Our Lot focuses equally on the misdeeds of both capitalists and leftists. But I won’t give the boiler room boys as much attention in this review because they’re a more familiar tale, while Katz’s reporting on the role of her side is compelling “testimony against interest“.
Katz is remarkably frank about how government programs and political pressure to boost minority homeownership helped blow up the economy. She’s particularly good at explicating how leftist housing activists, such as ACORN and Gale Cincotta, the godmother of the Community Reinvestment Act, worked with Democratic politicians such as Bill Clinton, HUD Secretary Henry Cisneros, and Jim Johnson, CEO of Fannie Mae, to lay the groundwork for the Bubble and Bust.
Katz doesn’t devote quite as much depth to the Bush Administration’s culpability (which, to my mind, is even greater). Perhaps she lacked Republican contacts to give her the kind of inside story she got on her own party’s mistakes.
Still, Our Lot makes clear that on housing policy, the Clinton-Bush years form a single continuum with one overarching plan: boost the minority homeownership rate by lowering credit standards. I call it the Era of Multi-Culti Capitalism.
And there’s little reason to think that its lessons have been learned yet.
Fortuitously for me, Our Lot fills in the political backstory of my own in-laws’ lives. My wife grew up in Austin, which had been a peaceful, densely populated working class where small children could play safely on the crowded sidewalks. Suddenly, in the late 1960s, middle class blacks began buying into the neighborhood.
Friends warned my late father-in-law, a classical musician and union leader, to flee, that underclass blacks would follow. But he and my late mother-in-law, a schoolteacher, resolved to show that integration could work.
After my future wife was mugged twice and her younger brother once, however, my in-laws finally sold in 1970—losing half their life savings. They moved 63 miles out of Chicago, to a dilapidated farm where they lacked running water for their first two years. (And my father-in-law started voting Republican.)
How did this disaster hit Austin? Katz demonstrates that it was the direct result of a 1968 change in the Federal Housing Administration, which set off a bubble and bust in America’s inner cities, like a smaller precursor of this decade. As in 2005,
“In 1972, in Chicago and in every other city in the nation, almost anyone could get a home mortgage, including borrowers who didn’t earn enough to pay them off, on just about any house, for any reason. … And just like the recent adventure in lending beyond any rational limits, the mortgage disaster of the early 1970s was born from a lofty ideological conviction that enabled the basest of crimes and most foolish of gambles under its cover, insulated from almost any scrutiny until the damage was already done.”Franklin D. Roosevelt had started the Federal Housing Administration to insure home loans, and Fannie Mae to buy loans from lenders. Together, these agencies created the familiar template of 30-year-year fixed rate mortgages with a moderate down payment that underpinned the growth of home-owning suburbanites after WWII.
FDR’s FHA, however, was reluctant to back loans in black neighborhoods—a practice that Cincotta later dubbed “redlining”. Eventually, in 1968, liberal Illinois Republican Senator Charles Percy and the Johnson Administration revamped the FHA in a more politically correct direction. Katz explains:
“The FHA was now, in effect, a front in the War on Poverty. … Under the new regime, homebuyers living in Chicago and other inner cities weren’t just eligible for loans. Lenders who signed up to sell FHA-insured mortgages were asked to do everything they could to make sure the buyers got them.”Of course, the results of the Federal government’s encouraging mortgages with down payments of never more than $500 were absolutely predictable:
“Across the country, neighborhood destruction became a booming business, financed by the federal government. In Chicago they called it ‘panic peddling.’ In New York, it was ‘blockbusting.’ … The FHA-insured loans threw gasoline on that smoldering fire. … Indeed, the insurance made it profitable to seek out the most impoverished and unreliable borrowers, since the sooner a borrower defaulted on a loan, the more quickly the lender would get paid back in full by FHA.”In Chicago, Gale Cincotta started a national coalition of “community activists”, who helped pass the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977. Cincotta remains a heroine to the author, although she can’t quite make clear Cincotta’s logic. If the feds encouraging lending to minorities had destroyed Austin, how was more hair of the dog that bit you supposed to fix Austin?
Sadly, Austin remains unfixed. On a visit to Chicago earlier this month, my wife drove by her old house. Her former home had no doorknob, just an empty hole in the front door. But at least it was still standing, unlike two large apartment buildings on her old block, which are now just crabgrass-covered vacant lots.
