Re: Subprime Suspects: The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.

[David Farber <dave () farber net>]

Begin forwarded message:

From: Robert Atkinson <rca53 () columbia edu>
Date: October 8, 2008 12:43:15 PM EDT
To: David Farber <dave () farber net>, Ip <ip () v2 listbox com>
Subject: Re: [IP] Re:     Subprime Suspects: The right blames the  
credit crisis on poor minority homeowners. This is not merely  
offensive, but entirely wrong.

Dave,

Some questions for the IP experts on this mortgage issue:

Did Freddie and Fannie "no downpayment/no credit check" ARMs and similar
mortgages that the "predatory lenders" originated? When did that  
start? Or
were such risky mortgages only "securitized" by Bear Stearns and other  
Wall
Street firms?  Did Freddie or Fannie have any role in the securitization
process?  What was a "conforming" loan during the bubble and who  
established
the criteria?

I ask because it seems that a root cause of the mortgage mess was that
mortgage originators and brokers had none of their capital at risk  
once they
could off-load the entire risky "conforming" mortgage to someone else  
and
simply pocket the origination fees. In fact, the originators would have
every incentive to push homeowners to take the biggest mortgage they  
could
off-load (for the higher fees) and they would have no incentive to  
warn home
owner of the re-set and other risks. Was anyone responsible for the
overseeing the mortgage originators, their sales pitches and their
incentives?

Thanks in advance for the education.

Bob

On 10/8/08 11:51 AM, "David Farber" <dave () farber net> wrote:

