Wednesday, February 6, 2008

Did Liberal Policies Create the Current Mortgage Crisis? It Appears So!

Stan Liebowitz, a professor of economics at the University of Texas at Austin recently wrote a great article entitled “The REAL Scandal,” in which he outlined how Liberal “anti-discrimination policies,” designed to sombat “redlining” caused the current mortgage mess.

“PERHAPS the greatest scandal of the mort gage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults,” writes professor Liebowitz. But WHY has this NOT become a major story, YET?!

We hear every day about “poor, gullible loan consumers, tricked into taking out loans they couldn’t afford,” and how “short-sale predators are now whisking away homes right under the defaulting people’s noses,” but that’s all nonsense.

People who take out loans they CANNOT afford are just DUMB.

If you don’t know what you can afford to borrow, it’s up to YOU to find out and if someone is willing to lend you more than you’re credit says you can safely borrow, YOU’RE the idiot for signing that loan document!

As professor Liebowitz notes, “At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.”

Instead we hear dimwits in the mainstream media saying idiotic things like, “ARMs (Adjustable Rate Mortgages) are the cause of this mortgage meltdown.”

That is utter nonsense.

In truth, ARMs are sound financial vehicles. You just have to understand what an ARM is and when it’s advisable to use one.

When mortgage rates are high, ARMs are a good tool, as they lock in short term lower rates and rise, according to the prime rate, at a capped amount each period (6 months or a year, depending on the loan contract). When mortgage rates are high, it’s a sound strategy to take out an ARM and then seek to re-finance to a 30 year fixed rate vehicle when rates come down.

But DUMB people (loan consumers) is ONLY part of the current problem, the other part is even DUMBER banks!

“In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress (Read DEMOCRATS) got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.”

That Bill was based on flawed studies and even more flawed (altered?) data!

According to Professor Liebowitz, “A landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

“That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

“Yet the political agenda triumphed - with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

“No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."

“Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.

“Sound crazy? You bet. Those "outdated" standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

“Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

“Flexible lending programs expanded even though they had higher default rates than loans with traditional standards.”

And who stepped into this breach?

Yes, as you might guess it was Countrywide Mortgage. “...An enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

“Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.”

It’s vital that Conservatives be prepared to place the blame for such misguided fiascos where they belong. Otherwise Liberal nimrods will go on deluding themselves into thinking that “mean, greedy bankers,” and “evil corporations” are behind what’s wrong in our economy, rather than bone-headed Liberal policies!


mal said...

Of course you are correct, JMK.

And, of course, you know the answer to your own question.

I have been saying the same thing for months now. What we had was an artificially inflated housing boom based, in large part, on people who either:

a) had no business owning a home given their financial condition or

b) tried owning a house they simply could never have been considered for say 20 years ago.

You will recall a parallel in this hypocrisy several years ago when Democrats screamed at FEMA to 'cut through the red tape' to get victims reparations for Katrina.

Later, when massive fraud was discovered (yes, like you, I was shocked, SHOCKED!) the same Democrats had the chutzpah to blame FEMA (and Bush!) for the fraud.

Never expect the media to be balanced on stories such as these, my friend.

They simply cannot and will not do so.

JMK said...

You're right, though in this case, lending standards were sacrificed on the altar on anti-bigotry (anti-redlining) based almost entirely on a single bogus study.

Quietly, lending standards are moving back to their default positions and "redlining" is hardly ever mentioned any more.

The OUTRAGE here is that government had the audacity to coerce banks into loosening their lending practices, when there isn't a single servant among the 535 public servants in Congress who knows more about banking than you or I.

Seane-Anna said...

Great post, JMK! But no matter what kind of "anti-bigotry" policies liberals' were pushing, the real cause of the housing "crisis" is all those people who bought homes knowing they couldn't afford them. You're right, JMK. They were DUMB, and now we're all paying for their stupidity.

JMK said...

The crazy thing Seane-Anna is that those tried and true lending practices were suspended across the board and that resulted in money (CREDIT) becoming "too cheap."

As a natural result, housing, a major credit commodity, as it's generally the largest purchase (almost always mortgaged) any of us make, began to escalate sharply in price due to rampant speculation.

People foolishly over-extended themselves and bought houses with 100% and even 125% financing (often on ARMs when rates were as low as they'd ever been), often adding Home Equity Lines (that could be had at 3% for awhile) on top of that.

When the credit crisis or "housing bubble" broke, house prices declined sharply over the past 18 months and are still declining.

As a result, there are many people who bought houses for $500,000, added $50,000 or more in Home Equity Loans to that and now have a home financed at $550,000 or even $600,000 that's now worth $420,000 on the open market.

If/when those payments got too big (as the ARMs went up), or they over-extend themselves with other credit, or simply could no longer pay the freight, they wound up in foreclosure, but the house didn't even cover the costs of the foreclosed loans (as seen above).

The DUMB banks, instead of holding the deadbeats responsible, have gone to the government for a "bailout," and the DUMB people, who basically lost (in the above example, $180,000 in borrowed money...and overall hundreds of billions of dollars) skate at OUR expense!

And NOW, some even DUMBER people in Congress want to "bail out" these deadbeat people as well!

Again, the ONLY people PUNISHED are those productive and responsible people who never over-extended themselves and are still paying their bills.

Once again, a corrupt system has the good, decent and SMATER people paying the freight for the DUMB, reckless and vile people.

THAT'S a very bad prescription all around.

Rachel said...

The crazy thing Seane-Anna is that those tried and true lending practices were suspended across the board and that resulted in money (CREDIT) becoming "too cheap."

state banks did this back in the 1800's - only it was land, and not houses & land. The end result was economic recession.
At least we don't have a Pres. who wants to destroy the National Bank.

Rachel said...

correction - requirements were not suspended; rather the state banks gave to just about anybody

JMK said...

I think banks learned from earlier mistakes Rachel.

Honestly, I do feel bad for many borrowers who got in over their heads, it's easy to do.

When my wife and I were selling one house to buy another in 2005, we were cleared for a mortgage far beyond what we felt comfortable with and stuck to the guidelines we were OK with.

Same with ARMs...they're a good tool, but only when used under the right circumstances.

An ARM is good IF (1) rates are high and you're betting that they'll go down over the next five to ten years or (2) you believe that your salaries will markedly increase over the next few years.

Taking out an ARM when rates are historically LOW is a real bad bet.

That's why I say that both the LENDERS and BORROWERS who've gotten into trouble during this crisis are DUMB, ar at least have done a lot of very dumb things!

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