Fannie Mae’s public-private disaster

If “public-private partnerships” sound wonderful to you, please consider that the housing meltdown and the Great Recession we’re still struggling to escape were largely produced by a public-private partnership.

Two other pet ideas in the nonprofit world also played major roles in the disaster: “structural racism” and “advocacy.”

Don’t take my word for it. Read an important new book that comes with impeccable center-left credentials.

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon is published by a New York Times’ imprint and was written by the Pulitzer-prize winning New York Times reporter Gretchen Morgenson and housing finance expert Joshua Rosner. No less a liberal doyen than Bill Moyers gives it a glowing blurb: “Read it and weep.”

The book has received much press for its analysis of the housing crisis and for its devastating portraits of government and private-sector eminences. Yet the book’s detailed reporting on ugly doings in the tax-exempt world has received scant attention. I can find no mention of the book, for example, at the Chronicle of Philanthropy or Nonprofit Quarterly or the National Committee for Responsive Philanthropy, which proclaims itself a watchdog of abuses at charities and philanthropies.

Let’s help them out. Start with this passage that describes a critical turning point, when then-Housing and Urban Development (HUD) Secretary Andrew Cuomo demanded “new and aggressive affordable housing goals for Fannie and Freddie.” Cuomo’s 1999 initiative was launched at “a veritable friends-of-Fannie lovefest” whose speakers included

Bart Harvey, chairman of the Enterprise Foundation, a Maryland-based nonprofit organization that advocates for moderate-income housing. Enterprise received $11.1 million from the Fannie Mae Foundation over the decade that began in 1993 and had two Fannie Mae executives on its board.

Cuomo bragged that his plan “will help reduce the huge homeownership gap dividing whites from minorities.” This pleased President Clinton, Morgenson and Rosner write, who saw that his

public-private partnership was ramping up. Regulators were relaxing rules, Fannie and Freddie were inflating their portfolios, homebuilders and subprime lenders were flexing their muscles too. To meet the goals Fannie and Freddie had to buy riskier mortgages, such as those defined as subprime. Some $160 billion in subprime loans would be underwritten in 1999, up from $40 billion five years earlier. And in another four years, that figure would jump to $332 billion. Many of those loans wound up in Fannie’s and Freddie’s portfolios. By 2008, some $1.6 trillion of toxic mortgages, or almost half of those that were written, were purchased or guaranteed by Fannie and Freddie.

This snapshot brings together the story’s essentials: oceans of tax dollars flowing to private groups – for-profit and nonprofit – that are praised by politicians who want credit for the subsidized housing boom, with the whole party lubricated by the dissolving of traditional lending practices, which in turn is justified by claims that unfettered lending will remedy racial disparities in housing.

Those disparities, of course, are Exhibit A for advocates of “structural racism” theory, who cite the disparities to claim that America unjustly privileges whites and discriminates against minorities.

Morgenson and Rosner are especially hard on this fairy tale. Earlier, they explain how politicians and advocacy groups gave the first big push in this direction with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. The law was supposed to protect taxpayers if Fannie or Freddie got into trouble with the mortgages they financed or held. But it had a

key element that would, more than any other single act, lead to the disastrous home lending practices of the 2000s. [It] actually encouraged unsafe and unsound activities at both Fannie and Freddie by assigning them a new affordable housing mission.

How had Congress concocted these new housing regs for Fannie and Freddie?

Henry B. Gonzalez, the Texas Democrat who headed the House Banking Committee and its subcommittee on housing and community development, had invited ACORN, Fannie’s new ally, to help legislators define the goals….

ACORN, the Association of Community Organizations for Reform Now, has since fallen on hard times and is busy shutting itself down (or at least re-naming its many entities) thanks to numerous run-ins with the law, but it was long a poster child for champions of nonprofit “advocacy.” (Two of the best accounts of ACORN’s misdeeds are Matthew Vadum’s Subversion Inc. and Stanley Kurtz’s Radical-in-Chief.)