> Begin forwarded message:
>
> From: "David P. Reed" <dpreed () reed com>
> Date: October 8, 2008 11:13:10 AM EDT
> To: dave () farber net
> Cc: ip <ip () v2 listbox com>
> Subject: Re: [IP] Re:   Subprime Suspects: The right blames the credit
> crisis on poor minority homeowners. This is not merely offensive, but
> entirely wrong.
>
> Small data point - ARMs are not inherently bad.  I have always had
> ARMs, even though I can "afford" fixed rates.  Why?  Because for
> someone in my financial position (strong positive net worth >>
> mortgaged amount) an ARM is a great source of personal liquidity, at
> market rates.  The ARM I get is a "fair" deal with the bank.   Fairer
> than a 30-year fixed would be.
>
> As an example, my current ARM mortgage (5 years old) just adjusted its
> rate.  And it went *down* more than one percentage point, with no
> fees, ...  avoiding a costly game of "refinancing" where the bank
> would risk losing my business if I had a fixed mortgage.
>
> When I look back over the last 20 years, the ARMs I've had have saved
> hundreds of thousands of dollars, which I've invested in other
> places.  It's not evilness in the product itself.
>
> The politicians are oversimplifying the situation.  The problem is
> that ARMs were marketed to the wrong people in this case, people who
> had a high probability of default, known at the time of the mortgage
> issuance.  If it hadn't been ARMs it would have been some kind of
> "sweetened" mortgage which was called a "fixed" rate mortgage, with a
> balloon at the end, or any of a set of products that could be
> deceptively packaged.
>
> The real problem was that the banks were incented to sign up
> mortgagees, whether they could pay back the loan or not.
>
> Now, of course, we have the right screaming to eliminate "mark to
> market" accounting!   They have NO SHAME.
>
>
>
> David Farber wrote:
> > Begin forwarded message:
> >
> > From: "Victor Marks" <victormarks () gmail com>
> > Date: October 8, 2008 8:45:38 AM EDT
> > To: dave () farber net
> > Subject: Re: [IP] Re: Subprime Suspects: The right blames the credit
> > crisis on poor minority homeowners. This is not merely offensive,
> > but entirely wrong.
> >
> > Dave,
> >
> > For IP if you wish. I'd like to add some personal experience.
> >
> > In 2005 I got a mortgage and closed on a home. In attempting to get
> > the mortgage before making an offer, I went to a few different
> > mortgage brokers. I'm not a minority. I was offered on more than  
> > three
> > occasions an ARM. Between the fast-talking about how great it was
> > going to be, and no detailed mention of what would happen when the
> > numbers turned against me even when I asked about that situation, I
> > walked. It didn't help matters that my wife was with me for these
> > meetings and believed it when the brokers told us, "This is the only
> > way you're going to get a mortgage" in the push to 'sign now.' The
> > fourth broker started to pitch it, but understood when I said I  
> > needed
> > something I could understand, simple, straightforward, traditional  
> > and
> > fixed. And that's what I ended up getting, 30 year fixed at 5 and
> > 7/8ths %.
> >
> > It rings a little false to me when Dave Wilson writes that minorities
> > were offered the ARM and whites had the option of getting a
> > traditional fixed - instead, the climate was such that everyone was
> > being encouraged to take ARMs and you had to work to get something
> > other than that. I admit that I'm not disclosing my credit score, my
> > credit history, my income, or any other factors in this email, so
> > readers will have a hard time controlling for those - draw  
> > conclusions
> > based on the resulting 30 year fixed and the percentage rate
> > previously mentioned.
> >
> > Victor Marks
> >
> > On Wed, Oct 8, 2008 at 8:11 AM, David Farber <dave () farber net> wrote:
> > > Begin forwarded message:
> > > From: "Dave Wilson" <dave () wilson net>
> > > Date: October 8, 2008 7:43:53 AM EDT
> > > To: dave () farber net
> > > Subject: Re: [IP] Subprime Suspects: The right blames the credit
> > > crisis on
> > > poor minority homeowners. This is not merely offensive, but
> > > entirely wrong.
> > > This revolting lie (that policies aimed at giving minorities the
> > > chance to
> > > own a home have brought the world to economic collapse) is
> > > particularly
> > > egregious given the data (from Fannie Mae) proving that about half
> > > of all
> > > the subprime loans given to minorities were issued to people who
> > > actually
> > > qualified for standard, prime mortgages. Yes, it seems that if you
> > > showed up
> > > at Countrywide with a credit score of 760 or better but happened to
> > > be
> > > black, you were offered a predatory adjustable rate loan; if you
> > > were white,
> > > you at least had the option of getting a traditional 30 year
> > > mortgage at a 6
> > > percent fixed rate. Put simply, when controlling for such factors
> > > as income,
> > > credit history, and property location, non-white mortgage seekers
> > > have
> > > received a disproportionately higher share of these predatory loans
> > > (adjustable, high interest rates combined with things like
> > > penalities for
> > > refinancing that make it nearly impossible to get out of the
> > > agreement) that
> > > companies like Countrywide have been repeatedly fined for issuing.
> > >
> > > So while it's true that subprime mortgages held by minorities are
> > > failing at
> > > a significant rate, it's also true that many if not most of those
> > > mortgages
> > > would have been just fine if they did not have an adjustable
> > > interest rate,
> > > an option that was not offered to many of those families seeking
> > > homeownership simply because they were black or latino. This
