Andrew Cuomo’s Subprime Skeletons

NY Attorney General Andrew Cuomo may face tough questions about his own record on the mortgage market.


New York Governor David Paterson’s current troubles — linked to his entanglement in an aide’s messy breakup, followed by accusations that he violated state ethics laws — may be a boost for Andrew Cuomo. Or maybe not.

The ambitious attorney general of New York was asked by Paterson to investigate an incident involving the governor’s alleged interference in a top aide’s domestic dispute. The controversy prompted Paterson to end his campaign for the state’s gubernatorial election coming up in November — a race Cuomo is widely expected to enter at any moment.

But the 52-year-old son of three-term New York governor Mario Cuomo may face questions about his own record — in this case, on the mortgage market — as the election approaches.

In June 2000, near the end of his four-year tenure as U.S. secretary for the Department of Housing and Urban Development during the Clinton administration, Cuomo warned in a prescient 119-page report that demand for mortgage-backed securities was driving Wall Street into the risky business of subprime lending. He cautioned that unscrupulous lenders were doling out loans without proof of borrowers’ ability to repay. And he recommended making mortgage transactions more transparent, prohibiting practices that injure consumers, restricting abusive transactions and issuing more prime loans.

Yet according to experts on housing policy, Cuomo was one of many politicians in Washington in the late 1990s who inadvertently helped plant the seeds of the subprime mortgage implosion by easing terms on federally insured home loans. They were trying to do the right thing — fight home-lending practices that discriminated against ethnic minorities — but some point to dire consequences.

“It is definitely the case that some of those [HUD] initiatives laid the groundwork for subprime lending,” says Harvard Law School professor Howell Jackson, an expert on housing law. “A new industry emerged to provide much more credit than was appropriate and, beyond that, take advantage of unsuspecting consumers.”

Under Cuomo’s watch, HUD oversaw the easing of lending standards on Federal Housing Administration home loans — with the maximum size of FHA-approved loans for single-family homes in low-cost areas rising from $86,317 to $121,296, minimum down payments falling from 7 percent of the purchase price to 3 percent and insurance premium costs for mortgages dropping from 2.25 percent of the loan amount to 1.5 percent, according to HUD press releases.

The easing resulted from HUD’s attempt, championed by Cuomo, to reduce “redlining,” a term describing home-lending practices that discriminate against ethnic minorities.

“In retrospect specifically easing lending standards was probably not a good idea,” says Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School who was assistant secretary for policy development and research at HUD under Cuomo. She adds, “Everybody was doing it, not just the FHA.”

Cuomo’s defenders point out that the HUD director spoke aggressively across the country against predatory lending. “Had Cuomo’s recommendations been followed,” says Howard Glaser, Cuomo’s general counsel at HUD, “we would not have had the depth of the subprime crisis that we had.”

Richard Bamberger, a spokesman for the attorney general’s office, says HUD became “a revitalized engine for economic development” under Cuomo and that the FHA was “in the best financial shape in its history.” During the subprime crisis the FHA guaranteed only 30-year fixed, owner-occupied and fully documented loans. “The FHA did not offer no-doc loans, investor loans, adjustable loans, option ARM loans or interest-only loans — all products of the subprime mess,” he notes.

Moreover, at the height of subprime lending, the FHA’s share was only 2 percent of the market. The agency “lost significant market share,” explains Bamberger, “because it did no exotic lending.”

To be sure, gubernatorial voters will not be looking for exotic this fall.