Subprime Scapegoats

[Joanne98]

Boston Globe Editorial

AMID A GLOBAL financial crisis that began with unsustainable loans to people with bad credit, it was only a matter of time before apologists for Wall Street excesses would try to pin the blame on the poor - and on government policies meant to help them.

Sure enough, the Community Reinvestment Act has emerged in recent weeks as a favorite target of conservatives and others who oppose any government intervention in the market, for it requires banks to lend in neighborhoods they might otherwise avoid.

And yet the Community Reinvestment Act has nothing whatsoever to do with the subprime mess.

The law applies specifically to commercial banks, which in recent months have been the least volatile part of the financial-services industry. The measure was passed in 1977 to combat redlining, the practice of banks refusing to write mortgages in poor neighborhoods - even when they were taking deposits from residents of those neighborhoods.

To meet Community Reinvestment Act requirements, banks do make loans to low-income homebuyers - often in concert with community groups that provide financial advice and other crucial training. While banks at first had to be "dragged into participating," said Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, loans made under the auspices of the reinvestment law have performed remarkably well. One key initiative of this sort, the state's SoftSecond mortgage program, has a delinquency rate of 1.8 percent - compared with about 5 percent for all mortgages in Massachusetts.

The subprime mortgages that have failed left and right are the antithesis of the carefully designed, well-supervised loans provided by tightly regulated banks. No law forced a mob of unregulated lenders to make loans in poor neighborhoods. Rather, mortgage companies and Wall Street financiers saw a business opportunity in subprime lending, where the risk of default was high but so were the interest rates.

Never mind that subprime mortgages were once considered as disreputable a business as check-cashing stores and payday loans; big-time investors took a keen interest once the potential rewards became clear. When financial firms began buying up and bundling mortgages, redividing them into securities, and selling them off, individual brokers had no incentive to make sure any given mortgage would be sustainable if housing prices fell.

Far from being forced to write new loans, brokers competed to sell home mortgages to lower-income customers. Nadine Cohen, a senior attorney in the consumer unit of Greater Boston Legal Services, has a client who had been living in public housing in Cambridge for $350 a month - before getting a $500,000 home loan.

In that case, as in so many of today's mortgage horror stories, the lender wasn't a traditional bank. According to Callahan, 98.4 percent of the subprime mortgages in Massachusetts in 2006 were made by lenders whose operations in the state are not subject to the Community Reinvestment Act.

To be sure, the act isn't the only vehicle by which government officials have sought to influence lending behavior. President Clinton and his Housing and Urban Development secretary, Henry Cisneros, did seek to raise homeownership rates among low-income and minority buyers. Fannie Mae and Freddie Mac, the two government-chartered mortgage wholesalers whose practices were closely watched within the lending industry, did face political pressure to ease their lending standards.

But those were hardly the only factors behind lax lending standards. There was enormous pressure within the marketplace. As The New York Times recently reported, Fannie Mae was losing business because of competition from Wall Street and elsewhere, and mortgage lenders and Fannie Mae's own shareholders were pushing the firm to dive deep into the subprime loan business.

The subsequent meltdown of the nation's entire financial system could not have happened without a huge - and entirely voluntary - inflow of money from Wall Street into a sketchy sector of the mortgage market. Nobody forced investment firms to wager billions of dollars directly on these loans, or to build an elaborate web of complex financial transactions dependent upon their continued performance. But they did.

The recent animosity over the Community Reinvestment Act, in short, simply can't be explained by the facts. Among the law's critics, there's more than a whiff of social Darwinism - the certainty that only a government policy aimed at helping losers could lead the whiz kids of Wall Street so far astray. Hogwash. The current financial crisis grows out of loose regulation that gave big investors plenty of freedom to make foolish bets, and then force their losses upon the taxpayers.

http://www.commondreams.org/view/2008/10/11-5

[Stellabella]

1. Leave it to repukes to try to find a way

to blame this mess on poor minority individuals.

Party of personal responsibility, my ass. They shirk responsibility for EVERYTHING, and always have. They only want the other guy to be responsible, not them.

[ColbertWatcher]

2. For the GOP, this is the financial equivalent to "affirmative action." n/t

[Igel]

3. I remember the '90s.

A few regulations came out of it, but a lot of pressure because of threatened new regulation came out of it. This had the desired effect, just as pressure on universities to use more of their endowments had the desired effect last spring.

"No law forced a mob of unregulated lenders to make loans in poor neighborhoods" is perfectly valid; fear of regulation and laws, however, had a role to play. Quantifying it is difficult. A desire to show "community sensitivity" when it came to regulatory action requiring hearings also played a role. Of course, this wasn't all of the story. But it was part of the story, if you bother to remember the newspaper accounts from, oh, '93 to '97 and beyond.

