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The EditorsFebruary 22, 2010

In the aftermath of the housing crash of 2008, many analysts identified the cause as government policies aimed at expanding home ownership in the United States, particularly among U.S. communities that in previous generations had been locked out of the American dream house by mortgage redlining. The Community Reinvestment Act of 1977, meant to force banks to lend to the African-American and Latino “high risk” communities, was frequently pointed to as a culprit. But is the case against the C.R.A. really so solid? Even if it were, how should that affect national policy on home ownership going forward? Is the value of home ownership for all Americans still worth promoting?

The “blame the victim” narrative of the Great Recession may be more reliant on ideology than facts. More than 80 percent of the boom years’ problematic subprime loans were not even issued under C.R.A. regulations, and homeowners with C.R.A. mortgages have defaulted at a lower rate than other mortgage holders. The economic earthquake of the foreclosure crisis, which, if the C.R.A. were truly to blame, should have been domiciled mostly within U.S. urban communities, has been for the most part geographically specific, with regional centers in California, Florida, Illinois and Nevada accounting for about half of all foreclosures. It is true that some minority communities are experiencing higher rates of foreclosure in this crisis, but that is due more to the nature of the loans they received than to federal policies aimed at promoting home ownership among minority groups.

Low-income communities, exploited as opportunity zones for predatory lending, ultimately endangered the originating banks as much as they did the homeowners. Shaun Donovan, the secretary of Housing and Urban Development, has called those loans “a targeted scourge on minority communities.” Donovan reports that 33 percent of the subprime mortgages given out in New York City in 2007 went to borrowers with credit scores that should have qualified them for conventional and more affordable prevailing-rate loans.

But there was no federal regulation that required “zero down, interest only” and “teaser” loans destined to detonate later under the inexperienced and unwary. No government policy ever demanded that bankers abandon due diligence and caution in mortgage lending; but agog at remarkable quarterly profits generated by the subprime market frenzy, bank executives and shareholders did exactly that. Aggressive brokers pushed adjustable rate mortgages on novice homebuyers with a wink and a nudge, suggesting they merely refinance when the ruinous interest rates kicked in, not warning them that this could prove impossible. Others were sold on interest-only mortgages with the naïve expectation that home values moved in only one direction: up.

As the nation emerges from its housing hangover, the temptation is strong to lay too much blame on the subprime mortgage holders who threw the spark to the tinder in 2006. Certainly tightening procedures on the streets where they live and where this crisis began is not a bad idea. Just as surely it is not enough to prevent a similar economic scorching in the future. We would be setting ourselves up for false security even as we condemn working-class American dreamers unjustly. Many may have signed mortgages they did not understand, but how many “analysts” on Wall Street recommended complicated derivatives and subprime mortgage packages they did (and do) not understand and whose risks they blithely and negligently ignored?

As a nation we responded to this crisis by bailing out banks and leaving soon-to-be ex-homeowners twisting in the historic downturn. Now, as the officers of the big banks insist it is time for them to get back to “business as usual,” which apparently means transferring risk to the taxpayer, little good can be achieved by further diminishing the reach of the C.R.A. Surely it would be more reasonable to recognize that the era of self-regulation, whether among the investment scions of Wall Street or the predatory mortgage writers at your neighborhood commercial bank, must end.

Broad-based homeownership remains a worthy goal for a nation reliant on a sturdy middle class to hold its ends together. It may surprise many to learn that in spite of foreclosure rates almost triple the norm, U.S. home ownership at 67.2 percent remains near historic highs, and the rate of home ownership among minority communities likewise remains at levels never seen before.

It would be a great injustice if one of the few groups forced to “reform” because of this debacle were the working class families who had finally been able to open the door to their American dream.

