Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates.This is representative of the quality of public debate over what caused the mortgage meltdown. In public, there are only two sides: the liberal (Corporate Greed!) and the libertarian (Government Interference!).
There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s) amnd subprime lending (middle 90s):“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing. As his sister, Lori, told me, “Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’And just what might have this done to Angelo’s world view later on? Alex, I’ll take pop psychology for $100:
He was always this Italian guy people didn’t want to accept.” She went on, “When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”Despite Mozilo’s ideals, Countrywide did not have a strong record of lending to minorities. In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. Robert Gnaizda, former general counsel of the Greenlining Institute, a nonprofit organization focussed on minority rights, sent the report to Mozilo and other mortgage bankers. “I received a harsh response from Mozilo,” Gnaizda told me.It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric . . .
Privately, however, Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. Then he dispatched African-Americans, posing as prospective borrowers—he called them “mystery shoppers”—to Countrywide branches, and concluded that they were indeed treated differently from white borrowers.
Countrywide opened new offices in inner-city areas, created counselling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and twenty-five per cent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.
“Countrywide went from close to the bottom in lending to minorities to near the top,” Gnaizda said. “I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ ”
Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished. “It was a careful entry, considered closely by those at the top of the company,” a former high-level Countrywide executive recalled. “We sat together and asked each other, ‘Would you make this loan with your money?’ ”
To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to thirty-five per cent. . .”
In contrast, the real divide is between the overwhelmingly dominant Diversity Dogmatists, liberal and libertarian, versus the tiny number of Diversity Heretics. Personally, I don't oppose government regulation of the mortgage business to prevent over-optimistic borrowers and lenders from causing defaults down the road, so I'm not a libertarian on this. But, in this case, the federal government was (and still is) regulating in the wrong direction: toward more risk.
Would minorities have ended up getting vast amounts of overly optimistic loans anyway even if the government had been neutral on the question? Perhaps — the Diversity Dogma is so entrenched in our society that supposedly hard-headed businessmen like Mozilo believe it just as much as the politicians — at least judging from their public statements. And, in the long run, few people have the strength of character to be hypocritical enough to act prudently when acting on the "ideals" you constantly extol (but don't actually believe) can you make a lot of money in the short run.
Finally, even if government and business had been sensible, the brute fact of population change in California, replacing middle class people with peasant class people, would have caused massive problems in generating enough productivity to repay debts.
But this way of thinking is so foreign, so unthinkable that almost nobody understands the catastrophe that just happened to us.