Monday, May 24, 2010

The U.S. Mortgage Meltdown and its Discontents....

There are some folks who are now deflecting blame away from the pernicious, even incompetent government policies that led to the mortgage meltdown, by claiming things like “CRA applies only to deposit-taking institutions, and it simply prohibits “extractive” banking practices: if a bank actively solicits deposits in a community, it is also expected to make loans to qualified applicants there.”

They often further argue that, “The subprime crisis was not the fault of the CRA which did not apply to the unregulated brokers that originated a disproportionate number of loans that went to delinquency and foreclosure. In the subprime market, the three largest lenders were independent mortgage companies, not subject to supervision by any bank or thrift regulator 51% of subprime loans were made by unsupervised mortgage companies in 2005. If there is any racial preference in CRA it is now a blatant case of white privilege: Whites are 50 percent more likely than Blacks to obtain loans from CRA-covered institutions.”

Actually virtually all of that is demonstrably factually and historically wrong.

The CRA was initially targeted at banks and savings and loans, but the government used BOTH the CRA (which allowed “housing activists” to block bank mergers and opening new branches without making deals over “more loans to low-income families”) AND misused civil rights litigation (that took naturally occurring “disparate impacts” as “proof of discrimination”) to force banks to loosen traditional lending criteria and make more loans to more “subprime” borrowers – those with “spotty” credit histories and bankruptcies in their histories.

Banks actively fought this erosion of lending standards and accurately predicted the disaster that was to come, way back in the 1980s. Incredibly enough, the government sued banks and mortgage brokers using data that actually SUPPORTED the mortgage industry’s defense! ALL the data showed that under traditional lending criteria, blacks and whites granted loans had the SAME default rates. If banks were discriminating against blacks the data would have showed that more undeserving whites were getting loans, resulting in a higher default rate among whites. That was NOT the case. However, today, blacks and Hispanics have a much far higher default rate than whites and Asians, indicating that far more NON-creditworthy blacks and Hispanics got loans than non-creditworthy whites and Asians.”

The government’s role in the erosion of traditional lending criteria via BOTH regulation AND litigation) IS what caused the mortgage meltdown and the subsequent global credit crisis.

Further, no one, so far as I know has in ever implied that the subprime loans were targeted ethnically/racially. A fact that most liberals seem unaware is that 71% of the poor in America are...white. Given that appx. 30% of America’s poor are black, low income whites would be expected to garner more than double the number of subprime loans, NOT merely 50% more.

The term “affirmative action” (which was used by Andy Cuomo to accurately define the government’s regulating and litigating “subprime” loans in the attached YouTube video) also does not necessarily imply race as a factor. Perhaps such people are unaware that slightly over 60% of the subprime loans written between 2000 and 2008 (a period in which $4 TRILLION in subprime loans were doled out) went to whites, so I do not understand this obsession with race on the part of the deflectors.

If such people believe that “traditional lending criteria” (a minimum of 10% with PMI, at least 20% down to avoid PMI costs, proof of continual and steady employment with one’s most recent three years of tax returns, limiting loans to 2½X the combined family income, along with reliance on the borrower’s debt to income ratio, etc.) have a negative and disparate income on low income people and thus a profoundly negative and disparate impact on blacks, since a larger percentage of that group is “low income”...well, that is indeed true.

But so what?

Proof of such a negative disparity is NOT, in and of itself, proof of ANY actual or verifiable discrimination, just as widely disparate test scores on written exams (ie. SATs, GREs, various Civil Service Entrance Exams and the various professional exams – the Law Boards, the CPA Exams, etc.) do not prove any intentional/deliberate discrimination...and yes, across the board on ALL such exams, there exists a 1-standard deviation disparity between the test scores of whites/Asians and blacks/Hispanics, with smaller disparities between whites and Asians and blacks and Hispanics, as well as between various ethnicities within both the black and white communities, but that persistent 1 full standard deviation on all such exams between white and black test scores does NOT prove intentional discrimination, nor does it any way compromise, let alone invalidate the efficacy of such exams.

Accepting this basic premise (“disparate impacts are not proof of any actionable or reversible discrimination”), there is nothing at all wrong with the disparities in lending rates between income groups and/or racial/ethnic groups. It would appear that the subsequent black/white homeownership gap is entirely a function of personal behavior, not institutional racial bias. While blacks with higher incomes did get loans at lower rates than many whites with lower incomes, the fact that the default rates for blacks and whites who DID get loans were exactly the SAME shows that no discrimination occurred. If whites had been given some preferential treatment in lending, you’d expect that far more non-creditworthy whites would have been given loans, resulting in a significantly higher default rate among white applicants. That was NEVER the case.