> > > attempt to hang
> > > the collapse on minority homeownership is beneath contempt.
> > >
> > > For just one of the many excellent analyses available on this
> > > issue, please
> > > see "Unfair Lending: The Effect of Race and Ethnicity on the Price  
> > > of
> > > Subprime Mortgages" which was issued in 2006, long before the  
> > > current
> > > crisis.
> > > www.responsiblelending.org/pdfs/rr011exec-Unfair_Lending-0506.pdf
> > >
> > >
> > > On Wed, Oct 8, 2008 at 6:05 AM, David Farber <dave () farber net>  
> > > wrote:
> > > > Begin forwarded message:
> > > >
> > > > From: Barry Ritholtz <ritholtz () optonline net>
> > > > Date: October 8, 2008 6:00:48 AM EDT
> > > > To: David Farber <dave () farber net>
> > > > Subject: Subprime Suspects: The right blames the credit crisis on
> > > > poor
> > > > minority homeowners. This is not merely offensive, but entirely
> > > > wrong.
> > > >
> > > > Dave,
> > > >
> > > > In Newsweek/Slate, Dan Gross does a nice job explaining why Fannie
> > > > Mae and
> > > > the CRA were not the proximate causes of either the housing crisis
> > > > or the
> > > > credit crunch.
> > > >
> > > > Its important to understand how this situation occurred in the  
> > > > first
> > > > place, if we want to be able to fix it.
> > > >
> > > >
> > > >
> > > > Barry L. Ritholtz
> > > > The Big Picture
> > > > http://bigpicture.typepad.com
> > > >
> > > >
> > > > ~~~
> > > >
> > > >
> > > > Subprime Suspects The right blames the credit crisis on poor
> > > > minority
> > > > homeowners. This is not merely offensive, but entirely wrong.
> > > > By Daniel Gross
> > > > Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET
> > > > http://www.slate.com/id/2201641/
> > > > We've now entered a new stage of the financial crisis: the ritual
> > > > assigning of blame. It began in earnest with Monday's
> > > > congressional roasting
> > > > of Lehman Bros. CEO Richard Fuld and continued on Tuesday with
> > > > Capitol Hill
> > > > solons delving into the failure of AIG. On the Republican side of
> > > > Congress,
> > > > in the right-wing financial media (which is to say the financial
> > > > media), and
> > > > in certain parts of the op-ed-o-sphere, there's a consensus
> > > > emerging that
> > > > the whole mess should be laid at the feet of Fannie Mae and
> > > > Freddie Mac, the
> > > > failed mortgage giants, and the Community Reinvestment Act, a law
> > > > passed
> > > > during the Carter administration. The CRA, which was amended in
> > > > the 1990s
> > > > and this decade, requires banks—which had a long, distinguished
> > > > history of
> > > > not making loans to minorities—to make more efforts to do so.
> > > >
> > > > The thesis is laid out almost daily on the Wall Street Journal
> > > > editorial
> > > > page, in the National Review, and on the campaign trail. John
> > > > McCain said
> > > > yesterday, "Bad mortgages were being backed by Fannie Mae and
> > > > Freddie Mac,
> > > > and it was only a matter of time before a contagion of
> > > > unsustainable debt
> > > > began to spread." Washington Post columnist Charles Krauthammer
> > > > provides an
> > > > excellent example, writing that "much of this crisis was brought
> > > > upon us by
> > > > the good intentions of good people." He continues: "For decades,
> > > > starting
> > > > with Jimmy Carter's Community Reinvestment Act of 1977, there has
> > > > been
> > > > bipartisan agreement to use government power to expand
> > > > homeownership to
> > > > people who had been shut out for economic reasons or, sometimes,
> > > > because of
> > > > racial and ethnic discrimination. What could be a more worthy
> > > > cause? But it
> > > > led to tremendous pressure on Fannie Mae and Freddie Mac—which in
> > > > turn
> > > > pressured banks and other lenders—to extend mortgages to people
> > > > who were
> > > > borrowing over their heads. That's called subprime lending. It
> > > > lies at the
> > > > root of our current calamity." The subtext: If only Congress
> > > > didn't force
> > > > banks to lend money to poor minorities, the Dow would be well on
> > > > its way to
> > > > 36,000. Or, as Fox Business Channel's Neil Cavuto put it, "I don't
> > > > remember
> > > > a clarion call that said: Fannie and Freddie are a disaster.
> > > > Loaning to
> > > > minorities and risky folks is a disaster."
> > > >
> > > > Let me get this straight. Investment banks and insurance companies
> > > > run by
> > > > centimillionaires blow up, and it's the fault of Jimmy Carter,
> > > > Bill Clinton,
> > > > and poor minorities?
> > > >
> > > > These arguments are generally made by people who read the
> > > > editorial page
> > > > of the Wall Street Journal and ignore the rest of the paper— 
> > > > economic
> > > > know-nothings whose opinions are informed mostly by ideology and,
> > > > occasionally, by prejudice. Let's be honest. Fannie and Freddie,
> > > > which
> > > > didn't make subprime loans but did buy subprime loans made by
> > > > others, were
> > > > part of the problem. Poor Congressional oversight was part of the
> > > > problem.
> > > > Banks that sought to meet CRA requirements by indiscriminately
> > > > doling out
> > > > loans to minorities may have been part of the problem. But none of
> > > > these
> > > > issues is the cause of the problem. Not by a long shot. From the
> > > > beginning,
> > > > subprime has been a symptom, not a cause. And the notion that the
> > > > Community
> > > > Reinvestment Act is somehow responsible for poor lending decisions
> > > > is
> > > > absurd.
> > > >
> > > > Here's why.
> > > >
> > > > The Community Reinvestment Act applies to depository banks. But
> > > > many of
> > > > the institutions that spurred the massive growth of the subprime
> > > > market
