The Truth About Minority Home Ownership Initiatives
A new talking point that's rapidly gaining traction in right wing circles is that the root cause of our current financial crisis was the push by Democratic lawmakers to expand home ownership among minorities. Right wing commentators are arguing that these initiatives were reckless and that they led to the large-scale issuing of risky loans, which led us down the road to where we are today. Neil Cavuto made this argument on Fox today, and Pat Buchanan echoed it on Rachel Maddow's show just a moment ago.
Putting aside for a moment the very real racism embedded in this argument, does it even make sense on its own terms? The answer is quite clearly no. And the reason for that is pretty simple. Expanding minority home ownership was a key Republican initiative. It was a central part of the Bush Administration's "Ownership Society." Bush and Cheney ran on it in 2004. Don't believe me? This is from an August 2004 press release that's still on the White House website:
And I certainly don't mean to suggest that this was an unworthy goal. The problem, of course, was that the push to expand home ownership was not accompanied by reasonable regulations and safeguards against predatory lending. Expanding home ownership was seen as an end in itself; it didn't seem to matter to the Bush administration that much of the increased ownership was the result of sketchy lenders preying upon vulnerable populations and talking people into taking complicated, expensive loans that they could not afford.
Moreover, it wasn't just the reckless lending that was the problem. It was the deregulated banking environment that allowed for the commoditization and securitization of these loans and the highly leveraged investments in them. Minority and low-income communities were largely the victims of this process and they are the ones paying the highest price right now in terms of home foreclosures. The real irresponsibility was on the part of lawmakers in Washington (during a time when both the White House and Congress were controlled by Republicans) and investors on Wall Street (whom the taxpayers are now being asked to bail out).
Putting aside for a moment the very real racism embedded in this argument, does it even make sense on its own terms? The answer is quite clearly no. And the reason for that is pretty simple. Expanding minority home ownership was a key Republican initiative. It was a central part of the Bush Administration's "Ownership Society." Bush and Cheney ran on it in 2004. Don't believe me? This is from an August 2004 press release that's still on the White House website:
Expanding Homeownership. The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago. President Bush's initiative to dismantle the barriers to homeownership includes:It's certainly true that there was Democrat support for many of these initiatives, but minority home ownership was a signature Republican issue for virtually the entire Bush administration. Bush called for "broader home ownership, especially among minorities" in his very first State of the Union speech.
American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families;
Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes;
Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and
Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.
And I certainly don't mean to suggest that this was an unworthy goal. The problem, of course, was that the push to expand home ownership was not accompanied by reasonable regulations and safeguards against predatory lending. Expanding home ownership was seen as an end in itself; it didn't seem to matter to the Bush administration that much of the increased ownership was the result of sketchy lenders preying upon vulnerable populations and talking people into taking complicated, expensive loans that they could not afford.
Moreover, it wasn't just the reckless lending that was the problem. It was the deregulated banking environment that allowed for the commoditization and securitization of these loans and the highly leveraged investments in them. Minority and low-income communities were largely the victims of this process and they are the ones paying the highest price right now in terms of home foreclosures. The real irresponsibility was on the part of lawmakers in Washington (during a time when both the White House and Congress were controlled by Republicans) and investors on Wall Street (whom the taxpayers are now being asked to bail out).
posted by A.L. at 8:34 PM
17 Comments:
Hey AL: have you seen Katie Couric's blog post about her upcoming interview of the governor of Alaska? She's asking for suggestions.
http://svmomblog.typepad.com/nyc_moms/2008/09/my-upcoming-int.html?cid=131809634#comment-131809634
Midwifed via Wm.J.Clinton.
NYTimes 9/30/99:
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
...Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
I'm a little worried about posting questions for the Earmark Queen so she and her Bush adviser can prepare pat answers to them but these are questions that are open-ended and require a detailed answer. It's impossible for this retired teacher to believe that journalism school doesn't teach how to ask open-ended questions.
If you needed to assume the Presidency, who are some of the people you would want as your Vice-President? What qualifications would you be looking for?
Tell us the process you would use to find a qualified nominee for the federal bench or the Supreme Court? Is membership of the Federalist Society a requirement?
What would you do to improve the lives of children after they are born?
What is your position on the death penalty and how do you square that position with your extreme Pro-Life position?
What would you do to provide health insurance for children?
Would you ever consider a DRAFT? If NO,how will you increase the armed forces for continuance of 2 wars and all other possible interventions?
I want questions asked that can't be answered with a "learned response" or "pat answers".
Of course, I think this blog is a way to give Sarah Palin the questions before she is interviewed.
