The Long Road to Slack Lending Standards
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Steven Malanga, Real Clear Markets, October 1, 2008
In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.
Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue—mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.
Eventually, the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study which concluded that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed. This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed’s conclusions showed serious deficiencies in the original work. One economist for the Federal Deposit Insurance Corp. who looked more deeply into the data, for instance, found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.
Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards in order to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled “Closing the Gap: A Guide to Equal Opportunity Lending.”
Quoting from a study which declared that “underwriting guidelines . . . may be unintentionally racially biased,” the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades. It told banks they should consider junking the industry’s traditional debt-to-income ratio, which lenders used to determine whether an applicant’s income was sufficient to cover housing costs plus loan payments. It instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to “consider extenuating circumstances” that might still make the borrower creditworthy. When applicants didn’t have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying.
Of course, the new federal standards couldn’t just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry. In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government.
Meanwhile, those who raced to make these mortgages were lionized. Harvard University’s Joint Center for Housing Studies even invited Angelo Mozilo, CEO of the lender which made more loans purchased by Fannie and Freddie than anyone else, Countrywide Financial, to give its prestigious 2003 Dunlop Lecture on the subject of “The American Dream of Homeownership: From Cliché to Mission.” A brief, innocuous description of the event still exists online here.
Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.
But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.
What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market. And so when faced with the idea that minorities weren’t getting approved for enough mortgages because they didn’t measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.
Now we all have to pay.
(Posted on October 1, 2008)
Comments
This is a landmark article on how little the government thinks of it’s taxpayer citizens. They would squander your money with little thought to consequences so they could insure themselves eternal political power by buying the votes of the poor and disenfranchised through the lure of home ownership.
Posted by Tim at 5:54 PM on October 1
Naturally, I had suspected that lending standards had been lowered to benefit minorities, but it’s nice to have a financial journalist confirm it. What Mr. Malanga doesn’t say is that there’s no way out of the depression we’re now entering. Our great and good will continue to insist that non-whites are just as credit-worthy as whites, despite all evidence to the contrary. Our economy, therefore, must quickly come to resemble sub-Saharan Africa’s. Dont’ buy gold, buy ammunition.
Posted by Gringo_Malo at 6:06 PM on October 1
Much faster than I would have thought possible, the liberal obsession with assuaging their guilt by raising up blacks, is resulting in the economic downfall of the United States.
Posted by ricpic at 6:33 PM on October 1
This is the kind of thing that will turn us into a Third World nation. Once the amount of non-productive people reaches a critical mass you cannot sustain a modern economy.
Too many drains, too many leaches with their hands out. And these tend to be the same people who claim they are discriminated against.
Posted by Boone at 6:39 PM on October 1
Yesterday I noticed the upper half of the Federal Reserve Bank of Boston bulding was in a permanent “FOG”. Does anyone remember if Judge Garrity left the bench to join this Bank? We will all pay the price of this affirmative action disaster started by Dem pol hacks Jimmy Carter to the current Barney Frank(aka Fanny May)and their co-conspirators the lib media.
Posted by Paddy at 6:49 PM on October 1
Two days ago (9/29) AmRen posted a report, “Countering the Lies About Race and the Meltdown,” in which a black writer criticized Minnesota Republican Congresswoman Michele Bachmann for drawing a connection between the Fannie/Freddie failures and the Community Reinvestment Act (used by the government to coerce financial institutions into lowering their lending standards in order to promote minority home-ownership).
Representative Bachmann was further criticized last night (9/30) on MSNBC when “Countdown’s” Keith Olberman flat-out called her a “racist” for having brought this “inconvenient truth” to the attention of the House.
Olberman has furnished plenty of evidence that he is a bigot in his own right, but this pernicious insult/vicious attack on Bachmann was really egregious and infuriating.
I thought MSNBC had announced that Olberman and Chris Matthews would be taken off the air because of their not-so-subtle support for Obama’s candidacy. So what are they waiting for? The election to be over?