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Mike Evans
14 years 4 months ago

Finally someone dares to admit that it was not the CRA, Fannie or Freddie that made greedy banks and mortgage brokers originate and approve loans with no documents, bogus appraisals, rip-off teaser rate terms and general misrepresentation of all the facts to victim borrowers. It was also those same greedy investors who precipitated the huge collapse in property values by irresponsibly dumping Repos and mismanaging the entire foreclosure process. It is still these now bailed out entities that refuse to negotiate loan modifications or approve short sales leading to more and more people simply walking away. Perhaps if a few criminal charges and class action suits were filed, we might wake these snakes up! Look at the lack of utilization of FHA loans with strict property, credit and loan standards. The entire balloon and bubble was due to lender greed and borrower obsfuscation.

John Persico
14 years 4 months ago
I am glad you have corrected the facts on this issue. I have heard too many repeat this lie that the "victims" are to blame for the meltdown and subsequent recession. The one way I do believe many of us are to blame is for our excessive debt and credit spending. I read the average American was spending five percent more than they earned for a substantial number of years. However, the credit card companies, not to mention ads and consumer culture all endorse the "shop until you drop" mentality which has certainly (or certain to me), become excessive. We all need to live within our means, but it will take a major culture change and systemic changes to make this happen. I still am waiting for these changes. John
John Walton
14 years 4 months ago

I checked my JP-II era catechism and don't find lack of financial foresight to be a sin...that's not my original thought but it was used, loosely translated thusly,  by one of the profs at my alma mater in an address last week...pretty apropos, huh?

Here's a paradox - most mortgages written under standard credit terms prepay at faster rate when interest rates go down.  Subprime mortgage loans, on the other hand, prepay when rates moved up, down or sideways!  This owes to the relationship between generally better economic circumstances and higher interest rates.  When the bread-winner gets a better job, they refinance - and this can be when rates are high.  Sub-prime mortgage securities are thus much harder to model than conventional.  When the economy was operating under the "Pax Bushicana" and volatilities were very low, market participants were lulled into a false sense of complacency and under-priced the product.  This won't happen for another 8 to 12 years, but it will happen again.

In a comprehensive survey of banking institutions by the Federal Reserve Board of Governors, it was found that CRA residential loans were barely profitable to money-losers.  The loss experience of CRA "business" loans was much worse than loans written in the ordinary course of business.

If, as a society, we wish to make banking less risky we should rid ourselves of deposit insurance and encourage investment banks to return to general partnerships.  We need the guys in suspenders discretely toddling off to Bridgehampton or Sharon every summer weekend, knowing full well that a mistake can sink their firm.

C Walter Mattingly
14 years 4 months ago

In my opinion, this editorial does not give a full, accurate description of the situation.  Concerning Frank's directive to Fannie and Freddie to make loans with no down payment, a fundamental rule of good banking was thereby violated. Not only do down payments reduce risk for the bank and the borrower, but the simple fact that a borrower could save up 20% of the value of the mortgage indicated that he had proven to all concerned that he could actually save more than he spent. No money down waives the requirement for this proven discipline, which is essential for anyone to pay back a debt of any kind. While WAMU, the largest private mortgage lender for housing, should have chosen not to go down that path, they were pressured to match Fannie's terms or lose their business. This sort of distortion of the market by federal intervention causes serious problems.

Yet the larger problem, much more related to defaults, is the fraud committed under what has come to be called liar loans. The magazine Slate described the problem this way. "The vast majority of the people who took out (liar loans) exaggerated at least a little. Most lied a lot. And it's likely that most of the liar loans-including those given to people with excellent credit histories-will go bad. 3 out of 5 borrowers overstated their incomes by over 50%!" These were typically people with good credit scores, average of 705. Slate continued. "Clearly, amazing degrees of stupidity and mendacity were involved. These folks earned $3,000 a month and had mortgage payments of $2700. Was it so hard to see this was a mistake?"

It seems to me that many of these borrowers knew very well what they were doing-speculating that the housing bubble would continue and they would make a killing when the value of their house doubled. Appreciation would bail them out. Like the worst of Wall Street executives, they were guilty of greed and dishonesty. Add together the command by Frank and associates to make loans using proven bad banking judgement and this much larger number of liar loans and together you have a huge part of the mortgage banking fiasco accounted for. You also have a good guess as to why fraudulent acts and statements were not prosecuted more aggressively in the aftermath of this crisis: 90% of the individuals guilty of fraudulent statements and acts were likely the mortgagees.