This is just another smokescreen - for the sake of veering perilously close to strawman territory, the right will never own up to their mistakes, instead preferring to blame their political opponents (and, if they can, a social- or ethnic minority for good measure) - the most famous example quite possibly being the stab-in-the-back theory which was propagated in Germany after WW1: that it was not the incompetent generals and megalomaniacs in government, ie. the people actually making the decisions, but leftists and Jews who were somehow responsible for Germany's defeat in the war. It eventually became a rather popular sentiment which helped carry the Nazis into government in the 1930s. Now, while I wouldn't go as far as comparing the GOP to the NSDAP, this is merely to illustrate that this sort of sentiment is very common among the right. Vietnam? Blame the dam hippies. Iraq? Blame the anti-war demonstrators at home. Ignore the fact that both wars were/are unwinnable and were conducted by among the most corrupt and incompetent governments in America's history.
Besides, the rightist slant you outlined in this article carries with it the added zing that you can blame minorities as well as Democrats. Win! Except it isn't, quite patently, at least not for us in the reality-based community.
There seems to be a story "out there" that Fannie Mae and Freddie Mac got into trouble because they were politically pressured into making sub-prime loans.
From what I have gathered, the definition of a "sub-prime" loan is basically that Fannie Mae and Freddie Mac would not undertake it. So sub-prime borrowers went elsewhere.
These two banks got into trouble because of the interlinkage of the finincial system. They loaned money to banks who had given sub-prime loans. Thyy probably bought the "packages" of good and bad loans bundled as "financial products" that were offered for sale, but which are now worthless because no one can distinguish the good from the bad. And probably many people with good credit some time ago are now in financial straits and defaulting.
Fannie Mae and Freddie Mac are no more responsible for this debacle than any of the major banks who now stand to avoid the consequences of their profligacy.
This study from Jan 2008 is worth reading in this context. Full title:
"The Community Reinvestment Act:
A Welcome Anomaly in the Foreclosure Crisis
Indications that the CRA Deterred Irresponsible Lending
in the 15 Most Populous U.S. Metropolitan Areas"
Also search for the title on the web; there is an addendum and some glowing articles. I didn't see anything negative in the first page of hits.
This problem wasn't due to "deregulation", but just the opposite; bad regulation. It seems to have as much to do with changes to a regulation the Clinton administration put in regarding the Community Reinvestment Act (CRA) of 1977. What it did was force banks to adopt measures that highlighted favorable performances during bank examinations based on things liked by community organizations like ACORN. This 2000 City Journal piece goes into detail on all this. This includes Fannie Mae and Freddie Mac buying all of these subprime loans and pooling them with good ones, and the lack of proper regulation of these two "private companies", which Democrats shut down at least twice.
Yes, all of these lawmakers are to blame, but to say Democrats didn't do the most damage is to deny reality.
Yup, all that regulation on those new instruments and the derivatives markets is what's at fault...
To claim, after Republicans were in charge of Congress from 1995 through 2006 (except the Senate, by 1 during 2001-2003) and the WH from 2001 to the present, that Democrats did the most damage is insane.
Bush tried to set up a new agency to better regulate Fannie and Freddie, but the idea was opposed enough to never be considered. Democratic Reps. Frank and Watt thought the problems being highlighted by the administration were exaggerations and a shell game.
Republicans tried to get the Federal Housing Enterprise Regulatory Reform Act (S. 190) passed. McCain joined as a co-sponsor in 2006. It passed in the Banking Committee on a party-line vote (11 - 9); I'm speculating it would have never passed a filibuster without Democrat goodies, but there's no other information on it that I can find.
Plus, Fannie and Freddie employees have donated more to Chris Dodd's various campaigns than anyone else over the last 20 years. And this includes Franklin Raines.
To ignore reality is what it is insane, not what is perceived to be reality.
you're right it was bush's fault largely, but cavulto and bucchanon know this. you are also right that we need regulation, but you are looking to the very people who created this mess to solve it through a different kind of regulation. the insanity of your argument is worrisome as it seems to be the prevailing sentiment in a nation of people with very little understanding of economics or human nature. the best regulation we can place on the economy is the free market. even bill clinton says that this fiasco was created largely due to the increased money supply created after the dot com bubble burst when the fed reduced interest rates to 1%, thus drastically increasing "free money" to be lent to any idiot out there. quit grouping people into the category of "minority" and then equating that with "victim"...it is insulting to me. how bout this...how bout let all the predatory lenders go bankrupt and then let the idiots who borrowed under stupid terms enjoy the bankruptcy ride with them...i didn't make a bad choice by lending to bad borrowers nor did i make a bad choice by borrowing what i couldn't afford...don't penalize me.