Posted by KonfederateKarl at 7:00 PM on October 1
so little is being made of this in the media because it would make blacks look bad, and of course their darling Obama
Posted by at 9:07 PM on October 1
We always knew all this wonderful “Diversity” and “Equality” would be the ruin of America - just never could say quite how it would manifest. Well…now we know - and so the end begins…
Posted by HH at 9:22 PM on October 1
As one poster said here a few days ago, WaMu gave a $612,000 mortgage to an illegal alien claiming he was making $9 an hour. Considering the thousands upon thousands of such mortgages made, what we’re seeing now in the meltdown is the only possible consequence. BTW, I just watched the Senate debate on the “rescue” (nee bailout) bill, and the Dems are complaining about people’s house values decreasing. Of course it is, it was never supposed to be that high to begin with.
Any reforms must include a return to the old-time 20/28 standards, as a strict rule. That is, 20% down at least, 28% of documentable monthly income as mortgage payment at most.
Posted by Question Diversity at 9:37 PM on October 1
In answer to those who are impatient and want to do something that will assist the trend toward partition of this country, many experts have advised numerous times that it isn’t necessary to do anything to hurry things along, because the situation will degenerate to critical mass all on its own. And that’s what we’re seeing right now.
Gang warfare, black/Hispanic warfare, black on white assaults, murders and rapes, plus blacks fighting with everybody, are all progressing towards the culmination of a situation that will soon be unsustainable, and it will erupt into one big conflagration all on its own, pushed along greatly by the disasterous decision to give homes to people who can’t pay for them.
All of it together is beating the country down seriously, making it quite obvious serious societal degeneration is taking place.
So, things are moving along quite as expected and are making the people who predicted these situations appear as gifted oracles.
Posted by ice at 10:10 PM on October 1
I’d like to hear some black people’s point of view on this other than the usual racisssss bigot cracka distractions we see on here. This is another “gotcha” moment just like OJ, the LA riots, Jena 6, Duke rape hoax, Katrina and all the other things to numerous to list, only this likely lead us into an economic crash.
Posted by John at 10:30 PM on October 1
Words alone really can’t express how thrilled I’ll be if articles like this make it into the mainstream. Washington post, New York Times, Yahoo News, Fox news, &c..
Posted by at 10:44 PM on October 1
Many of these good-for-nothing borrowers, when they abandoned
their properties, took all the plumbing and electrical fixtures, windows, AC systems and anything else they could steal.. What’s the old saying?..’The road to Hell is paved with good intentions’. It’s so disgusting to see this country go down that road led by stupid liberals and all their failed ideas.
ACE2X
Posted by ACE2X at 11:11 PM on October 1
Kill me,
Does it makes us feel good that this present crises is the result of special lending privileges and rules for minorities? Does it makes us feel good that we can blame a Black or Mexican for the collapse of our ENTIRE financial system?????
Are we to believe that the entire collapse of the worlds largest financial empire and even the financial collapse of America is sitting on the back of the Black and Mexican???
Who made these laws, who created these financial conditions, who was managing these giant financial organizations that have now collapsed as a result of the small number of Black and Mexican borrowers?
It always comes back to the Ruling Elite. They are the ones who made the rules, paid for the legislation, marketed the concept to the gullible public, signed the legal documents, cooked the books and financial statements for nearly 10 years. When are Americans going to focus on WHO created this mess?
Who forced these loans on the banks? Which politicians forced these loans on the banks? Which judges forced these loans on the banks? WHO had the big stick AND the propaganda machine to force these so called bad loans on the banks and financial institutions that are now in a growing state of collapse??
The Ruling Elite of the West created this mess, they profited from this mess, and this week they used the best democracy that money can buy to pass any risk and loses to those who ARE NOT the Ruling Elite.
When will we focus on the ROOT of our demise and destruction of White America?
Sherwood Smith
Posted by Sherwood Smith at 12:18 AM on October 2
It is not question of who..it’s a question of why. Why did Carter/Clinton order new legislation that forced banks to lend to people who normally would be rejected as bad credit risks.
When will we focus on the ROOT of our demise and destruction of White America?
