The Real Scandal: How Feds Invited Mortgage Mess
Countrywide Financial heads towards bankruptcy
Thomas Sowell, on the subprime credit crisis:
The government has brought on the housing problem, partly by these very low interest rates, which encouraged many people to go way out on a limb. They’ve brought it on by highly restrictive building policies, which have caused housing prices to skyrocket artificially. And they’ve brought it on by the Community Reinvestment Act, which presumes that politicians are better able to tell investors where to put their money than the investors themselves are. When you put all that together, you get something like what you have.
Stan Liebowitz, Professor of Economics, University of Texas at Dallas, writing in yesterday's NY Post:
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.
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.
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.
Ironically, 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 (see chart above of Countrywide's 90% stock decline).
The government has brought on the housing problem, partly by these very low interest rates, which encouraged many people to go way out on a limb. They’ve brought it on by highly restrictive building policies, which have caused housing prices to skyrocket artificially. And they’ve brought it on by the Community Reinvestment Act, which presumes that politicians are better able to tell investors where to put their money than the investors themselves are. When you put all that together, you get something like what you have.
Stan Liebowitz, Professor of Economics, University of Texas at Dallas, writing in yesterday's NY Post:
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.
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.
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.
Ironically, 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 (see chart above of Countrywide's 90% stock decline).
12 Comments:
Thats something that hasn't been discussed NEARLY enough by the MSM and it won't be.
The funny thing is the same "civil right leaders" that criticized lenders for being too stringent in their lending practices are now criticizng the same lenders for being irresponsible.
Economically speaking, the left is just one big contradiction.
Machiavelli999
I can't believe that you actually believe that left leaning people would advocate loaning money to people without income verification, without asset verification and without verification of their ability to repay the loan.
The subprime crisis was caused by pure fraud.
Just watch the headlines in the coming months and years as this debacle plays itself out.
Public policy can often have unforeseen consequences which result in the opposite effect from the one intended. Another aspect of this crisis is the little known role played by the Basel rules.
Several years ago, the international banking rules (referred to as the Basel rules) were modified to increase capital requirements for conventional loans & mortgages. The new capital rules did not, however, apply if the loans were held in a bundle of loans (ie. as securities). What resulted was a proliferation of securitized products.
Rather than strengthening the international banking system as intended, this new rule has helped to weaken the international financial system by encouraging excessive leveraging.
The basic principle of economics is that people respond to incentives.
"The subprime crisis was caused by pure fraud".
Sources...
Pure fraud? Nothing else? Not signing an agreement for a loan at the maximum value approved with an adjustable rate that could only go up. Not one person did this. They were all duped?
Even if so, isn't it still THEIR reponsibility not to LIE about their income in order to secure these loans? They lied about their income, the lenders did not catch it, and somehow, the lenders are the only responsible party? If someone committed fraud in this scenario, isn't it the lendees that lied about their income?
Sources...
Call me a "fly-on-the-wall" you will see the stories more and more in the news.
Pure fraud? Nothing else? Not signing an agreement for a loan at the maximum value approved with an adjustable rate that could only go up. Not one person did this. They were all duped?
If a lender or a borrower enters into an agreement and either one of them is aware or should be aware that the agreement can not be fulfilled for what ever reason then the party or parties that were aware or should have been aware of such shortcomings but who proceeds with the agreement anyway is committing a deception for personal gain and that is the essence of fraud.
Even if so, isn't it still THEIR reponsibility not to LIE about their income in order to secure these loans? They lied about their income, the lenders did not catch it, and somehow, the lenders are the only responsible party? If someone committed fraud in this scenario, isn't it the lendees that lied about their income?
Whoa don't get all defensive on me I didn't say that the lenders were solely to blame. But if you look at how this debacle was possible it could not have been pulled off without deception from at least one party to the transaction and that includes the borrower, the broker and the lender plus other miscellaneous players including the analysts on Wall St. that gave higher than possible ratings to the securitized loan packages.
