1992 Federal Housing Enterprises Financial Safety and Soundness Act

Tuesday, Jul 07, 2009

In the early 1990s, Fannie and Freddie began to come under considerable pressure to lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers. A deeply flawed 1992 study published by the Federal Reserve Bank of Boston, purporting that minorities faced discrimination in mortgage lending, was particularly influential at the time. This study has since been shown to have been based on inaccurate data, including loans which were supposedly made to borrowers with a negative net worth. When researchers ran the models again after correcting the flawed data, the discrimination that had been the study’s central finding disappeared. Yet the damage had been done and Congress seized on the study as part of a major legislative reorganization of the GSEs’ function.

In 1992, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act, which created an “affordable housing mission” for Fannie Mae and Freddie Mac. This legislation directed HUD to establish three separate quotas requiring the GSEs to set aside a certain percentage of their yearly mortgage purchases to loans with affordable characteristics. These quotas were expressed as the minimum share of mortgages that Fannie and Freddie purchased every year which had to be made to “low and moderate-income families … low-income families in low-income areas and very low-income families,” as well as borrowers in “central cities, rural areas, and other underserved areas.” Congress granted HUD the authority to adjust these three affordable housing quotas for the GSEs over time, allowing both Democratic and Republican Administrations to consistently make campaign promises to boost homeownership through government intervention in the market. Consequently, under both the Clinton and Bush Administrations, HUD dramatically increased these quotas, which reached their zenith when the Bush Administration raised them to 56 percent, 27 percent and 39 percent, respectively.

The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008, Staff Report of Republican Representative Darrell Issa, Ranking Member of the U.S. House of Representatives Committee on Oversight and Government Reform, Page 6, July 7, 2009, http://republicans.oversight.house.gov/media/pdfs/20090707HousingCrisisReport.pdf.