Posted by at 5:34 AM on October 2
“Who made these laws, who created these financial conditions, who was managing these giant financial organizations that have now collapsed as a result of the small number of Black and Mexican borrowers?” Sherwood Smith
While I would never excuse the irresponsible behavior of our greedy, privileged elite, the numbers of black and Chicano borrowers was anything but small. If you look at the housing default areas, many of the heavily hit areas are in the minority enriched areas of Florida, Texas, Michigan and California.
Posted by Sardonicus at 12:14 PM on October 2
Lax lending standards started in the American car business way back in 1986 when I was Finance & Insuarnce Manager at Anaheim Nissan, then Orange County´s largest and oldest Nissan dealership in Anaheim California. I do not recall the name of the bank, but it was one which called their program `Special Finane´; the name stuck. It was a program designed according to a certain formula, disregarding the traditinal guidelines and more importantly the REASONS for these guide lines - to whit, racial profiling. Until that tme, it was customary for underwriters at a bank to really look askance at blacks because of their known disregard for common decency and standards. A black smply did not (does not) pay his bills as a general rule. It was this way then, it is this way today and anyone who denies this simple fact is a liar plain and simple. Blacks are credit-criminals, it has nothing to do with income, it is genetic and all the ill-advised idealism will not change it. In the meantime the break-down of common morality (win at all costs and winning is justfied, no matter what)has caused many whites to become credit criminals in much the ame way, even if not yet to the same degree. At the time I told my buddy and co-pilot as it were, this will never fly; this is a disaster in the making, for as all finance people with hands-on experience know the facts outlined above. The ones who DO NOT know are the college grads who with business degrees and theoretical knowledge, but NONE of human nature, dictate business and banking practices these days. Gerry Frederics
Posted by Gerry Frederics at 1:41 PM on October 2
What is really different about this diversity crash is that, unlike the earlier scandals and riots, this financial crisis has liberal/minority/moderate Republican fingerprints all over it. And if it gets really nasty, the low IQ minorities are not going to understand that we can no longer afford the transfer payments. That’s when it will really hit the fan. It will be interesting to see how the liberal media will then point the accusatory finger of racism at the struggling middle and lower white classes, who will be in no mood to be lectured to by the coastal media elite.
Posted by Xenophon at 2:24 PM on October 2
The next stage of this collapse will be the hedge funds. It’s already happening.
A recent poster made the comment that Army Times had announced that elements of the Third Infantry Division is training this month to combat “domestic man-made disasters” and opined that perhaps they are getting ready for the riots that will follow an Obama defeat in November. There is another possibility, however, even more unsavory than this one. President Bush some time ago signed an executive order relating to “continuity of government” allowing him in event of “terrorist acts”, “financial crisis” or “natural disaster” to suspend the constitution, declare martial law, cancel elections, etc. Since the National Guard after hurricane Katrina went door-to-door confiscating legally-owned firearms in violation of the US Second Amendment, the implications of this training for 3rd ID are a little unsettling, as the “financial crisis” in Bush’s executive order is already upon us.
Posted by Michael C. Scott at 4:40 PM on October 2
Thank you….
It is a question of WHO, and also of WHY.
The WHO are the elites of every tribe in the U.S.
The WHY is for more POWER and WEALTH.
The white elite, the black elite, the Jewish elite, and the Hispanic elite see each other as kindred spirits.
They control the Government, the Media, and the Banks.
They use this power to keep the rank and file blacks, whites, Hispanics, and Jews at each others’ throats.
For enforcers they have co-opted the cultural Marxist new left, who believe they are moving history forward to UTOPIA through racial conflict.
Each side, that is the new left and the elite, understand that they are using each other for their own benefit.
Each side believes they will vanquish the other.
So it is up to each one of us to stop viewing each individual black as part of “the blacks”.
Each white as part of “the whites”.
Each Hispanic as part of “the Hispanics”.
And each Jew as part of “the Jews”.
As long as we act like trained monkeys acting as our masters’ want us to act, we will always be nothing more than grist for their mills.
Or we can become men again.
The elites don’t think racially.
But they want us to.
