The quote below is from a review of a new book by a former chief economist at the International Monetary Fund, “Fault Lines: How Hidden Fractures Still Threaten the World Economy.”

The credit market””at least as regards housing””was distorted by government policy, not by a sudden and mysterious escalation in ” greed.” The trends that shook the world economy came out of Fannie Mae and Freddie Mac, out of the Federal Housing Administration, and out of their ” regulator,” the U.S. Department of Housing and Urban Development.

By 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. Out of ” compassionate conservatism,” perhaps, the Bush administration raised that mandate to 56 percent. Rajan cites Fannie Mae’s former chief credit officer, Edward Pinto, who notes that, by 2008, ” the FHA and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans to these categories.” Peter Wallison of the American Enterprise Institute found that government-mandated loans accounted for two-thirds of ” junk mortgages.” (emphasis added)

Although I think some of what Rajan writes is whacked, that’s a pretty convincing argument that contradicts economist Paul Krugman’s constant assertion that Fannie and Freddie had nothing to do with the real estate boom and bust.


On a tangentially related note, I found a nugget in this article that may help explain the economically fascinating but tragic crash of home prices in the low income area of Maryvale in Phoenix.

They found that, if you look at the period between 2002 and 2005, the number of mortgages obtained in a given ZIP code ” is negatively correlated with household income growth.” In other words, lenders preferred un-creditworthy borrowers to creditworthy borrowers.

So it may be that lenders were actually targeting unqualified borrowers in low income areas like Maryvale (because loan officers got paid phenomenally more for selling subprime loans). That would help explain the subsequent huge number of quick foreclosures in Maryvale when the market tanked. The massive number of foreclosures in Maryvale drove prices down to only 25% of the peak price and half of what home prices were before the real estate boom began.

So those Maryvale loans went bad fast, the lenders foreclosed fast and the lenders forced home prices down far below where they were before the real estate boom began.

It’s ironic that Federal measures intended to help low income home buyers ended up wiping out a lot of Maryvale homeowners and their families financially.

The human cost of the real estate boom and bust is huge throughout the Valley but it may be highest in the lowest income areas because it seems lenders targeted those areas for subprime loans.