by Peter J. Wallison, Edward J. Pinto
American Enterprise Institute
March 17, 2014
Last week, Senator Elizabeth Warren noted that an academic paper published by the St. Louis Federal Reserve was “proof” that the affordable housing goals did not contribute to the subprime mortgage boom. We have seen this paper before and advised the authors that it was based on a faulty understanding of how the housing market worked during the period they covered. However, the paper was not modified in any substantial respect, and Senator Warren, who was no doubt delighted to find an academic paper that supported her position, has been taken in. The answer to the paper’s question, “Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?” is a resounding yes. The affordable housing goals created substantial demand for subprime loans, and Fannie and Freddie Mac’s purchases of subprime loans gave the market its start and then sustained it to the end.