Posted by Michael Erpelding at 4:47 PM on October 2
Except for a privileged few who are born with silver spoons in their mouths, Whites have to actually earn their respective ways in life. Blacks do not. Whites have to earn the right to secure loans. Blacks do not. Whites have to qualify to enter schools. Blacks do not. Whites have to take extra steps to secure government contracts. Blacks do not. Whites have to qualify for employment. Blacks do not. Whites have to prove their merit and potential. Blacks do not.
Blacks, as a whole, act as a massive handicap for America in virtually every way. They prove time and time again that they are unable to function, even partially, in civilization. They are not even dependable when it comes to menial tasks that require little thought.
The federal government entered the picture in the 1990s and threatened lenders by essentially saying, “It does not matter if Blacks are untrustworthy and terrible credit risks with no redeeming qualities whatsoever, nor does it matter that they will never repay the loans or that you will squander your investment capital by participating in very high-risk loans on their behalf. You must lend them money. If you refuse, we will
punish you. Your progress will be routinely measured.”
Ergo, the only way that Blacks “succeed” in civilization is through the heavy-handed tactics of the heavily-armed, federal government, which forces their will on the general White populace.
Of course, Liberals, always the Socialists and Communists, forever maintain that all Blacks are entitled to a home and that it is the responsibility of the government to provide homes for them. In the 2000s, the Neocons, driven by greed and corruption, were only too happy to oblige.
What should the lowest 98 percent of White taxpayers expect next? Should we expect to surrender every penny that we own and all material possessions that we own to the federal government for them to redistribute the collective pot equally to all citizens and denizens? That seems to be what the government is pushing and what many gullible White citizens are demanding.
The USA is already a fully Socialist country. How long until full Communism is forced upon us?
Posted by at 4:53 PM on October 2
Lending practices were fudged (badly) to help minorities, however this was not the main reason that said practices were fudged. No reputable economist would take that position and AmRen readers are rather gullible if they think minority home-buying practices lie at the bottom of the worldwide financial crisis.
At the bottom of this crisis is the outsourcing of American heavy industry, the break-down of America’s physical economy and its replacement with a succession of economic “bubbles,” the latest and most pernicious of which is the housing crisis.
I have lived in California my whole life and have seen home prices skyrocket to levels unattainable for the vast majority of white as well as minority persons. (If you do not live in California or one of the other high-grade economic areas in this country, I doubt you have a full sense of the fact that there has been a housing crisis for over a decade). The imposition of this housing bubble was the impetus for the sub-prime loan practices that precipitated the current crisis. Any analysis that omits these catalytic steps is insufficient.
Posted by at 5:02 PM on October 2
The thing with this minority mortgage mess is that it’s been in the news for at least a year now. People are really starting to talk about it now so I suspect the left wing gestapo and the NAACP will attempt to suppress any further news coverage of it. “Mortgage meltdown”, “subprime”, “bad credit” and “low income” will be considered code words for black disfunction and called hate speech.
Posted by Steve at 8:37 PM on October 2
The person that posted at 5:02 has it right. Free trade signed by Bill Clinton has moved the decent paying jobs out of the country. Housing is way too expensive. I saw on tv news people who were working 2 or 3 jobs to make payments. Then this government wants to tax the majority who can barely keep up with neccessities. We are at the tipping point. Usuary and greed are not helping. Then the politicians say the jobs are not coming back. Wheres the unions in all this. They must of lost some members but you don,t here a peep out of them.
Posted by at 10:49 AM on October 3
Lending practices were fudged (badly) to help minorities, however this was not the main reason that said practices were fudged. No reputable economist would take that position and AmRen readers are rather gullible if they think minority home-buying practices lie at the bottom of the worldwide financial crisis. Posted by at 5:02 PM on October 2
“Anren readers are rather gullible” in determining blame on minorities for the sub-prime loan fiasco?
Do you even begin to understand that almost the entire international business world accepts minority giveaways as the basis for the meltdown? Except, of course, the leftist radicals who caused it and are stupidly attempting to divert blame. Amrenners have reached the same obvious conclusions and are just agreeing with the multitudes of experts.
Do you realize how foolish unintelligent, and out-of-touch you sound? It’s like claiming that Hurricane Katrina didn’t cause the devestation of New Orleans.