Cincotta died in 2001—across the municipal border from Austin in Oak Park. In telling contrast to Austin, that prosperous suburb that had succeeded in saving its famous district of Frank Lloyd Wright homes (where my father was born in 1917) by limiting the number of blacks allowed to move in through its notoriously illegal but effective “black-a-block“ quota.
Katz notes that Cincotta’s organization of the left, combined with the invention of mortgage securitizing by investment banker Lewis Ranieri in 1983, made possible the disasters of this decade.
Cincotta began siccing her “pushy capitalist radicals” on Fannie Mae, which remained reluctant to buy the dubious mortgages of likely deadbeats. Still, Katz writes, “The reality was that to meet its growth objectives, Fannie Mae needed these poor people as much as the poor people needed them.”
Looking back from 2009, Katz asks:
“How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages? … It all started with the best of intentions, with … the activists who demanded bank loans for the poor and urban.”Democrat Jim Johnson took over as CEO of Fannie Mae in 1991. He soon came up with a nice round number as a goal: one trillion dollars to lend by 2000 to ten million incremental homeowners. Katz writes:
“Jim Johnson only needed to point to the Atlanta Journal-Constitution’s [Pulitzer Prize-winning investigative series] The Color of Money to show that he was embarking on nothing less than a civil rights crusade. …”Fannie Mae wanted to raise the homeownership rate to 75 percent, which meant, Katz notes, that “Consumers would have to borrow more and pay less up front.”
Johnson, whom Barack Obama had put in charge of vetting his Vice-Presidential candidates until it was revealed that he had snagged a cheap mortgage as a “Friend of Angelo” [Mozilo], quickly found a private partner:
“By 1993, he’d made a deal with [Mozilo’s] Countrywide to buy $2.5 billion in loans for lower-income and minority borrowers. Financially, these homebuyers would be a motley lot, with no money in the bank, other debt to deal with, and less than stable employment. … Fannie Mae targeted much of its advertising budget to Black Entertainment Television and made a sponsorship deal with Univision, the dominant Spanish-language TV network. … The advertising campaign explicitly targeted young families, new immigrants, and single parents.”Katz points out the culture-changing role that Fannie Mae played:
“More than anything, Fannie Mae made working people comfortable with the idea of taking on vast debt as the price for participating in the American Dream. From 1989 to 2004, mortgage debt for low-income people increased by 46 percent, compared with just 15 percent for upper-middle-income and 5 percent for high-income.”Johnson, to his credit, retained important limits on debt, such as 3 percent minimum down payments. But George W. Bush would go to war against down payments in 2002.
Meanwhile Johnson’s allies in the Clinton Administration decided to goose the homeownership rate to at least 67.5 percent. But who was left to lend to? Katz comments:
“The reality was that the consumers the [mortgage] industry had depended on … were spoken for. More than nine of every ten suburban middle-class white households owned their homes. If the industry were going to grow, it would have to tap new borrowers, and HUD’s research team concluded that those were going to be urban, black (only 43 percent were homeowners), Latino (41 percent), and people under age thirty-five (just 38 percent).”So Clinton decided to enlist the real estate and financial industries in Fighting Racial Bias for Fun and Profit. Katz quotes him from a 1994 speech to the National Association Of Realtors Conference:
” ‘I want to target new markets, underserved populations, tear down the barriers of discrimination wherever they are found,’ he proclaimed to cheers at the Realtors’ annual convention.”Did Clinton really believe that in 1994 lenders were passing up profits out of prejudice? This theory was always economically illiterate. As Gary Becker’s Ph.D. thesis (based on a suggestion by his adviser, Milton Friedman) pointed out, if firms were irrationally discriminating against minorities, it would be profitable for nondiscriminators to enter the market and cash in. The much-hyped 1992 Boston Fed report that claimed to prove discrimination existed was easily refuted at the time by Peter Brimelow and Leslie Spencer in Forbes Magazine, when they demonstrated that it had misunderstood the meaning of mortgage default rates. But no-one wanted to hear that.
Still, if you had doubts about discrimination claims, Clinton had another argument for you: his National Homeownership Strategy would transform dissolute renters into respectable middle class citizens through the responsibility-generating magic of owning a home.
Unfortunately, this theory was based on the usual social engineer’s misperception that correlation equals causation. Katz writes:
“Eventually, scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one’s home, the homeowners and tenants really aren’t all that different.”And, it turns out, some people just aren’t responsible enough or capable enough to buy a home.
