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Government Housing Policies in the Lead-Up to the Financial Crisis: A Forensic Study

181 Pages Posted: 13 Sep 2010  

Edward Pinto

American Enterprise Institute (AEI)

Date Written: August 14, 2010


The major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. 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. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

Keywords: FHA, financial reform, Barney Frank, Congress, financial crisis, HUD, subprime, housing crisis, mortgage, Fannie, Freddie, housing, foreclosure, bubble, Senator Dodd, lending, bailout

JEL Classification: E60, E65, G18, G21, G28, H11, H20

Suggested Citation

Pinto, Edward, Government Housing Policies in the Lead-Up to the Financial Crisis: A Forensic Study (August 14, 2010). Available at SSRN: or

Edward Pinto (Contact Author)

American Enterprise Institute (AEI) ( email )

1150 17th Street, N.W.
Washington, DC 20036
United States
240-423-2848 (Phone)

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