But even still, the real aim of those in government was NOT to close any racial homeownership gap, not at all. The primary reason for government’s involvement in eroding those lending criteria was to remake America’s banking system into one more like Europe’s where governments exert far more direct control over all banking policies.

That’s part and parcel of what’s derided as “the political economy,” or “Corporatism” – an inane and misguided partnership between business and government.

In fact, THAT’S exactly the economy America has had since 1912, when Bernard Baruch and J P Morgan (admittedly, two great men) fundamentally remade the American economy by selling the “security” (for both owners/entrepreneurs AND workers) of Corporatism and introducing the Federal Reserve, paving the way for the 16 the Amendment and an ever deepening partnership between business and government, which was strengthened greatly by FDR’s ill-fated policies of the 1930s - the Great Depression deepened from 1933 through 1938 as FDR followed Hoover’s “progressive” policies (Hoover began the “alphabet soup” of federal programs) that FDR followed and expanded on - and that partnership was strengthened even more during WW II when the government took actual control of numerous companies. Since the end of WWII that partnership between business and government has become virtually set in stone.

The two best books I’ve yet seen on this subject are Meltdown by Thomas E Woods and Architects of Ruin by Peter Schweizer. Both outline both the widespread abuses of the Community Reinvestment Act, but also noted that the vast majority of those running today’s major Corporate entities are “infected with the same poisonous liberalism” as are many in the political class. Robert Rubin, Tim Geithner, Jon Corzine (the failed Governor of NJ and former Goldman Sachs Exec),among many others easily criss-crossed between government and its “private sector” partners. Kerry Killinger (head of Washington Mutual) served as chairman of the Hogar (Spanish for “hearth”) advisory committee, set up by Congressional Hispanic Caucus specifically to “increase Hispanic homeownership.” Killinger’s fervent social liberalism led him to seek to transform WaMu into “the WalMart of banking” by catering to low income and high risk (those with poor credit histories) that other banks deemed too risky. In fact, in Killinger’s case, he set up an internal quota system for the bank’s lending policies. There existed “a company policy mandating that its performances within this demographic (low income, with a focus on minority applications) in a given market at least matches the bank’s overall position in the market.”

Why would so-called “private sector” financial leaders take such a high-risk stance, given their historically risk-averse natures?

Only one reason, they KNEW that government had already promised to bail them out for such excesses, just as it had bailed out Mexico in the mid-1990s to protect both Rubin’s CitiBank and Goldman’s positions there – both those firms had set up appx. 90% of the Mexican bonds at the time. Despite Bill Seidman (former head of the FDIC), Steve Forbes and Larry Kudlow all presciently testifying how bad an idea such a bailout was, in January of 1995 the Treasury Department announced a $20 BILLION line of credit to Mexico that saved those banks the losses their bad investments demanded.

The HUGE part that Fannie Mae and Freddie Mac played, was that in leading the charge on providing loans to low income applicants with poor credit histories, as all their “investments” were backed up by government, a/k/a TAXPAYER funds (despite the fact that easily upwards of 70% of Americans oppose the idea of any kind of “affirmative action in lending” to ANY group, for ANY 75% of Americans oppose race/gender-based preferences in any context) and were able to buy/GUARANTEE the bad loans made by banks and mortgage companies.

In 2000 Fannie Mae “owned” a whopping 24% of all U.S. mortgages, a sum virtually ALL economists declared “dangerously high.” By 2007 that number had risen to an astounding 51% of all mortgages and by 2009 had risen further to over 70%!

As promised, Fannie & Freddie had “bought up” (guaranteed) all the bad loans made by government’s “private sector” partners and indemnified them from risk by shifting that risk onto the American taxpayer.

In his 1999 speech at Harvard, Angelo Mozillo (the son of a Bronx butcher turned home loan guru) thanked Fannie, noting that without the financial support of Fannie Mae he couldn’t have done what he trigger the mortgage meltdown and the subsequent global credit crisis. Mozillo said, “I specifically and especially recognize Franklin Raines and his entire team at Fannie Mae for providing a great deal of the resources that have made possible for us to achieve our House America objectives.”

In 2000 the NY Times reported on how Fannie Mae and Freddie Mac had propelled Mozillo to the top, “By buying up his mortgages and thus freeing up his capital to solicit even more business (high-risk loans), Fannie and Freddie are a big reason Mr. Mozillo has driven Countrywide past the CitiGroups and the Wells Fargos to the top of the mortgage heap.”