Remember the essence of a fraud is a deception made for personal gain.
Tell me that the subprime crisis wasn't based upon deception for personal gain.
"I can't believe that you actually believe that left leaning people would advocate loaning money to people without income verification, without asset verification and without verification of their ability to repay the loan."
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Maybe, if that's the only way a protected minority can get to own property. But now we know that it doesn't work in the long-term.
"If a lender or a borrower enters into an agreement and either one of them is aware or should be aware that the agreement cannot be fulfilled for whatever reason then the party or parties that were aware or should have been aware of such shortcomings but who proceeds with the agreement anyway is committing a deception for personal gain and that is the essence of fraud".
A lender is unaware an applicant cannot fulfill his obligations, but despite the paperwork presented, he should have been aware and is therefore party to fraud when the borrower defaults. It seems that you argue that most of the lenders should have been aware that the applicants could not have repaid their loans. How can this be known? I have seen no data. I would agree some lenders were negligent in verifying applicant paperwork. Did some lenders also commit fraud? Yes. However, did some perform reasonable diligence to check applicant financial statements? I believe so, and I am just going to use my fly on the wall source.
I suppose, if you choose to define fraud as being committed anytime a default occurs, because the lender should have been aware of the end result, then, yeah, the whole mess is due to fraud. Realistically, I believe the crisis is due to borrowers attempting to live beyond their means, being financially ignorant, and making poor decisions.
The ironic thing about it is everyone thinks the same weasels that had the power to stop it and didn't are now the ones how are going to fix it.
While fraud is a factor, many of the sub-prime problems are concentrated in areas where house prices have outpaced income ie. California. If the average home is too expensive for the average family, guess what happens...someone develops a product to meet the customer's need, a product that makes home ownership more affordable.
When home prices fell and interest rates started to rise, any homeowner with a variable rate mortgage found that:
1. they could not afford the payments
2. they could not refinance because their house was worth less than the principle of the mortgage.
In this perfect storm scenario, the homeowner who has no principle invested in the home is better off defaulting on the mortgage.
With regard to what factors make housing prices rise, Ed Glaeser did a comprehensive study on this subject. Glaeser's data confirms that increased zoning restrictions is a significant factor in raising prices as demand exceeds supply of houses. Another factor was climate which one cannot blame on public policy. People prefer living in Arizona to living in Chicago. His full report is available on his website at Harvard.
Blaming muncipal planners or social activists or irresponsible lenders or financially illiterate homeowners tends to miss the point that the sub-prime problem is a highly complex problem. If we do not understand the problem, it is unlikely that we determine the approach that would best resolve the crisis.
I really enjoyed and appreciated this article. It made some good points. The idea that government is responsible for providing "affordable" housing is ridiculous. Let the market set the price. Subsidizing mortgages so that lower class people can buy homes they can't afford is unfair to society. And a legal system that "encourages" or strong-arms lenders into relaxing standards for "disadvantaged" communities i.e. blacks is unfair. Look at some of the cities with the highest foreclosure rates - like Detroit, Tampa, Compton - all cities with hardcore populations of permanent black underclass. "Community development" and "community reinvestment for the disadvantaged" - what scams.
And a legal system that "encourages" or strong-arms lenders into relaxing standards for "disadvantaged" communities i.e. blacks is unfair. Look at some of the cities with the highest foreclosure rates - like Detroit, Tampa, Compton - all cities with hardcore populations of permanent black underclass. great article. great thoughts.
You cannot tell me that a homeowner would knowingly enter into a mortgage agreement where he/she knew that his/her mortgage payments could rise at such a rapid rate that they could not pay them, increasing over 200% in a matter of a few years. These people were all lured into signing an agreement by seductively low interest rates without understanding the full ramifications of the agreement. There was most certainly fraud and deception involved on the part of these mortgage companies. Such fraud and deception SHOULD be illegal. Unfortunately, the power elite who run this country (most of them bankers)also pull the strings of many in the U.S. government.
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