"Rather, mortgage companies and Wall Street financiers saw a business opportunity in subprime lending, where the risk of default was high but so were the interest rates." This is true, but one important role was the issuance of the first mortgage-backed security in '97; having the regulations rewritten to allow a variety of interest rates also played a role (but immediately those with poor credit, often minorities, were given higher interest rates, and that created another race-based outcry).

Those banks that were small and couldn't afford the one-time write-down on selling their mortgages for bundling into derivatives didn't sell them nearly as often, and couldn't continue to issue risky loans; they're praised now for their morality in doing what was merely expedient at the time. Larger banks could take the one-time hit in exchange for being able to continue to recycle loan money; they also did what was expedient.

Much of the problem would have been impossible without the differential lending rates that were allowed, primarily, the regulators and Congress said, to help those with marginal credit, such as the poor and minorities and first-time buyers get mortgages. Greater risk without the possibility of greater return was a ultimately losing option; avoiding pressure from community groups and Congress was one kind of limited return on investment, but $s were a greater kind of return. When this was allowed, however, non-minority, non-poor loan applicants with bad credit were suddenly in line for subprime loans. The intention and the consequence aren't the same. It's one reason for Fannie Mae/Freddie Mac's accounting for a low percentage of buying risky loans late in the game, but upwards of 40% of them in '03; the loan purchases by the FMs didn't decrease much in the following year or two, but purchases and loan originations by other banks increased greatly. (The %s disguise the reality.) So while it's trivially true that private lenders account for most of the loans originated (since the FMs actually originate no loans), it's also true that the sheer quantity (in dollars) of loans to minorities/poor after '03 was dwarfed by loans to others, whether corporate or private.

The housing bubble also played a role. It made everybody--from Franks to Raines to the Treasury secretary under * see no problem and reject calls for greater regulation. You get in mortgage trouble, you sell, and the mortgage problem's gone. Only when housing prices levelled off did a problem appear; when housing prices fell, the problem became intense.

How you characterize the subprime, risky loans from '93 to 2006 varies with time; the analyses usually are from '05 and '06, very late in the game, when loans to the poor were dwarfed by other subprime loans. Early in the game the characterization would be different. The FMs were praised for their work, in the late '90s, specifically in helping minorities and the poor get into houses.

So where does blame fall? On regulators and Congress, for pressure, to help the poor and minorities by disposing of redlining and perceived disciminatory practices. Then on regulators and Congress for making lending easier to those with poor credit, intended to help the poor and minorities. Then on regulators and Congress for making mortgage-backed securities possible and relatively unregulated; I tuned out by then, and don't know why they did this. Then on bankers and investors, seeking the maximum return on an investment that was legally offered, and deemed essentially risk-free because of the housing bubble's virtual guarantee that foreclosure wouldn't entail a loss of capital. "Investors" are both rich people, as well as pension fund and endowment managers, those handling huge personal portfolios and those managing mutual funds.

How do people apportion the blame? Depends on their politics. They can pick the proximat cause, which is going to be the housing bubble's bursting. They can pick the wealthy, because we don't want to blame those we sympathize with. They can pick the poor, because we don't want to blame those we want to be part of. They can pick the Clinton administration's rule-rewrite because, well, they don't like Clinton. They can focus on the dem Congress' pressure on lenders to avoid even the appearance of racism, because they're repubs; or on the repub Congress' laws that contributed to the problem, because they're dems. All want a part of the problem to be the entire problem, and other parts of the problem to be whitewashed from the narrative.

I see people saying that the 1977 CRA can't be involved because it was from '77. It was involved, indirectly, even though banks covered by it per se bear but a small portion of the responsibility, because it formed the rhetorical and administrative basis for much of what happened in the '90s. What happened in the '90s and early '00s--just before each large uptick in either risky loans, mortgage securitization, or increase in quantities of such such securitization, bears greater blame. And one such "happening" has to do with CRA-like argumentation and the threat of altering and extending the CRA, another has to do with a rewrite of CRA *regs* (not a change in the law), another has to do with a change in financial regulations, a fourth has to do with a law that is completely (on paper) unrelated to the CRA but deals instead with interest rates, and a fifth is ever-increasing house prices. You can argue that a specific cause doesn't account for the problem so therefore it's not part of the problem, but that's a kind of argumentation that invariably always shows that for any complex disaster there can be no responsibility apportioned because there's no one, single cause (and constitutes a kind of fallacy, all-or-nothing). Similarly, we hear that investors that pursue their self-interest in issuing bad loans or in buying risky mortgage-backed securities are evil, esp. if they didn't understand the consequences; the actual homeowners who pursue their self-interest in taking out such loans, esp. if they didn't understand the consequences, are victims. I figure each group is both, as I'd have expected in most situations.

As for allocating % blame, I'm not sure that's possible without very specific and probably insanely silly assumptions. Some require precision, justifiable precision, before they'll admit that actions in line with their beliefs and values could possibly lead to something undesirable, but it just ain't happening.