was a loan made to a borrower who was at or below the median income in the area where the home was located. A special sub-goal also required the GSEs to make loans to borrowers who were at or below 60 percent of the median income. These requirements were gradually tightened over time, so that by 2007 55 percent of all mortgages Fannie and Freddie acquired had to be “affordable” under this standard.
There are only so many borrowers with good credit who are at or below the median income in the areas where they live, and there was a lot of competition for Fannie and Freddie.
The Federal Housing Administration (FHA), a government agency, also needed loans to borrowers who were at or below the median income, and under the Community Reinvestment Act (CRA)—also beginning in the early 1990s— banks were required to make loans to borrowers who were at or below 80 percent of the median income in their areas. So there was a competition among all these entities to find low income borrowers who were willing to take out home mortgages, and by 2008 half of all mortgages in the U.S.—27 million, a completely unprecedented number —were subprime and other high risk loans. Of this total, the federal government was responsible—through Fannie and Freddie, FHA, and the CRA—for 19 million of these deficient and risky loans.
When the housing bubble started to deflate in 2007, these mortgages began to default at unprecedented rates, weakening the financial institutions that held them, forcing Fannie and Freddie into insolvency, and causing the financial crisis and the subsequent recession.
So imagine my astonishment when I heard Barney Frank admit that pushing low income people into home they couldn’t afford was a “great mistake.” I thought: well, there’s a testament to the power of democracy. Barney Frank was finally being seriously challenged for re-election, and this has caused him to rethink positions he had previously held inviolable.
But alas, it was not to be. On September 29, just before Congress recessed for the election, a few Democratic members of Congress introduced legislation that would extend the CRA to all financial institutions—not just banks. And Barney Frank declared that this bill would be his top priority in the lame duck session after the election.
This was very confusing. If Frank thought it was a “great mistake to push low income people into homes,” why would he favor extending the CRA to the entire financial system? That would mean insurance companies, auto finance companies, credit card firms and securities firms would be required to provide credit and other services—not just mortgages—to the same people who couldn’t afford to repay their mortgages.
Here’s my guess: despite my initial impression, Barney Frank actually doesn’t get it. Instead, his real views had only been imprisoned for the election. When the idea of extending CRA came along, they escaped.
Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.