> > > > weren't regulated banks. They were outfits such as Argent and
> > > > American Home
> > > > Mortgage, which were generally not regulated by the Federal
> > > > Reserve or other
> > > > entities that monitored compliance with CRA. These institutions
> > > > worked hand
> > > > in glove with Bear Stearns and Lehman Brothers, entities to which
> > > > the CRA
> > > > likewise didn't apply. There's much more. As Barry Ritholtz notes
> > > > in this
> > > > fine rant, the CRA didn't force mortgage companies to offer loans
> > > > for no
> > > > money down, or to throw underwriting standards out the window, or  
> > > > to
> > > > encourage mortgage brokers to aggressively seek out new markets.
> > > > Nor did the
> > > > CRA force the credit-rating agencies to slap high-grade ratings on
> > > > packages
> > > > of subprime debt.
> > > >
> > > > Second, many of the biggest flameouts in real estate have had
> > > > nothing to
> > > > do with subprime lending. WCI Communities, builder of highly
> > > > amenitized
> > > > condos in Florida (no subprime purchasers welcome there), filed for
> > > > bankruptcy in August. Very few of the tens of thousands of now-
> > > > surplus
> > > > condominiums in Miami were conceived to be marketed to subprime
> > > > borrowers,
> > > > or minorities—unless you count rich Venezuelans and Colombians as
> > > > minorities. The multiyear plague that has been documented in
> > > > brilliant
> > > > detail at IrvineHousingBlog is playing out in one of the least-
> > > > subprime
> > > > housing markets in the nation.
> > > >
> > > > Third, lending money to poor people and minorities isn't
> > > > inherently risky.
> > > > There's plenty of evidence that in fact it's not that risky at
> > > > all. That's
> > > > what we've learned from several decades of microlending programs,
> > > > at home
> > > > and abroad, with their very high repayment rates. And as the New
> > > > York Times
> > > > recently reported, Nehemiah Homes, a long-running initiative to
> > > > build homes
> > > > and sell them to the working poor in subprime areas of New York's
> > > > outer
> > > > boroughs, has a repayment rate that lenders in Greenwich, Conn.,
> > > > would envy.
> > > > In 27 years, there have been fewer than 10 defaults on the
> > > > project's 3,900
> > > > homes. That's a rate of 0.25 percent.
> > > >
> > > > On the other hand, lending money recklessly to obscenely rich
> > > > white guys,
> > > > such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear
> > > > Stearns, can be
> > > > really risky. In fact, it's even more risky, since they have a lot
> > > > more
> > > > borrowing capacity. And here, again, it's difficult to imagine how
> > > > Jimmy
> > > > Carter could be responsible for the supremely poor decision-making
> > > > seen in
> > > > the financial system. I await the Krauthammer column in which he
> > > > points out
> > > > the specific provision of the Community Reinvestment Act that
> > > > forced Bear
> > > > Stearns to run with an absurd leverage ratio of 33 to 1, which
> > > > instructed
> > > > Bear Stearns hedge-fund managers to blow up hundreds of millions
> > > > of their
> > > > clients' money, and that required its septuagenarian CEO to play
> > > > bridge
> > > > while his company ran into trouble. Perhaps Neil Cavuto knows
> > > > which CRA
> > > > clause required Lehman Bros. to borrow hundreds of billions of
> > > > dollars in
> > > > short-term debt in the capital markets and then buy tens of
> > > > billions of
> > > > dollars of commercial real estate at the top of the market. I
> > > > can't find it.
> > > > Did AIG plunge into the credit-default-swaps business with abandon
> > > > because
> > > > Association of Community Organizations for Reform Now members
> > > > picketed its
> > > > offices? Please. How about the hundreds of billions of dollars of
> > > > leveraged
> > > > loans—loans banks committed to private-equity firms that wanted to
> > > > conduct
> > > > leveraged buyouts of retailers, restaurant companies, and
> > > > industrial firms?
> > > > Many of those are going bad now, too. Is that Bill Clinton's fault?
> > > >
> > > > Look: There was a culture of stupid, reckless lending, of which
> > > > Fannie Mae
> > > > and Freddie Mac and the subprime lenders were an integral part.
> > > > But the
> > > > dumb-lending virus originated in Greenwich, Conn., midtown
> > > > Manhattan, and
> > > > Southern California, not Eastchester, Brownsville, and Washington,
> > > > D.C.
> > > > Investment banks created a demand for subprime loans because they
> > > > saw it as
> > > > a new asset class that they could dominate. They made subprime
> > > > loans for the
> > > > same reason they made other loans: They could get paid for making
> > > > the loans,
> > > > for turning them into securities, and for trading them—frequently
> > > > using
> > > > borrowed capital.
> > > >
> > > > At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin
> > > > Lehman's
> > > > demise on Fannie and Freddie. After comparing Lehman's small
> > > > political
> > > > contributions with Fannie and Freddie's much larger ones, Mica
> > > > asked Fuld
> > > > what role Fannie and Freddie's failure played in Lehman's demise.
> > > > Fuld's
> > > > response: "De minimis."
> > > >
> > > > Lending money to poor people doesn't make you poor. Lending money
> > > > poorly
> > > > to rich people does.
> > > >
> > > > Daniel Gross is the Moneybox columnist for Slate and the business
> > > > columnist for Newsweek. You can e-mail him at moneybox () slate com.
> > > > He is the
> > > > author of Pop! Why Bubbles Are Great for the Economy.
> > > > Article URL: http://www.slate.com/id/2201641/
> > > >
> > > >
> > > >
> > > >
> > > >
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