Eric Romsted wrote:
> Hello all,
> I'm new to this list, so perhaps something like this has been discussed
> before, but I couldn't find anything.
> On another message board I was reading, someone claimed that the financial
> crisis in the housing market was really caused by community groups forcing
> banks to lend to high-risk homeowners in the name of overcoming racial
> redlining, citing the reproduced below (and on the web at
> http://www.independent.org/newsroom/article.asp?id=2114). So it wasn't too
> little government oversight of the market, it was too much government
> interference, ha ha!
>
> Anyone know anything about the claims being made or have an intelligent
> response?
>
> The Real Scandal: How Feds Invited the Mortgage Mess
> February 5, 2008
> Stan J. Liebowitz
> New York Post
>
> Perhaps the greatest scandal of the mortgage 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.
>
> At the crisis¹ core are loans that were made with virtually nonexistent
> underwriting standards‹no verification of income or assets; little
> consideration of the applicant¹s ability to make payments; no down payment.
>
> Most people instinctively understand that such loans are likely to be
> unsound. But how did the heavily-regulated banking industry end up able to
> engage in such foolishness?
>
>>From the current hand-wringing, you¹d 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 ³progressive² political
> forces.
>
> In the 1980s, groups such as the activists at ACORN began pushing charges of
> ³redlining²‹claims that banks discriminated against minorities in mortgage
> lending. In 1989, sympathetic members of Congress got the Home Mortgage
> Disclosure Act amended to force banks to collect racial data on mortgage
> applicants; this allowed various studies to be ginned up that seemed to
> validate the original accusation.
>
> In fact, minority mortgage applications were rejected more frequently than
> other applications‹but the overwhelming reason wasn¹t racial discrimination,
> but simply that minorities tend to have weaker finances.
>
> Yet a ³landmark² 1992 study from the Boston Fed concluded that
> mortgage-lending discrimination was systemic.
>
> That study was tremendously flawed‹a colleague and I later showed that the
> data it had used contained thousands of egregious typos, such as loans with
> negative interest rates. Our study found no evidence of discrimination.
>
> Yet the political agenda triumphed‹with the president of the Boston Fed
> saying no new studies were needed, and the US comptroller of the currency
> seconding the motion.
>
> No sooner had the ink dried on its discrimination study than the Boston Fed,
> clearly speaking for the entire Fed, produced a manual for mortgage lenders
> stating that: ³discrimination may be observed when a lender¹s underwriting
> policies contain arbitrary or outdated criteria that effectively disqualify
> many urban or lower-income minority applicants.²
>
> Some of these ³outdated² criteria included the size of the mortgage payment
> relative to income, credit history, savings history and income verification.
> Instead, the Boston Fed ruled that participation in a credit-counseling
> program should be taken as evidence of an applicant¹s ability to manage
> debt.
>
> Sound crazy? You bet. Those ³outdated² standards existed to limit defaults.
> But bank regulators required the loosened underwriting standards, with
> approval by politicians and the chattering class. 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.
>
> Banks that got poor reviews were punished; some saw their merger plans
> frustrated; others faced direct legal challenges by the Justice Department.
>
> Flexible lending programs expanded even though they had higher default rates
> than loans with traditional standards. On the Web, you can still find CRA
> loans available via ACORN with ³100 percent financing . . . no credit scores
> . . . undocumented income . . . even if you don¹t report it on your tax
> returns.² Credit counseling is required, of course.
>
> Ironically, an enthusiastic Fannie Mae Foundation report singled out one
> paragon of nondiscriminatory lending, which worked with community activists
> and followed ³the most flexible underwriting criteria permitted.² That
> lender¹s $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 nation¹s largest mortgage
> lender, recently in the headlines as it hurtled toward bankruptcy.
>
> In an earlier newspaper story extolling the virtues of relaxed underwriting
> standards, Countrywide¹s chief executive bragged that, to approve minority
> applications that would otherwise be rejected ³lenders have had to stretch
> the rules a bit.² He¹s not bragging now.
>
> For years, rising house prices hid the default problems since quick
> refinances were possible. But now that house prices have stopped rising, we
> can clearly see the damage caused by relaxed lending standards.
>
> This damage was quite predictable: ³After the warm and fuzzy glow of
> Œflexible underwriting standards¹ has worn off, we may discover that they
> are nothing more than standards that lead to bad loans . . . these policies
> will have done a disservice to their putative beneficiaries if . . . they
> are dispossessed from their homes.² I wrote that, with Ted Day, in a 1998
> academic article.
>
> Sadly, we were spitting into the wind.
>
> These days, everyone claims to favor strong lending standards. What about
> all those self-righteous newspapers, politicians and regulators who were
> intent on loosening lending standards?
>
> As you might expect, they are now self-righteously blaming those, such as
> Countrywide, who did what they were told.
>
> Stan J. Liebowitz is the Ashbel Smith Professor of Economics and Director of
> the Center for the Analysis of Property Rights and Innovation at the
> University of Texas at Dallas and coauthor with Stephen Margolis of Winners,
> Losers, and Microsoft published by the Independent Institute.
>
>
>
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