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capitalized and operated safely… I regret, however, that the Congress chose to attach these important reforms to a housing bill that contains numerous provisions that raise serious concerns. My Administration worked diligently to craft a compromise housing bill that would target assistance where it is needed most, expand homeownership opportunities, ensure fiscal integrity, and empower recipients of Federal housing assistance.” Title XIII was a compromise between those politicians who wished to restrain the GSEs and those who wanted to unleash them. It turned out not to be a very fair fight. On the one hand, FHEFSSA created a separate prudential (safety and soundness) regulator for Fannie Mae and Freddie Mac: the Office of Federal Housing Enterprise Oversight (OFHEO), which was lodged in HUD. It was clear to many observers at the time, however, that a policy-oriented department such as HUD was not the appropriate agency for lodging a prudential regulator. While there may have been a policy angle in this being allowed, it should also be noted that Fannie and Freddie spent over $200 million lobbying the Congress to avoid tighter oversight. The GSEs were essentially a government-supported banking system and should have been regulated as such. On the other hand, FHEFSSA specified a set of “mission goals”: essentially, efforts to help support housing for low- and moderate-income households, as well as a special “affordable
27 goal” and serving “underserved areas” (formerly inner-city areas). It established HUD (but not OFHEO) as the mission regulator. The mission goals essentially gave the GSEs a mandate to purchase lower-quality mortgages. These riskier mortgages received the same implicit government guarantee nevertheless. While Chapter 1 laid out the growth of Fannie and Freddie during the last 30 years, this chapter provides evidence of their increasing use of riskier mortgages from the mid 1990s until 2003, as a result of (or at least justified by) the 1992 Act. For good reason, many analysts point to the behavior of Fannie and Freddie in 2004-2007 when it comes to ramping up the risk of their portfolio. But, as a matter of fact, the seeds for this behavior and the GSEs’ eventual collapse started a decade earlier. Analysts, regulators, and politicians, however, did not realize that the GSEs were a ticking time bomb because aggregate U.S. housing prices increased every month from July 1995 to May 2006, thus obscuring the ever-increasing credit risk that Fannie and Freddie were taking on. 2.1 The “Mission” to Support Affordable Housing The new mission laid out in FHEFSSA was quite specific and encompassed three related goals for the GSEs. The overarching theme was for the GSEs to reach a target percentage of their mortgage purchases in terms of homeownership for lower and middle income households.