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Edward Pinto, a former Fannie Mae chief credit officer and one of the most prominent observers of the U.S. mortgage industry, is warning that the Obama Administration is pursuing a new agenda that risks creating a new financial crisis.
In a Wall Street Journal opinion column, Pinto, who is co-director and chief risk officer of the International Center on Housing Risk at the American Enterprise Institute (AEI), accused the White House of engaging behavior that he compared to a “troubling flirtation with another mortgage meltdown. Citing President Obama’s recent announcement on the lowering of Federal Housing Administration (FHA) annual mortgage-insurance premiums, Pinto declared that such endeavors, no matter how well intended, will have deleterious effects on housing.
“Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail,” Pinto wrote. “In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives, private lenders will be blamed—and homeowners and taxpayers will once again pay dearly.”
Pinto also blamed the government-sponsored enterprises for pushing affordable lending in a manner that he saw as reckless. He noted Fannie Mae’s decision last month to revive three percent downpayment mortgages as a repeat of the enterprise’s 1994 decision to do the same thing, which Pinto dubbed as Fannie Mae’s “first price war against the FHA,” arguing that the FHA is not in a position to go into head-to-head competition with Fannie Mae and Freddie Mac.
“The law stipulates that the FHA maintain a loss-absorbing capital buffer equal to 2 percent of the value of its outstanding mortgages,” Pinto continued. “The agency obtains this capital from profits earned on mortgages and future premiums. It hasn’t met its capital obligation since 2009 and will not reach compliance until the fall of 2016, according to the FHA’s latest actuarial report. But if the economy runs into another rough patch, this projection will go out the window.”
Pinto stated that Fannie Mae and Freddie Mac policies should not be driven by mandates to artificially inflate the level of affordable lending activity.
“Congress should put an end to this price war before it does real damage to the economy,” Pinto added. “It should terminate the ill-conceived GSE affordable-housing mandates and impose strong capital standards on the FHA that can’t be ignored as they have been for five years and counting.”