Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of over-leveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs.Pinto charts the GSE's shares of sub-prime/Alt-A single family home mortgage origination and first securitization:
source: Ed Pinto, Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study, at 142
Conclusion: Freddie and Fannie were the core of the problem. For a start at a solution, see Alex Pollock's "To Overhaul the GSEs, Divide Them into Three Parts."
(via EconLog, Carpe Diem)