Deep in the liberal alternative universe of mortgage lending

NY Times Editorial:

The mortgage crisis that has placed millions of Americans at risk of losing their homes has been especially devastating for black and Hispanic borrowers and their families. It seems clear at this point that minorities were more likely than whites to be steered into risky, high-priced loans — even when researchers controlled for such crucial factors as income, loan size and location.

The Congress that takes office in January can start to deal with this problem by strengthening fair-lending laws, especially the Community Reinvestment Act, which encourages fair, sound lending practices while requiring banks to lend, invest and open branches in low- and moderate-income areas.

Lawmakers should also extend that law to cover the often fly-by-night mortgage-lending companies that helped drive the subprime crisis. Those companies saddled entire neighborhoods with risky, high-priced loans that borrowers could never hope to pay back, sold those loans to Wall Street and then went out of business.

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The need to revisit fair-lending law is evident in numerous studies of federal lending data. A particularly striking analysis in 2006 by the National Community Reinvestment Coalition found that nearly 55 percent of loans to African-Americans, 40 percent of loans to Hispanics and 35 percent of loans to American Indians fell into the high-cost category, as opposed to about 23 percent for whites. There also were troubling gender differences. Women got less-favorable terms than men.

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The Community Reinvestment Act was actually the cause of the problem along with Democrat coercion of lenders to make irresponsible loans to people who could not afford them. The problem was that most of the bad loans were to people who could not meet objective standards such as the total monthly payment should not exceed one-fourth of the total monthly take home pay. Lenders apparently responded to having to drop such standards in order to meet the quotas forced on them by the CRA by raising the rates which did not solve the inherent problem.

Any revisions of the CRA should do away with quotas and reimpose objective colorblind standards. I am not sure the Times has that in mind since their rhetoric is too close to the thinking that got us in this mess to begin with.

Harvey Golub provides a rational look at how we got in this problem. One of the problems with the Times universe is it makes the irrational assumption that lenders wanted to lose money by lending to people who could not afford the loan payments.

Golub explains how we got in the mess.

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To begin to understand today's problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers -- i.e., people without sufficient documented income or employment history and little or no savings or credit history.

The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.

The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism.

The standards applied to these subprime loans began to be applied to what heretofore had been prime borrowers who also increasingly became overextended. But, as housing prices increased, owners cashed out their equity and bought cars, appliances and other items, including using the freed-up equity to pay for everyday living purchases. Over the past decade alone, U.S. households have taken on some $8 trillion in debt, bringing the nation's current consumer debt load to $14 trillion.

This cynical and unsustainable cycle was abetted by mortgage originators who had little interest in making sure loans were good quality, investment banks that securitized and packaged these loans, rating agencies who forgot fundamental laws of gravity, and purchasers who bought securities they could not possibly understand. This was fueled by borrowers who committed fraud and bought houses, or speculated in them, when there was no realistic chance they could afford them.

All of this led to a huge overleveraging in the consumer market....

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There is much more. His prescription for getting out of the problem makes more sense, but we are dealing with a Democrat Congress and President so there is little reason for optimism. I think they are more likely to screw things up and make it worse.