“The experience in neighborhoods confirmed what Fannie Mae’s market research was also discovering: Borrowers who were new to home buying, especially if they were members of minority groups, tended to care more about how they were treated by the person selling them a loan than about the financial soundness of the loan itself. If it were a friend or a family member selling the mortgage or property, so much the better.”Subprime lending grew—but as long as Fannie and Freddie wouldn’t bless it, the problem might remain chronic rather than critical. However, under Clinton the mandates were already in place that were pushing Fannie and Freddie to covertly back subprime mortgages. Katz:
“Remember what [community activists] won back in 1991: By now, nearly half of the loans financed by Fannie Mae and Freddie Mac had to go to low-income borrowers and urban communities. … “But where can you find enough borrowers who are both poor and prime? Fannie and Freddie couldn’t. So they started buying mortgage-backed securities that mixed some subprime in with prime. Katz explains:
“By buying prime-heavy portions of the securities as investments, Fannie and Freddie could meet Congress’s quotas for the number of loans they had to finance for low-income borrowers. … But because the riskier parts of the pools consisted almost exclusively of subprime loans, Fannie Mae and Freddie Mac were effectively putting their billions into financing subprime lending…”Momentum was building: “Under HUD secretary Andrew Cuomo, the Clinton administration gave a parting gift to the burgeoning subprime industry”: Cuomo raised the government-sponsored enterprises’ quotas for lower-income borrowers from 40 percent to 50 percent.
Most of the pieces were now in place for the foolhardy Bush Administration to push to a cataclysmic conclusion. That didn’t stop Bush from adding his special flavor, though:
“To this brew, George W. Bush added something quite peculiar for a conservative: a racial quota. Under pressure from the Bush administration, which had launched an investigation into their financing practices, in 2002 Fannie Mae and Freddie Mac together committed to finance $1.1 trillion in loans specifically for minority borrowers. … By the time George W. Bush left office, HUD decreed, three out of every five mortgages financed by the government loan funds would have to go to the poorer half of America …”Katz doesn’t give Bush as much of a drubbing as he deserves. But she does tell the story of a Mexican carpenter in Arizona, Jorge Sotelo, who was employed doing the jobs Americans just won’t do (namely, building houses Americans just can’t afford). This immigrant had such a bad credit history that he couldn’t qualify for even a subprime mortgage. So he had to have his uncle to sign for it:
“Sotelo thought it was a joke when, in March 2004, his boss at a construction firm told him to prepare to meet the president, not of the company but of the United States. Jorge Sotelo would appear with George W. Bush as an exemplar of minority homeownership. … ‘No tienes que estar nervioso. Esto va a ser muy sencillo y muy divertido,’ President Bush reassured Sotelo backstage… [‘No need to be nervous. This is going to be very simple and very fun.’]”By the way, Katz runs into the same problem I’ve had finding coherent quotes in transcripts of Bush’s speeches: he always mangled key phrases:
“‘There is a minority homeownership gap in America,’ Bush shared with the audience in the vast hangar. ‘Not enough minorities own their homes. It seems to me’—he paused to thump his palm on his chest, confessionally—’like it makes sense to help all people own their own homes.’ Bush peered down to a lectern to locate the number he was looking for. ‘Five point five new—million new minority homeowners into homes over the next five years.’” [Transcript]The President invited Sotelo and his wife to a White House Christmas party that year, but the expense left them short of cash. And they wanted two new cars.
“So they were grateful when they started getting offers for home mortgages that would let them get cash back in the transaction. In the two years since Jorge Sotelo’s convergence with George W. Bush, Jorge had turned from a pariah into a desirable customer.”Sotelo extracted $246,000 out of his home equity—which is a lot more than the house is worth today. But don’t worry:
“Sotelo’s got it all figured out. With a low enough mortgage payment, they could cover the bills by renting the Avondale house to a tenant. He’d move his family out to a new place.Katz sums up this decade:
They’d be renting that home, right?
“‘Oh, no,” says Sotelo, surprised at the question. ‘We’ll own it.’”
“This was everything Gale Cincotta had fought for—and a worse nightmare than she could have imagined.”The Mortgage Meltdown, and the Diversity Recession that it has precipitated (if we’re lucky), are worse nightmares than any of us could have imagined.
Unless we look frankly at the causes, it will all happen again.
Alyssa Katz goes at least some way to doing that.