During the past twenty years there have been numerous calls for easier access to mortgages for the low income and minority population. These calls have come mostly from the left of the political spectrum. Usually, along with the call for more mortgage funds, there were insinuations of racism being the cause of this lack of mortgage availability. A more honest and dispassionate explanation would be that low credit scores equal less access to capital and a higher cost for that capital. There are good reasons for this market mechanism and the current credit crisis stems from political interference that came mostly from the left. Your reprint of Bush Administration website PR does nothing to diminish this truth. This is a crisis created by Democrats and their left of center allies and it is a brazen disregard of the facts to suggest otherwise. I have also picked up on a Democrat strategy of blaming the crisis on "deregulation" and the always evil "Phil Graham". This is a cynical and dishonest attempt to shift blame from where it belongs.
Let's assume that Buchanan, Cavuto and Coulter are being truthful.
Let's also assume that minorities are 25% of the total population.
Using these assumptions, they couldn't have brought down Wall Street. There's no way. They couldn't have barrowed enough money in the subprime market to make this happen.
And just for fun, let's assume that they DID. Wouldn't this be just one more argument for tight regulation of the financial markets. It really bothers me that no one uses the word greed anymore.
That's all that this is: Greed.
Blame can be spread across many spectrums, socially, economically and politically. The impetus of raising the home ownership rates was the beginning of the end in rational thinking in asset based lending. Heretofore asset based lending did not have mandates to fill, hence lived up to it's name "asset based" which is what all real estate lending was prior to homeownership mandates. These mandates set out agressive targets for homeownership that then opened the flood gates for the GSE's to relax standards of income, credit and down payments. The result was the borrower/homeowner the programs were designed to protect became entranced by the "idea" of achieving the american dream coaxed by industry professionals who were marketed by mortgage company sales people who in turn were being encouraged to produce as the Wall Street investment bankers had big investors who were hungry for residential mortgage backed securties. Leading back to the big investors not unlike heavyweights like CALPERS who benefitted by the higher yields provided by RMBS with the relative safety of American residential mortgages. As one ex wife used to say, "It ain't all gold where it shines".
Will The REAL Cause
of the Financial Crisis Please Stand Up?
In any initial reactive blame-game, it is typical for both sides to resort to overly simplistic taglines. (In this case, a certain degree of racism has also crept in at times, by some who have extended the claim specifically to ‘minority’ borrowers. For instance: “They wanted their minority and lower-income constituents to have houses even they couldn't afford them.”) These short summations are enthusiastically accepted without much critical thought, because they ‘sound right’ or resonate with someone’s already fervently held beliefs.
But the seemingly intuitive easy answers almost always turn out to be either distortions or simply wrong. So it is in this case. It has become popular to blame mortgage defaults by lower-income people as the fundamental root cause of our current financial crisis. Initiatives to encourage loans to lower-income borrowers are now characterized as reckless, leading us down the road to where we are today.
The reality is that lower-income people have traditionally had, and in this case continue to have, the highest repayment rates. Unlike many of the loans made by subprime mortgage lenders, the loans made by community investment programs that help low income people buy homes have an extremely high repayment rate. The repayment rate for CRA loans (the agency most often cited in early, reactive articles) is actually historically higher than others. Similarly, Habitat for Humanity reports, for instance, that homes bought with their support are showing none of the same foreclosure and repayment issues highlighted in the past year. According to Habitat CEO Reckford, their foreclosure rate is less than 1%.
Though small-home purchases by lower-income borrowers certainly are involved as well, the much larger bulk of now-defaulting loans were made to middle- and higher-income class borrowers (incorporations as well as individuals) who wanted to invest in much bigger and better houses, which they acquired with option ARMs under sub-prime lending standards as recommended by their mortgage lenders and as counseled by their real estate agents. Sub-prime lending increased from around 5% to an unsustainable 30% of all mortgages -- but these loans were taken primarily by the middle class and above.
Will The REAL Culprits Please Stand Up?
Most of these subprime loans were not done under the CRA. Nor were they done under Freddie / Fannie. Had they been, they would have been better regulated since those organizations had stricter lending practices than the rest of the market.
Number One: Sub-Prime Loans at All Income Strata
The very reason “subprime loans” bear that name is that they are not within the standard lending conditions set by F/F regulations (ie: Prime). Subprime lenders target "less than desirable" borrowers at every income strata; those who would otherwise have a difficult time getting a loan at the level they sought, and in essence apply a ‘high-risk fee’ by assessing a high interest rate. In the most egregious cases, and indeed those that constitute the majority of now-defaulting loans, either proof of income or proof of sufficient back collateralization (for real estate investment investment firms) was not required. So, the first root-cause problem does indeed lie with sub-prime lending practices, though not, as commonly claimed, specifically with low-income lending.
