Housing policy didn’t cause the 2007 crash
This was originally published as a Letter to the Editor in the Wall Street Journal
Peter Wallison criticizes Steven Mnuchin’s Treasury Department for supporting “regulation of the housing-finance market” in the face of “the aggressive deregulatory work of the Trump administration” (“A Rogue Treasury Department Turns Toward the 1930s,” op-ed, Jan. 24).
Mr. Wallison makes an argument he has been repeating since 2008 that the affordable-housing mandates at Fannie Mae and Freddie Mac were the primary cause of the 2007-09 recession. They weren’t, and the argument has been studied, and debunked, by a multitude of government and academic researchers.
In the run-up to the financial crisis, Fannie Mae and Freddie Mac made mistakes. They followed Wall Street investors into securities backed by high-risk mortgages. Still, John Weicher (George W. Bush-appointed assistant secretary at HUD), defends the affordable housing goals, writing they had “little if any impact” on the enterprises’ participation in riskier loans. The timeline doesn’t fit. The mandate was passed in 1992 and expanded in 1995. The enterprises didn’t heavily invest in subprime mortgages until seven years later, from 2002-04.
The government’s official investigation into the 2007-09 recession fully exonerated the affordable-housing goals. Its findings illuminate that few of Fannie Mae’s subprime securities, for example, were tallied toward the mandate. Dozens of Fannie and Freddie employees testified that the real driver of riskier decisions were originator demands and shareholder expectations.
Fannie or Freddie have been making homeownership possible for millions of Americans since 1938 (Fannie) and 1970 (Freddie). As we debate their future we must protect the affordable-housing goals and the American dream of homeownership.