Posted by ice at 3:07 PM on October 3
There are more of these disasters on the horizon. California has just asked the Feds for a 7 billion dollar loan to fund their majority minority schools. Illegal immigration costs the state 10 billion a year! Wake up!
Posted by at 4:54 PM on October 3
The government says they might make money by buying these toxic loans. A great deal of these mortgages were for amounts in the neighborhood of $50,000 or less. That tells me these houses are 40 year old 2 bedroom woodframes sitting in undesirable neighborhoods just off MLK blvd. How are they going to find a buyer without resorting to subprime lending?
Posted by at 8:55 PM on October 3
Mr. Scott,
It was the city police who confiscated weapons in New Orleans. In fact, the NRA filed a lawsuit against the city of New Orleans on behalf of those gunowners.
To which executive order are you referring? Check out Clinton orders 12919 and 13010. They sound pretty scary.
Posted by middle-aged magnolia at 11:25 AM on October 4
Diversity is the wrecking ball for the US economy from subprime lending to offshoring to affirmative action hiring to bad public schools.
Posted by at 5:00 PM on October 4
Want a laugh? In Baltimore the cry was heard as elsewhere that Blacks were unfairly discriminated against for mortgage loans. Fast forward to about a year ago the Blacks headed by Mayor Sheila Dixon banded together to sue lender Wells Fargo for unfairly foreclosing on loans they couldn’t afford! Damned if you do or don’t?
Now with the lending crisis at hand two Black congressmen who represent districts with 58% of the foreclosures voted for the Wall Street Bailout with assurances from Barney Frank that their constitents would receive handouts from the Fed setup agency dispensing tax dollars. of course we could expect President Barry Obama to oversee things impartially for the taxpayer? Meanwhile we need to be “patriotic” and “fair” to see that these mistreated borrowers will take our money without our permission - wait a minute, isn’t that called stealing?
Posted by factualist at 7:07 AM on October 5
Question Diversity,
You are right about houses being overpriced, but think about the domino effect of falling prices. The housing boom had created a plethora of new houses, so a lot of people have new mortgages that they obtained with no downpayment, therefore have no equity. A decreased value would mean that their mortgage is now unsecured. They also have to pay a mortgage on a house that is not worth what they are paying amd comparable houses are selling for much less. So houses could be abandoned at a greater rate than ever. Or banks could call loans or refuse to refinance the ARM when the balloon is due if the buyer doesn’t put up more collateral. These are all legitimate concerns. However, I don’t think the government can stave off the disaster forever, and ultimately may make things worse.
Posted by middle-aged magnolia at 9:53 AM on October 5
Middle Aged Magnolia:
You’re correct. What you are describing is the only possible consequence of the affirmative action mania in mortgage lending. The banking and financial system is in crisis because these mortgages were bought and sold as if they were assets, and people assumed that even if the blacks and Hispanics didn’t make their payments, the housing values would go up forever. But if that much property gets foreclosed upon, and banks get scared and reimpose standards for mortgages, thereby with the algebra reduce the principle values on loans they approve, where else is housing going to go but down?
Posted by Question Diversity at 9:57 AM on October 5
Minorities benefit from the so-called “bailout.” White (aka the taxpayers) will suffer further financial degredation. This is just an excellerated wealth transfer from whites. We’re getting to the point where we can’t afford to raise families, and US as we know it will end. I think this will happen within 15 years.
Posted by at 5:20 PM on October 5
5:02 PM on Oct 2 has its finger on something. If we still had a real economy, based on creating wealth by changing ore into steel, and steel into sewing machines, we might have something to fall back on. People need clothes. But people don’t need five dollar cups of flavored coffee, or the latest CD from Country Bob and his Homeboy Rapsters. Too much of what we do make here is utterly frivolous, the object of what economists call discretionary spending. Our products serve short-term desires, are consumed or discarded, and replaced by other baubles of temporary interest. But when people are short of money, they stop buying things they can do without. Goodbye Starbucks, and all the money invested in their stock.
Posted by Schoolteacher at 9:56 PM on October 5