Mel Watt, President Obama’s nominee for director of the Federal Housing Finance Agency, pushed government programs to help welfare recipients buy homes during the creation of the subprime mortgage bubble.
Watt, a 20-year Member of Congress from North Carolina’s 12th district, also had a hand in programs allowing borrowers with poor credit to buy homes with no down payment. The American financial system was subsequently destroyed when millions of bad borrowers defaulted on their loans, setting off a market crash that wiped out nearly 40 percent of the net worth of Americans.
In 2002, Watt teamed up with Freddie Mac and Fannie Mae, Bank of America, BB&T, and UJAMMA Inc., to announce Pathways to Homeownership, a pilot initiative designed to give home loans to welfare recipients.
A press release from Watt’s campaign office in October 2002 said that the loans to the welfare recipients would require “as little as $1,000 of the down payment to come from their own funds” and that the city of Charlotte would help borrowers obtain a “down payment subsidy” to cover the rest of the 3% down payment.
If approved to head up Federal Housing Finance Agency (FHFA), Watt will be regulating the very government agencies whose rules he negated in 2003.
Watt, alongside then-Democratic Massachusetts Rep. Barney Frank, blocked Bush Administration efforts to reduce Fannie and Freddie’s overexposure to subprime loans. “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Watt said in a banking committee hearing, downplaying the risks inherent in pushing.
In 2007, a full year after the real estate market peaked and began to plummet under the weight of millions of mortgage defaults, Watt and Frank co-sponsored a bill forcing Fannie and Freddie to meet even higher quotas for affordable lending and investing in an “Affordable Housing Fund” for inner city communities.
Watt’s deregulation of Fannie and Freddie came after the government-sponsored enterprises spent billions in his congressional district. “Freddie Mac has purchased $9.5 billion in mortgages made to an estimated 82,000 Charlotte-area residents,” Watt’s staff announced in 2002.
Many of those risky loans ultimately led to the housing bubble and financial crisis. Charlotte was among the hardest-hit areas of the country. The 6.09 percent foreclosure rate for the North Carolina city was more than double the national average of 2.85 percent, according to the Charlotte Observer. CNN.com listed Charlotte number five of the hardest hit foreclosure hotspots in America in 2011.
Watt began setting the subprime wildfire several years before it engulfed the nation. In 2001, Watt helped start the Congressional Black Caucus’ “With Ownership, Wealth” (WOW) initiative, which sought to add one million black households to the ranks of America’s homeowners by 2005. The program was designed to close a racial gap in homeownership between blacks and whites, which according to Watt stood at 46.7 percent vs. 73 percent respectively.
Watt, who once said he has “no use” for a majority of white voters “in the democratic process,” blamed racist lending practices for this gap and in 2008 called for “a more coordinated approach to dealing with these issues of discrimination, failure to be fair in loan terms.”
He continued his race demagoguery in an interview with the National Community Reinvestment Coalition. “Discrimination is an ongoing problem. How do you really effectively legislate and regulate through governmental agencies to eliminate that problem?”
The WOW initiative, relying on Fannie Mae and Freddie Mac’s secondary market mortgage purchases and corporate bank sponsorship forced by the Community Reinvestment Act, set low standards for mortgages to help spur black homeownership. Whether it alleviated the racial disparity in home ownership is unclear, but Americans across racial lines responded to Watt’s government-created incentives for bad mortgage lending. Demographic research [pdf] shows that of the subprime borrowers who were foreclosed on in the ensuing meltdown, a solid majority were white and non-Hispanic.
Watt also drove hard to increase loans to borrowers making no down payment or showing extremely bad credit. “Loan products will be aimed at borrowers experiencing challenges in accumulating wealth and who have not developed traditional credit histories, or who have impaired credit,” explained a 2002 press release on the WOW initiative from the Congressional Black Caucus. “Other mortgage products will be available for low- and moderate-income borrowers with incomes at or below 100% of the Area Medium Income.”
As Watt’s scheme and other public incentives artificially stimulated demand, Charlotte saw home prices rise precipitously before they collapsed in 2006. The failure of many Charlotte residents to pay off their loans led to the housing price collapse. Nationally, the wave of subprime defaults bankrupted Fannie and Freddie, which were placed into a conservatorship by the Treasury Department in 2008.
But rather than punish Watt for pushing this policy, Obama is promoting him to be the chief regulator of the mortgage entities.
“Mel has led efforts to rein in unscrupulous mortgage lenders. He’s helped protect consumers from the kind of reckless risk-taking that led to the financial crisis in the first place. And he’s fought to give more Americans in low-income neighborhoods access to affordable housing,” Obama said on Wednesday, announcing Watt’s nomination.