Former Fannie Mae (FNM)
executive vice president and chief business officer Robert Levin, speaking to the Financial Crisis Inquiry Commission (FCIC) today, said affordable housing goals at the government-sponsored enterprise (GSE) did not reflect market demand.
These goals forced the GSE to meet inflated levels of demand for affordable housing and ultimately crushed the credit strength of Fannie's books, Levin said in the congressionally-appointed panel's third consecutive day of hearings on the subprime market implosion.
The full extent to which many of the related mortgage assets would fail could not be anticipated, he told the FCIC.
Levin said the US Department of Housing and Urban Development
(HUD) mandated affordable housing goals for lower-income demographics and communities considered "under-served." These goals "were often higher than what our market naturally produced," he told the FCIC.
As a result, Levin said Fannie created housing finance business, partly through outreach programs, to meet these goals and balance "potentially conflicting objectives."
Cy Richardson -- vice president of economic development and housing at the National Urban League
-- is following the hearings. He paid particular attention to today's testimony, and found Levin's statements as no surprise.
"We were hearing from Fannie during that period that they had aggressive goals, but their infrastructure didn't align with these goals," he tells HousingWire
Richardson added that, while Fannie embodied the ethos of HUD mandates, they never considered that they were trying to sell 30-year obligations to a population unused to such long duration debts.
"The pipeline was lubricated, but there was no financial education for borrowers," he said.
Additionally, Levin noted the growth of private-label securitization brought competition to the secondary market. It also challenged Fannie's ability to meet its affordable housing goals, since private-label securitization had "affordability features" that attracted low-income borrowers, which took business from Fannie, Levin said.
Ultimately, Fannie Mae was engulfed by unprecedented home price decline, high unemployment and the overall credit crisis.
"In hindsight, if we and the industry as a whole had been able to predict the nature and extent of the changes to the market, it is clear that we all would have conducted our business differently during this period," he said in prepared testimony (download here
Also testifying before the FCIC today, former Fannie president and CEO Daniel Mudd noted there was a "balance between finance goals….and mission goals for affordable housing and liquidity" at the GSE.
"[A] monoline GSE asked to perform multiple tasks cannot withstand a multi-year 30% home price decline on a national scale," Mudd told the panel.
He said he supports the ultimate assessment that the cause of the GSEs' troubles lies with their business models. For example, mandated affordable housing goals at the GSEs increased to the point that, by 2004, 50% of their business was required to be below median income levels, according to Mudd's testimony. He added that this ratio increased to 57% by 2008, despite a decline in the overall mortgage market.
"I want to be clear. I was the CEO of the company and I accept responsibility for everything that happened on my watch," Mudd told the FCIC.
Fannie struggled to meet "aggressively increasing" goals set by HUD, he said, while at the same time its delinquency rate rose on single-family mortgages.
"It is impossible to plot a future course for Fannie and Freddie without understanding what we want to accomplish in housing our citizens, and what we are willing to risk to achieve it," he said in prepared remarks (download here
Write to Diana Golobay
Additional reporting by Jacob Gaffney.
Disclosure: the author holds no relevant investment positions.