Some of the names on Mozillo’s Countrywide board-of-directors are astounding. One such person was the notoriously and reliably left-wing Goldman Sachs’ Executive Kathleen Brown (sister of the equally notoriously and reliably liberal former CA Governor, Jerry Brown) and former HUD Secretary Henry Cisneros, who along with Janet Reno sued banks AND lending companies over “unfair lending practices,” using data that actually SUPPORTED the bank’s defense, ALL the data showed that under traditional lending criteria, blacks and whites granted loans had the SAME default rates. If banks were discriminating against blacks the data would have showed that more undeserving whites were getting loans, resulting in a higher default rate among whites. That was NOT the case. In fact, today, blacks and Hispanics have a far higher default rate than whites and Asians.

None-the-less, the Cisneros-Reno team sued. While the CRA only applied to Charter banks, the Cisneros-Reno team “went after EVRYBODY,” noting “We’re not eliminating anyone from the mix here. Lending discrimination will be challenged regardless of where it is occurring.”

With that legal war on banks the Cisneros-Reno team “changed the way American banks did business.” THIS is what paved the way for Cisneros to sit on Countrywide’s notorious board.

The primary and most vital cause of the mortgage meltdown and the subsequent global credit crisis was a toxic and corrosive liberalism, which has fostered a hideous partnership between government and business, driving American businesses to accept a “greater social responsibility” at the expense of business’s first and ONLY reason for being – to make money for its shareholders.

The original charge by Housing Activists like Gail Cincotta and the Rathke’s that “banks and businesses had an affirmative obligation to the poor,” is unfounded, untrue and by any appreciable measure, intentionally harmful to business interests.

The fact that community banks had, at that time, invested, on average, 89% of their lending funds outside those communities was NOT proof of those banks doing anything wrong, quite the reverse!

Banks do not owe their customers/depositors either jobs, a specified share of the loans and investments they make, nor any “share of their profits,” they merely owe them what any business owes it customers - “good business,” in the form of things like lower bank fees, free checking with a set amount in one’s saving account, convenient hours, the best loan rates (for those that meet the traditional lending criteria) etc.

They owe their SHAREHOLDERS (their real owners) far more. Those businesses owe their shareholders their full efforts to make the most money they can. That’s how their shareholders (pensioners, pension funds, 401-Ks, 457s, etc) make their money.

What the CRA did, in effect, was to mandate that these banks become de facto arms of the government’s social services outreach at the direct expense of their shareholder/owners.

In that regard, it turned American banking on its head, by reversing the fundamental purpose of business, FROM solely making the most money, TO promoting a misguided and amorphous “social and economic equality.”

The late Senator William Proxmire (D-WI) in defending and pursuing the CRA even said, “Government through tax revenues and public debt cannot and should not provide more than a limited part of the capital required for local housing and economic development needs...The banks and savings and loans have the funds...If we are to rebuild our cities, it will have to be done with the private institutions.”

That is a disgusting statement, one that lauds a partnership between business and government with government as the lead/directing partner.

In the intervening years, government has increasingly resorted to bailing out businesses and industries for the unfunded mandates foisted upon them by government. As a result, many, if not most in business have come to embrace this partnership and ostensibly support the perverted goals of the “social justice” platform.

So, yes, “private” enterprise played a part in all this via its acceptance (surrender) to this misguided government/business partnership, just as many in the GOP are also guilty of signing onto “the Ownership Society” of Jack Kemp. G W Bush, like Bill Clinton made a major issue of “reducing the black/white homeownership gap,” BUT the primary, fundamental...even FOUNDATIONAL cause of all this remains a toxic, corrosive social liberalism that has deeply infected the political class and their partners in corporate America and its largely corporate media and government sponsored education system.

This self-serving, toxic liberalism views “rule by an (allegedly) enlightened elite,” preferable to the chaos of the free-for-all of the market. This partnership is rooted in Keynesian economic policy, which supposes that government spending, even government-run industries can operate as effectively as privately run ones. This partnership exists to benefit solely the political class and by extension, their partners in business, the corporate media and the government sponsored educational establishment.

The American “Capitalist” system has been increasingly regulated and controlled by the government starting in 1912. As a result, we haven’t had “free market capitalism” in the U.S. since 1912.

The government DID NOT EVER “fail to regulate capitalism” and certainly NOT over the past decade! The G W Bush administration reliably produced over 1,000 new pages of business and fiscal regulation every year, including one of the most expensive and far-reaching pieces of financial regulation ever to come down the pike in the form of Sarbanes-Oxley!

There is ONLY ONE singular cause of the current crisis and that’s the failure of Corporatism – the oppressive and anti-American partnership between business and government.


Joe said...

If I'm in business, my point is to make money...for my shareholders, for my employees and for me and my family. That't the whole point.