Morgenson and Rosner show that Fannie’s philanthropic dollars and ACORN’s pliability were central to Fannie’s schemes. In the early 1990s,

as Congress mulled over the company’s future, Fannie Mae began making significant grants, hundreds of thousands of dollars each, to consumer and community groups favoring increases in low-income housing. The groups, such as the Association of Community Organizations for Reform Now, or ACORN, had been agitating for tighter regulations on Fannie Mae. But after receiving the grants, ACORN and most of the other groups changed their tunes.

This strengthened Fannie’s strategy, which was “to finance so much low-income housing” that its “government perquisites could never be taken away.”

During the same era, ACORN and other peddlers of structural racism-style arguments attacked banks with the claim that “discrimination was rampant” in mortgage lending. The arguments were reinforced in 1992 when the Boston Fed published a landmark study that purported to show pervasive racial bias in mortgages. ACORN loved it. The media loved it. “Federal regulators heaped praise” on it. And James Johnson – then-head of Fannie Mae and the chief villain of Morgenson and Rosner’s book – loved it, too, because he saw the “opportunity” it brought to boost Fannie’s image and to unleash a rapid expansion of Fannie’s portfolio that would help him snag multimillion-dollar bonuses.

Johnson “was soon fanning the flames lit by the Fed’s report” and writing op-eds weeping over those “whose only barrier to achieving their dream of home ownership is not their economic status, but their racial status.” He quickly set up a Housing Impact Advisory Council and filled it with top executives from nonprofits like ACORN, the National Council of La Raza, and the National Low Income Housing Coalition, as well as business allies. He made sure “these housing advocacy groups also received grants from the company.” And so, “amid cries of racial discrimination, risk-averse practices were jettisoned.”

But “there was only one problem.” The Boston Fed report was so flawed that

it was impossible to conclude that banks routinely rejected minority borrowers or that their decisions were driven by anything other than sound lending decisions.

The report’s flaws were clear, Morgenson and Rosner observe. Under questioning from Forbes, the report’s lead researcher confessed that their study found mortgage default rates in minority neighborhoods equaled those in white neighborhoods. Yet if banks were discriminating against minority borrowers by holding them to higher standards, then their default rates should have been lower than those of whites.

Alas, minority default rates are no longer equal to whites’, thanks largely to the work of Fannie, Freddie, and their allies.

Morgenson and Rosner have many more stories of the tax-exempt sector’s collaboration with Fannie Mae. For example, in addition to the national Housing Impact Advisory Council already mentioned, Fannie “duplicated this public-private partnership effort in every major urban area” by opening a network of “partnership offices.” With the aid of “bankers, builders, Realtors, and advocacy groups nationwide … Fannie Mae soon had an army of foot soldiers at the ready to thwart any opponents.”

Those soldiers swung into action when the D.C. City Council dared to contemplate having Fannie pay income taxes – something the for-profit company escaped thanks to its perks as a Government-Sponsored Enterprise (GSE). “The company sprang into action, calling in chits from community organizers in the District with whom it had worked.” And so thanks to Fannie friends like the Marshall Heights Community Development Organization (long a recipient of “affordable housing funds”) and local talk show host Barbara Lett Simmons (whose husband sat on the Fannie Mae Foundation board), Fannie’s highly paid execs didn’t have to worry about a trickle of revenues (and potential bonuses) going to taxes that other businesses must pay.

Fannie’s supreme political ally has been Rep. Barney Frank (D-Mass.), and once again philanthropy has played a role:

Fannie Mae also made sizable contributions on more than one occasion and awarded its “Fannie Mae Maxwell Award of Excellence” at least twice to a Boston nonprofit group cofounded by Elsie Frank, the congressman’s mother.

Numerous other members of Congress received similar treatment after Johnson put $350 million into Fannie’s foundation so it could become “a powerhouse in charitable giving that targeted organizations associated with favored politicians or located in their areas.”