Number Two: Inappropriate Ratings Assessments on Loan Bundles
Yet, that alone does not account for the current financial crises and is not the cause of the bank failures. What more is going on here?
Then they bundle that loan together with a number of others, including less-risky loans, and sell shares of that package to investors - banking on their chances that while many borrowers will default, the 'safer' loans combined with the high interest rates risky clients pay will make up for any other lost money. So, the first root-cause problem came in the ratings assigned to these loan groupings, by ratings companies such as Standard & Poors.
Number Three: Unregulated Multiple Layers of Derivative Trading Vehicles
The third root-cause problem is that which brought down the investment banks –excessively layered and abstracted CDOs. Unfortunately, though this is the primary element, it is the most easily ignored because of the complexity of the subject.
Commonly referred to within the industry as ‘the Shadow Market,’ the investment vehicles used to represent all mortgage loans (not only sub-primes) were completely unregulated; briefly put, they were sliced and diced into further and further repackagings, resulting in derivative instruments that bore less and less relation to the original loans they represented, until even remotely appropriate risk levels associated with the instruments had been entirely extrapolated away.
As an example of merely the first stage of these were IOs and POs, which separate a single loan into interest-only and principle-only segments. The IOs and POs were, in turn, repackaged and traded separately in yet further abstracted repackagings. After several such iterations, during which each type of CDO became more and more esoteric, Wall Street firms ended up working with abstracted investment vehicles that took such complex form that physicists and mathematicians worked to statistically categorize and model the loan vehicles – a single such vehicle typically involved a document that had literally hundreds or thousands of pages of legal and mathematical characterization -- none of which was understood by the investment community (and admittedly so, per the Wall Street traders involved), but which were nonetheless traded as though they held meaning for anyone involved. The risks involved were calculated to the nth degree (inaccurately, as it turned out), allowing these instruments to be traded and re-traded, with profit at each exchange, without regard for the actual risk involved, for it had been abstracted away.
Number Four: Credit Default Swaps
Having reached this level of abstraction and complexity, even Wall Street traders recognized there was excessive risk associated with these instruments. They therefore invented a new creature known as a “Credit Default Swap (CDS).” These are a form of insurance – one firm (for instance, any of the investment banks that recently went belly up) would offer a CDS for sale to a second firm that was buying some kind of CDO. What it represented was a promise that, should firm B find its investment had lost its value (due to a high rate of mortgage defaults, for instance), then firm A would pony up the value. The problem is that while investment insurance of this nature is regulated with requirements that firm A have sufficient collateral to back the insurance they offer, the traders got around that problem by calling it a “swap.” This rather transparent and simple tactic managed to get by everyone … but then, nobody at the time was interested in interpreting existing regulations strictly – the market was going strong and any move to restrict the trading was viewed as anti-business and an inappropriate restraint on free trade.
In Sum
The current bail-out, while it serves (to everyone’s distaste) to prop up the institutions that engaged in the worst abuse of CDOs and CDSs, does nothing to inhibit those practices. Congress cannot retire in satisfaction, thinking their work is done.
I don' really care who ripped off the banks but I do know how to fix it.
The Mortgage Forgiveness Debt Relief Act of 2007 removed the last incentive for borrowers to remain in “their” homes. This law must be rewritten and retitled the Patriotic Mortgage Repayment Act of 2008.
The Patriotic Mortgage Repayment Act of 2008 - If a borrower defaults on a mortgage and the market value of the collateral is insufficient to repay the money borrowed, the Treasury will recover 105% of the residual borrowed but unpaid amount using IRS collection methods and interest schedules. Such a law would prevent the general population from bailing out the speculators that purchased more house than they could reasonably afford. These wannabee flippers took grandma’s life savings out of the bank, now the bank has collapsed and the FDIC is having to pay off grandmas. The least these deadbeats should do is repay 100% of grandmas’ money to the treasury plus 5% as a handling fee.
It should be trivial for the borrower to meet his obligation. After the foreclosure sale recovers 60% of the original loan, the payments on the remaining 40% loss should be well within the budget of even the biggest speculative wannabe flipper real estate genius that bought at the top of the market using grandma’s money.
Karen - excellent comment.
For those who continue to insist that this is all the lib'ruls fault, I present you with President Bush's plan to increase minority homeownership by 5.5 million in ten years, initiated all the way back in 2002 before there even was a subprime crisis.
http://www.whitehouse.gov/news/releases/2002/10/20021015-7.html
And who did Bush go to for help with this ambitious plan for an ownership society?
Franklin Raines, Fannie Mae, and Freddie Mac.
Did Bush sign any laws to make sure this happened? Like Carter or Clinton did!!!!!
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