A Tale of Two Gaps: Achievement and Home Ownership, or How Political Correctness Is Unraveling America
Tom Shuford, Ed News, October 21, 2008
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A lot of politicians and, now we know, a lot of Wall Street CEOs are “doing the three-monkey thing.” It was their hear-no-evil, see-no-evil, and, above all, speak-no-evil attitude towards lowered lending standards — to close the white-minority “home ownership gap” — that caused the immense destruction of wealth of recent months.
Contemplating the wreckage brings to mind another gap, the white-minority “achievement gap.” Attempts to close this gap have also produced a spectacle of destruction, if one knows how to look. Let’s take a glance before proceeding to the Wall Street variation.
{snip} This comment appeared under one of the perennial reports on the achievement gap:
“As a long-term veteran teacher of the Oakland schools, I can only say that I completely dread the likely professional development which is surely to come, in which white teachers will again be told how culturally insensitive we are and how we fail at teaching. I have been hearing this (it’s nothing new) for my entire tenure of nearly two decades in the district. I have been called a racist for every imaginable reason .&bnsp;. . except actual racism. Both black parents and students assume racism on the part of white teachers, and it’s up to you to prove otherwise. .&bnsp;. . {snip} (“Summit called to address racial disparities in academic performance,” San Francisco Chronicle, November 12, 2007) (1)
To close “the home ownership gap,” similarly deluded minds decided to target lenders — to increase their “cultural sensitivity” one might say. The subprime lending fiasco and the near-collapse of the financial system are the results.
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First, here’s Andrew Cuomo, President Clinton’s Secretary of Housing and Urban Development in an April, 1998 press conference, announcing an “affirmative action” settlement with Accubank, a Texas bank. HUD forced Accubank to provide 2.1 billion dollars in risky mortgages to low-income Americans. The latter five minutes of this eight-minute video features Barack Obama explaining his own efforts as community organizer working for ACORN to force banks to make high-risk loans. (2)
Next, watch President George W. Bush in 2002 cheerleading the attack on lending standards: seven-minute video. Excerpt: ” . . . few(er) than half of the Hispanics and half the African Americans own the(ir) home . . . We’ve got to work to knock down the barriers that have created a home ownership gap.” Signal to bank regulators: ease up.
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The videos give the gist of what’s behind the market meltdown: not free markets, not deregulation. Delusional and/or corrupt social engineering brought disaster.
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1977 — The “Community Reinvestment Act” (CRA) is signed into law by President Jimmy Carter. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. The purpose is to ensure that under-served populations can obtain credit, including home ownership opportunities.
1980s — ACORN (Association of Community Organizations for Reform Now) and other community organizations accuse banks of “redlining” — discriminating against minorities in mortgage lending.
1989 — Congress amends the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. The 1989 legislation requires a four-tiered CRA rating system for banks: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance”:
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1992 — July — A Federal Reserve Bank of Boston study indicates that “even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites.” The study suggests racism is behind the higher loan denial rate.
1992 — A Democratic-majority Congress requires “that Fannie and Freddie increase purchases of mortgages for low-income and medium-income borrowers.” Fannie agrees to “buy more loans with very low down payments — or with mortgage payments that represent an unusually high percentage of a buyer’s income.” (3)
1993 — Forbes Magazine queries Boston Fed Senior Vice President and Research Director Alicia H. Munnell on the default rates of black and white mortgage holders in the Boston Fed’s 1992 study purporting to show that racism is behind the higher loan denial rate for blacks. The reporters learn that the default rates on loans of whites and minorities are equal. This indicates no discrimination, they point out to Munnell. “[That] is a sophisticated point,” she replies. “You need that [lower default rates for blacks] as a confirming piece of evidence. And we don’t have it.”
Forbes: Did you ever ask the question that if defaults appear to be more or less the same among blacks and whites, that points to mortgage lenders making rational decisions?
Munnell: No . . . I do believe that discrimination occurs.
Forbes: You have no evidence?
Munnell: I do not have evidence. . . . No one has evidence.
1994 — Barack Obama represents Calvin Robertson in a lawsuit against Citibank “charging the bank systematically denied mortgages to African-American applicants and others from minority neighborhoods.”
1994 — The Riegle-Neal Interstate Banking and Branching Efficiency Act repeals restrictions on interstate banking, beginning a wave of bank mergers. This gives activist groups like ACORN “power to demand more loans to their constituents because CRA allowed them to charge noncompliance and stop such mergers.” (Wikipedia)
1995 — President Clinton establishes new CRA regulations “requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race” and “allowing community groups that marketed loans to targeted groups to collect a fee from the banks.” (Ibid)
1996 — A study by the Federal Reserve System and academic specialists finds — like the 1993 Forbes investigation — no evidence “of substantial levels of bias in mortgage lending.” Quoting from the abstract of the study:
“Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a higher likelihood of mortgage default than other borrowers. These findings argue against allegations of substantial levels of bias in mortgage lending.”
1996 — The Department of Housing and Urban Development (HUD) requires that 42% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 12% should be “special affordable” loans typically held by borrowers earning 60% of their area’s median income. Note how HUD ratchets up these requirements in 2000 and then again in 2005. (5)
1997 — Bear Stearns, one of the largest global investment banks, makes the first public securitization of Community Reinvestment Act (CRA) loans.
1998 — HUD Secretary Andrew Cuomo announces an “affirmative action” settlement with a Texas Bank forcing it to provide 2.1 billion dollars in high risk mortgages to low-income Americans. {snip}
1998 — The Clinton administration authorizes Fannie Mae and Freddie Mac to purchase subprime mortgages to satisfy their affordable housing obligations. Note these prophetic paragraphs in a 1999 New York Times report on Freddie and Fannie’s expanded mission:In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’ s.
“From the perspective of many people, including me, this is another thrift industry growing up around us,’ said Peter Wallison, a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
1999 — Finance professors at the University of Illinois and at Wichita State University report findings on the creditworthiness of minorities consistent with the 1993 Forbes report and the 1996 Federal Reserve study cited earlier:
“[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans. . . . [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently ‘unfair’ because it works as a tax on one group that is used as a subsidy for another.”
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2000 — HUD requires that 50% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 20% should be “special affordable” loans typically held by borrowers earning 60% of an area’s median income. (5)
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2004-2007 — Fannie and Freddie accelerate their high-risk lending. Peter J. Wallison (the same Peter Wallison who predicted the current crisis in 1999) and co-author Charles W. Calomiris, explain:
“In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of ‘affordable housing.’ They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they . . . substantially magnified the costs of its collapse .”
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2005 — HUD requires that 52% of the mortgages purchased by Fannie and Freddie should be held by borrowers earning below the median income for their area; 22% should be “special affordable” loans typically held by borrowers earning 60% of their area’s median income. (5)
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What to make of these events, studies, people?
Washington’s effort to “close the white-minority home ownership gap” is a social engineering project with colossal “cost overruns.” The project is akin — in quality of leadership, in denial of reality, in results for intended beneficiaries, in terrible costs imposed on the taxpayers — to our government schooling monopolies’ forty-year obsession with closing the white-minority academic achievement gap.
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The subprime mortgage fiasco gives us a chance anew to study an American proclivity, the PC-blinded calamity. The financial meltdown has unique particulars from which much can be learned. But it belongs to a special category of failure that ought to be studied as such. I hope to examine those particulars and that category in a subsequent piece.
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