If some entitiy (like the government) says I can take chances that I would not ordinarily take (such as lend money to folks who can't handle loan payback) because the government will take care of any shortfall, I'm going to be sorely tempted to take advantage of it, not because I am greedy, but because it make me better able to serve my shareholders, employees and family.

But if I am forced to take advantage of those government offerings, it will not be my greed, my shareholders' greed, my employees' greed or my family's greed that causes problems if things go will be the government's fault.

I have said from the beginning of this financial crisis that its foundation is firmly entranced in the CRA.

WomanHonorThyself said...

The government’s role in the erosion of traditional lending criteria via BOTH regulation AND litigation) IS what caused the mortgage meltdown and the subsequent global credit crisis...yup but what we need is MORE govt!..not!!

JMK said...

"I have said from the beginning of this financial crisis that its foundation is firmly entranced in the CRA." (Joe)

The CRA was a big part of it, since it (1) directed how banks would manage their business and directing banks FROM being concerned primarily about their owners/shareholders (those they reallyb owed) TO placing a primary concern on their local customers....that's a business miodel doomed to fail....AND (2) it allowed "housing activists" like Gail Cincotta of Chicago and Dale & Wade Rathke to petition government overssers to block mergers and new branches if those banks failed to offer enough mortgages to "low income" Americans.

The CRA did exactly what the late Sen Proxmire said it would, turned America's banks into a de facto part of the government's social program.

What triggered the recent profligacy, however, was AG Reno & HUD Secretary Cisneros suing banks that didn't offer enough loans to "low income" Americans and find ways of restructuring those loans to make them more attainable and affordable....another business model doomed to fail....and it DID!

By the late 1990s the feds bailed out America's banks wirth BILLIONS in the wake of their having made $1 TRILLION in high-risk loans to these "subprime" borrowers.

Between 2000 and 2008 those banks were again simultaneously pressured by litigation and rewarded by Fannie Mae's and Freddie Mac's BUYING up the bulk of all this "subprime" debt into making an astounding $4 TRILLION in these "subprime loans."

When governmewnts get involved in ANY businesses bad things almost always follow; take cable TV. Cable contracts benefit local governments at the expense of the customers (who'd all be better served with multiple provider-competition. Those places that have cable competition have consistently lower prices and better service.

But Cable operators don't complain (at least not the ones left standing) because they benefit from their government-granted monopoly status. Same with bankers, they've been more than willing to become enthusiastic partners with government and even become a de facto arm of government's social services bureaucracy...AGAIN for their high-risk loans being bought/guaranteed by government (with taxpayer money, of course) and the never-ending bailouts to pay for their "mistakes."

It's a good deal for everyone EXCEPT the people....the taxpayers.

JMK said...

THAT is the way much of the news media has spun this Angel. When government intervention fails, they reflexively blame the (non-existant) "free market." America hasn't had a free market since 1912!

Even the recent debt build-up....the media and so many liberal stooges get it all wrong, on the one hand blaming Bush for his "deregulation and free market failure," while at the same time pointing to GW's own massive debt build-up (a sum that pales in comparison to the first year of the current administration).

Those views are insanely self-contradictory. Fact is, G W Bush presided over an administration that delivered over 1,000 new pages of regulation every year, including one of the most expensive and far-reaching pieces of financial regulation - Oxley-Sarbannes. Bush spent more (even adj for inflation) on reckless and needless social spending than even LBJ did!

G W Bush's primary flaw was his ddiction to government-spending and Keynesian economic policies.

But because the political class and the bulk of the media didn't understand the roots of this crisis, they blamed it on a non-existant free market.

As a result, we've followed up 8 years of Keynesianism with what is best called HYPER-Keynesianism!

Unknown said...

The best option these days to unlock the value of your home involves taking out a lifetime mortgage plan, equity release schemes will let you borrow money against the value of your home with the debt being repaid from its sale only after your death, seem an attractive solution to many cash-poor, asset-rich retirees.

JMK said...

The tragedy there Tony is that those "reverse mortgages," in effect, cede the mortgage-holder's ownership to another entity.

When there is no equity in a house, the owner, is pretty much tethered to that can't move if you can't sell and you can't sell if you can't get at least what you put down on it back out, or even worse, if it's "under water."

Moreover, a LOT of those "reverse mortgages" are like those vehicles that cash out annuities and long-term settlements, they cash you out, etc., but at a greatly reduced rate.

There's no other way for them to make money....they've got to figure that their bet (that these things will be worth more down the road) is better than the bet their customers make (I'd rather take what I can up front, right now).

Nothing illicit about any of that, but it's incumbent on those who enter such arrangements to do their own extensive research and "due diligence."

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