Saturday, July 10, 2010

Myths of Sub-Prime Mortgage Lending

There is cold weather in winter, hot weather in summer, and facts have a liberal bias.

And so it is that David Streitfeld of The New York Times now has found

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

This doesn't quite prove that the Community Reinvestment Development Act, President Clinton, Barney Frank, Chris Dodd, ACORN, and the poor should be held blameless for the subprime mortgage crisis which contributed to the financial crisis of the past 2-3 years.

But it does suggest that the right wing yarn laying blame for the financial cris on their favorite villains has been a sham- and there may be no better evidence than the reaction Friday of a nonplussed Rush Limbaugh, who commented

Well, that's not what we've been hearing. It's all a bunch of crock. So we need the rich to be spending, we need 'em out there, the economy is threatened here, but now these creeps are walking out on their mortgages, only the rich are walking out. Do you believe that?

The sound you hear is of a extraordinarily partisan reactionary getting blindsided by facts. There are some other housing facts which Limbaugh has never gotten around to mentioning to his adoring audience:

* Big government did not invent mortgage-backed securities, which encouraged issuance of no-document loans, as the financial institution simply issued the loan and promptly sold it to investors, usually from abroad, who assumed all the risk while the lending institutions collected originating fees. This (along with a low prime rate) created more capital for lending. The institutions borrowed even more, which made it initially profitable to offer, nay, push, NINJA loans. Assets of various sorts were sometimes pooled into collateralized debt obligations, a variant of the MBS which offered another avenue for short-term profit. The number of CDO issues exploded in 2006 and the casino was hopping.

* The collateralized debt obligations were very enticing, given that they received such high ratings- not surprising, given that the ratings agencies have been funded by the financial institutions issuing these risky investments.

* The CRA applied only to commericial banks and thrift institutions, leaving out investment banks, mortgage banks- which issued aproximately 50% of high-cost loans- and bank affiliates, which issued roughly 12% of these loans. In all, only 25% of all sub-prime loaning originated at CRA-covered institutions, which were less likely to make high-priced loans than were institutions not covered by the CRA. Predatory lending, including bait-and-switch and interest-only loans, were uncommon at institutions covered by the CRA. Comptroller of the Currency and Bush 43 appointee John Dugan concluded "CRA is not the culprit behind the sub-prime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with sub-prime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA."

* Paul Krugman notes "there was no federal act driving banks to lend money for office parks and shopping malls; Fannie and Freddie weren’t in the CRE loan business; yet 55 percent — 55 percent! — of commercial mortgages that will come due before 2014 are underwater."

* The Community Reinvestment Development Act was enacted in 1977, which should cast major doubt on its role in a subprime mortgage crisis which arose in the last few years. It did have some effect- but primarily because the federal government loosened the regulations in application of its requirements. Enforcement of CRA regulations declined after 2001 and regulatory or legislative changes weakening the Act transpired in 1994, 1995, 1999, 2005, and 2007. Regulations generally were eased in 2005 and Wikipedia explains "in April 2005, a contingent of Democratic Congressmen issued a letter protesting these changes, saying they undercut the ability of the CRA to 'meet the needs of low and moderate-income persons and communities.' The changes were also opposed by community groups concerned that it would weaken the CRA." Thus, most of the impact of the CRA in the housing crisis occurred after regulatory changes sought by industry and opposed by liberals and community organizations.

* Fannie Mae and Freddie Mac did contribute somewhat to the subprime mortage crisis, although they lost market share in the period of 2002-2007, as the housing bubble was developing. Meanwhile, Barney Frank tried to increase oversight of Fannie Mae and Freddie Mac. Lawrence Lindsey in April 2008 wrote "in fact, Rep. Barney Frank (D., Mass.) is the only politician I know who has argued that we needed tighter rules that intentionally produce fewer homeowners and more renters. Politicians usually believe that homeownership rates should- must- go even higher." One of these was Lindsey's boss, George W. Bush, whom in December, 2008 the New York Times reported

paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards....

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

Lawrence B. Lindsey, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsey said. “It would have conflicted with the president’s own policies....”

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down.

So give Barney Frank his due, even if you don't like his appearance, rumpled clothing, speech peculiarity, personality, religion, or sexual preference. He wasn't always right about the housing implosion but he was closer than George W. Bush, Rush Limbaugh, or almost any apologist for Wall Street.

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