regulator to enforce quality standards could result in budget cuts for the regulator. The combination of an activist Congress, government-supported private firms and a weak regulator allowed for the subprime market to boom.

86. Importantly, as housing boomed, the agencies found the high rates available on lowincome lending particularly attractive, and the benign environment and lack of historical experience with low-income lending allowed them to ignore the additional risk. Under the Clinton administration, HUD steadily increased the amount of funding it required the agencies to allocate to low-income housing. Moreover, enforcement of the Community Reinvestment Act (CRA), which had already been enacted in 1977, was sharply enhanced under the Clinton administration,<sup>62</sup> leading to further increases in mortgages to low-income segments of the population, especially in the highly visible and politically sensitive metropolitan areas where banks were most likely to be scrutinized.

87. The boom in the subprime market was further significantly ratcheted up under the Bush administration. The Bush administration pushed up the low-income lending mandate on Freddie and Fannie to 56 percent of their assets in 2004, even as the Fed started increasing interest rates and expressing worries about the housing boom.<sup>63</sup> One factor explaining the huge increase in lending in subprime mortgages was the concern by Freddie and Fannie about the impact of accounting scandals that had been exposed in 2004 and made them more pliant to Congress‘s demands for more low-income lending.<sup>64</sup> 88. <u>But lending from government-sponsored agencies does not explain the boom in the subprime mortgage market that led to the real estate bubble whose burst was at the core of the global financial crisis.</u> As more money from government–sponsored agencies flooded into financing or supporting low-income housing, real estate prices began to generate ever higher returns, while the new financial derivatives developed in the shadow banking system created the impression that risks associated with mortgage lending had fallen. Perceptions of lower risk and higher returns in a booming real estate market—to a significant extent encouraged by the new financial derivatives—encouraged further expansion of lending by the private sector to lowincome segments. In fact, while Freddie and Fannie played an important role in setting the stage for an expansion of the mortgage market to low-income households, by 2006, the vast majority of subprime mortgages (84 percent) came from private lending institutions and the share of subprime loans insured by Fannie and Freddie decreased as the bubble grew (from a high of

> 62 Bhutta (2008).

> 63 Federal Register Vol. 69 (211). HUD’s Housing Goals for Fannie Mae and Freddie Mac.  Also, see HUD news release No. 04-133:  “HUD finalizes rule on new housing goals for Fannie Mae and Freddie Mac”.  The new policy foresaw a target of lending to low- and moderate–income households of 56 percent by the year 2008. 64 “The Financial Crisis Inquiry Report,” Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. January 2011.

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