Village Voice Endorses My Reading Of The Mortgage Meltdown
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For a year now, I've been pointing out that the mortgage meltdown is partly related to the Establishment's long campaign to loosen traditional standards of creditworthiness for lower income and minority households. This national priority gave the get-rich quick artists in the business world the perfect excuse for doing what they'd always wanted to do: take the money and run and let the taxpayers and savers pay for the clean-up.


Now, others are starting to pick up on that insight, including the Village Voice. Via Arnold Kling, Edward Barrett writes in a hit piece on the New York attorney general, "Andrew Cuomo and Fannie and Freddie:"


Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth. But, as Paul Krugman noted in the Times recently, "homeownership isn't for everyone," adding that as many as 10 million of the new buyers are stuck now with negative home equity–meaning that with falling house prices, their mortgages exceed the value of their homes. So many others have gone through foreclosure that there's been a net loss in home ownership since 1998.

It is also worth remembering that the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK's footsteps. Each mortgage was a commodity that could be sold again and again–from the brokers to the bankers to the securities market. If, at the bottom of this pyramid, the borrower collapsed under the weight of his mortgage's impossible terms, the home could be repackaged a second or a third time and either refinanced or dumped on a new victim.

Those are the interests that surrounded [Clinton HUD secretary Andrew] Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice. ...

In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks–known collectively as Government Sponsored Enterprises–would have to buy. The GSEs don't actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD's secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.

Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible." ... Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted.

The politics of it all was amusingly complex:

While fashioning these final rules, Cuomo wrestled with the octopus-like reach of Fannie and Freddie, which spend tens of millions each year on lobbying firms. The GSEs hired 88 lobbying firms over six years, three of which were friendly enough with Cuomo to give to his campaign committee later. ...

But Cuomo was closer to the GSEs' most formidable opponents–namely, the Mortgage Bankers Association (MBA), regarded as the most influential private real-estate finance lobby in Washington, and the upstart FM Watch, a new coalition of heavyweights from Chase to AIG. Both of these groups wanted Cuomo to put as much affordable-housing pressure on the GSEs as he could, and they said so in their releases and newsletters. They opposed what they called Fannie and Freddie's profit-driven "mission creep," which they saw as a publicly subsidized invasion of their high-end mortgage market. Their goal was the same as Cuomo's: to push Fannie and Freddie deeper into low-end mortgages, consistent with the mission statement in their charters.

The background is that Fannie and Freddie can borrow at lower interest rates than other for-profit businesses because of the "implicit" government guarantee of their debt, so they have licenses to print money. Thus, there is a tug of war in Washington over which direction Fannie and Freddie's firehose of money would be pointed. The big guys in private lending wanted them to stay away from million dollar mortgages to anesthesiologists and instead back $200,000 mortgages for dry-wallers, a self-interested argument that the private bankers were happy to justify in terms of political correctness.

These groups clearly had Cuomo's ear, but he was also being pushed to commit the GSEs to more affordable and, in some cases, riskier loans by consumer organizations–groups like ACORN, which has considerable clout in New York elections.

ACORN has been closely linked to Barack Obama since he ran its 1992 black voter registration effort that got Carol Mosely Braun elected U.S. Senator.

You can single out individuals for blame, but the bottom line is that many of America's powerful interests were in on it. And they were able to use political correctness as a weapon for their own purposes. A few unpopular folks like me were pointing out that immigration policy is lowering the creditworthiness and productive capacity of the population, but such heretical thoughts were "the soft bigotry of low expectations."

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