OPINION: Don't let blame game kill Fannie, Freddie and CRA

Jim Morgo, the former chief executive of the Long Island Housing Partnership, is president of Morgo Private Public Strategies, a consulting firm focused on economic development and housing.

A talking point of the recently concluded campaign season was that the mortgage meltdown and ensuing economic chaos were caused by do-gooder, big government. The story line went that the Community Reinvestment Act forced banks to write risky mortgages for people unfit for home ownership, and that Fannie Mae and Freddie Mac were forced to make and buy subprime loans.

This simple, emotionally satisfying - and inaccurate - explanation of the complex causes of the mortgage crisis was perhaps unsurprising, but it blames the crisis on the very programs that encourage responsible home ownership and wealth-building.

Neither Fannie and Freddie nor the Community Reinvestment Act caused the meltdown. The CRA requires banks to lend to the entire community, including low-income neighborhoods. It has never pushed banks to market risky loans to families who would be unable to afford them.

CRA has existed since 1979, and it has never forced banks to make bad loans. Most of the defaulted loans were, in fact, refinances of CRA loans that, had they been left alone, would have performed just fine. Lenders associated with subprime abuses and foreclosures - including Delta Finance on Long Island and Countrywide and Ameriquest nationwide - were not subject to CRA regulation.

The situations with Fannie and Freddie are more complicated. Almost none of the recently defaulting subprime mortgages that were written before 2004 had been backed by either of them, since most did not meet their strict lending standards. While the credit bubble was peaking from 2003 to 2006, the loans originated by Freddie and Fannie dropped from $2.7 trillion to $1 trillion, while in the private sector, subprime-origination loans skyrocketed. Initially, Fannie and Freddie escaped the madness.

But in 2004, President George W. Bush ordered them to increase their backing of loans made to lower-income families. Fannie and Freddie, which were losing market share, purchased mortgage-backed securities made up of subprime loans that were not adequately documented. In the frenzy of quick profits from mortgage-backed securities, these government-sponsored enterprises got into the risky business of buying doomed products.

Blaming Fannie, Freddie and the CRA for the mortgage crisis distracts attention from the real causes of the meltdown: unregulated practices that enabled lenders to make bad loans and that allowed Wall Street to bundle, securitize and sell them.

Certainly the CRA and Fannie and Freddie are not perfect. CRA can be exploited by community organizations, and Fannie and Freddie can and did become more interested in market-share and profits than in their community-building mission. But the residue of the mortgage meltdown must not be the end of programs that made home ownership possible for millions of low- and moderate-income Americans.

What's needed is financial oversight for home mortgages. Both profit-motivated and not-for-profit home ownership organizations must realize that some families, for a host of reasons, should never own homes. A requirement for first-time buyers should be comprehensive pre-purchase counseling. And ownership training should go beyond the sale's closing. Post-purchase counseling that vigorously scrutinizes the traps of too-good-to-be-true home equity loans should be required.

Banks can make good, profitable and responsible loans to low- and moderate-income households. These families, like so many in the past, can use home ownership to build their net worth and improve the prospects of their children. The American dream of a home of one's own, where kids have sufficient room to study and prosper, cannot be sacrificed on the altar of unregulated greed.

The CRA, Freddie and Fannie have done real good for our nation and its families. We must not allow a distorted and simplistic blame game to destroy them.