Fannie even jumped audaciously into presidential politics when Republican candidate Steve Forbes proposed a flat income tax with no mortgage-interest deduction. Fannie brazenly inserted itself “into the Iowa and New Hampshire contests with full-page ads and mailers damning the proposal.”

Naturally Fannie’s foundation poured big sums into the nonprofit arms of the Congressional Hispanic Caucus and Congressional Black Caucus, but it didn’t neglect lower profile nonprofits:

Even nonpolitical neighborhood groups funded by the Fannie Mae Foundation helped the company play its power game. When a nonprofit applied for funding from the foundation, it had to supply a list of political contacts within their area or organization. These contacts gave Fannie Mae a roster of influence that grew to four thousand names at its peak.

Such politicized “philanthropy” finally drew serious scrutiny in 2004, when HUD investigated Fannie’s “partnership offices, the network of patronage and largesse providers” that advocated for more funding and other Fannie-friendly policies. The HUD study

demonstrated that the offices, which received preferential treatment for nonprofit work, were basically corrupt. A disproportionate percentage of their money had gone to support lobbying efforts and the dispensing of favors in violation of their nonprofit status or reporting requirements.

Many more such stories are in the book, but it’s no mystery why the center-left in philanthropy, then and now, has ignored them. Who wants to say that structural racism is wobbly on the facts and often serves as a fig leaf to cover public and private greed and fraud? Who wants to say that well-known advocacy groups could be bought and exploited by big donors whose actions brought ruin on those groups’ genuinely distressed constituencies?

The National Committee for Responsive Philanthropy, for instance, is both a defender of advocacy groups like ACORN and an applauder of Fannie Mae’s support for them. NCRP repeatedly scored Fannie Mae and Freddie Mac highly in its Criteria for Philanthropy at Its Best. The report shows the public/private entities as leaders in

  • --support for marginalized communities
  • --top 25 funders of economically disadvantaged communities
  • --social justice grantmaking
  • --general operating support
  • --multi-year funding

Similarly, in Advocacy for Social Change in Metropolitan Washington, NCRP bewails the “miniscule proportion” of funders who support “public policy advocacy organizations,” while ranking Fannie and Freddie as top donors of advocacy. A similar high ranking goes to Fannie in an NCRP report on New Orleans after Katrina.

As for ACORN, the head of NCRP, Aaron Dorfman, helped run chapters of it in Chicago, Minneapolis/St. Paul, and Miami. ACORN is one of the most-often lauded grantees in NCRP’s many reports on the kind of advocacy it wants donors to fund. Dorfman did write a fairly stern critique of ACORN’s famous cover-up of a large embezzlement, only to follow it two months later with a plea to “invest in ACORN again.” The latter piece, written in September 2008, explicitly praised ACORN as

one of the most effective voices for ensuring that the interests of those most at risk in any economic downturn, including the hundreds of thousands of low and middle-income homeowners caught up in the foreclosure crisis and financial market meltdown, are protected in bailout discussions.

That’s a fitting irony on which to end this look at Fannie’s flame-out. Let me just add a few caveats. I do not mean to say that every public-private partnership is bad, nor is every exercise of advocacy from the tax-exempt sector harmful. The housing mess and the broader economic downtown are complicated and involve more than Morgenson and Rosner can cover or even seem to understand. (For good critiques of the book’s limitations, see Peter Wallison’s review in Barron’s and John Tamny’s in Forbes.) And lastly, in this disgraceful tale there is plenty of blame to go around – for politicians and operatives of both parties, for businessmen large and small, and for nonprofits. The villains enriched themselves, while bringing far more hardship to the poor and minority Americans whose struggles were used to justify the scams.

UPDATE: Other writers who've engaged this post include Timothy Dalrymple, who mostly agreed, and Christine Scheller, who did not. I responded to Ms. Scheller in a comment to her post.

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