Do we really want to reward those who gambled, lied, and now are in danger of losing their investment? Do we want to reward fraudulent signed statements? At the very least, those who falsified their income to obtain the loans should not be subsidized in their deceit by the taxpayers.

Mike Evans
14 years 4 months ago

Walter continues the popular 'blame the victim' approach and accuses them of lying to participate in a gamble for the future. Any detailed and reasonable analysis of loans in default and the resultant foreclosure crisis would largely disprove this. Banks were and continue to be in the driver seat. Their behavior ala Country-wide, Wamu, Indybank et alia was to simply make as many loans as possible at any cost. Most were not able to be FHA insured (with minimum down payments) or resold to Fannie or Freddie. They were repackaged and sold to domestic and foreign investors looking for high rates of return by originators who had already made their profits in discount points and loan fees.

Jack proposes a return to frontier days of zero regulations, exactly the opposite of the measures that saved the banking system in the 30's.

C Walter Mattingly
14 years 4 months ago

Deacon Mike, first thank you for your service to our church.

To consider whether those who falsified their incomes to obtain loans they couldn't afford were victims or offenders, consider an analogy from high school years. The teacher who is giving a test to his students leaves the classroom during the test to use the restroom. Poor judgement, for sure. As soon as he leaves, 57% of the students start pulling out their textbooks, exchanging answers, etc. The other 43% don't cheat. Later, it is discovered by their answers who cheated and who didn't, and the principal advises the teacher that the students who cheated should be given F's on the test.

The students who cheated and got F's complain that they are victims because their teacher should not have left the classroom and left them unproctored so they could get away with cheating. Therefore they were victims who should not be accountable for their cheating. What do you think these students were, victims who were taken advantage of by their teacher, absolved of responsibility for their cheating, or students who cheated, got caught, and were justly punished?

And Barney Frank, to stretch the analogy, created a situation with no down payment and artificially low or even negative initial amortizations encouraged that set up many borrowers for failure. Granted this was a disastrous move, but the mortgagees still are responsible for meeting those conditions, unless they were mentally incapable of understanding their committments, which changes the situation.

What caused our mortgage problems were bad regulations as well as deregulation, coupled with greed from lenders and borrowers,  mostly middle class economically. Bottom line: I am in favor of assisting those mortagees caught up in this, but not those who committed fraud on their applications. There is a difference, after all, between guilt and innocence.

C Walter Mattingly
14 years 4 months ago

I would take issue with a statement in the above comment which I think incorrectly characterized what I wrote: "As Walter stipulated, fraud perpitrated on financially unsophisticated borrowers is just that, fraud, and is a non-starter in this conversation."

If fraud was perpitrated on any borrowers, I would be very much in favor of bringing those lenders to justice. But what I actually stated was that the fraud in liar loans is committed by the fraudulent statements of income by the borrowers, not necessarily the lenders, unless they told them they could lie about their income. Furthermore, if what Slate magazine says is true, 57% falsified their income by over 50%, the fraud was not inconsequential to but seminal to the problem. Finally, if Slate is accurate that the average credit score of these borrowers was 705, a good score which takes time to establish, they were not likely ignorant of basic rules of finance, such as you must pay back the mortgage, which payment must come from your real, not false, income.

And my thoughts on the issue we are all concerned with, who and how do we help those who have suffered from this mortgage bubble and subsequent collapse, is that we should consider whether or not we wish to extend taxpayer dollars to those whose fraud caused their difficulty in the first place. I personally don't think we should reward those activities, but rather think we should concentrate our efforts on those who are innocent of such shenanigans.

William SMITH
14 years 3 months ago

I agree with Walter...there has to be a personal acceptance of responsibility here.  The editors are way off base.

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