HUD Largely Responsible For Foreclosure Crisis

June 24th, 2008

There is a strong opinion making the rounds that HUD is largely responsible for the ensuing foreclosure crisis. In 2004 a warning had been given out that borrowers were being weighed down with sub-prime mortgages that they could ill afford to bear. HUD was too eager to accommodate underprivileged sections into houses of their own. They encouraged two government supported mortgage firms, Freddie Mac and Fannie Mae to buy more of these affordable loans that had been made to borrowers. It was backdated thinking to believe that this measure would benefit the public and foster housing for all. Today the mistake is being admitted by housing experts and some congress leaders. It is this mistake that has opened the floodgates of the present foreclosure crisis.

It was not checked and re-checked whether the borrower was in a position to repay the loan. Between 2004 and 2006 Freddie Mac and Fannie Mae bought $434 billion securities that were backed by sub-prime loans. This created a background for others to follow suit. Sub-prime loans had targeted the weaker section of society who came to be overburdened with higher interests in comparison to the traditional ones.

Unable to pay, today about 3 million to 4 million have lost or will lose the houses that are their homes. Those who were supposed to benefit from HUD are some of the worst affected foreclosure victims – the rate of default being three times more than other borrowers. Meanwhile HUD remains indifferent to their fate. “It was just irresponsible,” comments Michael Barr of Michigan University. In the coming July session it is expected that Congress will strip HUD of its regulating power over Fannie and Freddie and hand it over another stronger body.

The duo – Freddie and Fannie finance nearly 40% of the mortgages of the entire country. The outstanding debt is $5.3 trillion. Private shareholders own these but being chartered by the Congress it is free from state and local taxes. About $6.5 billion is subsidized annually by the feds so that they can loan money more cheaply than others who want to invest. In exchange they are expected to attend to public interests like seeing to affordable houses.

HUD refutes these allegations that they had encouraged predatory lending overlooking income standards. Their intentions were clean and above board but they never imagined that this would be the catastrophic outcome. But HUD has become the icon of sub-prime lending.