In Bid to Boost Black Homeownership, Rick Santorum Fueled Housing Bubble That Led to Financial Crisis

Charles C. Johnson, Big Government, February 27, 2012

One of the consistent refrains from the Rick Santorum campaign is that he opposes government bailouts, but as a senator, he supported the something-for-nothing policy most responsible for the housing bubble. Like George W. Bush and other “compassionate conservatives,” he was naively obsessed with affordable housing for low-income potential home buyers, a mismanaged cause that led to billions in loan defaults and which the IRS called a “scam.”

In his book It Takes A Family (2005), Santorum wrote at length and approvingly of the Nehemiah Project, a Sacramento faith-based nonprofit that helped mostly black low-income buyers get access to home ownership through its down-payment assistance program. (The name Nehemiah, who rebuilt Jerusalem, comes from the Bible.)

But as Jeff Horwitz and Dave Jamieson report from the Huffington Post’s Investigative Fund, down-payment aid programs like Nehemiah effectively “pav[ed] the way for even riskier subprime loans by private lenders.” How did this happen? Horwitz and Jamieson explained in 2009.

A home builder would agree to make a “gift” to the nonprofit in an amount equal to the down payment. The nonprofit would give the cash to the buyer, often earning a generous fee for its role as middleman. In less than a decade, nonprofits had arranged more than a million no-money-down house sales around the country. By 2008, they represented more than a third of all loans backed by the Federal Housing Administration (FHA).

The Santorum-endorsed Nehemiah Project and its nearest competitor, AmeriDream, according to Horwitz and Jamieson, helped set up 392,000 mortgages worth $54 billion, earning tens of millions in fees for itself—and nearly a billion dollars each for Centex, D.R. Horton, and Dominion Homes, the builders who made the donations that made the shaky mortgages possible. The loans to the buyers, which ended up with triple the default rate of other FHA loans, often required no down payment at all from them, something of which Rick Santorum specifically approved. Indeed, Santorum proudly worked with Senator Dianne Feinstein (recipient of $1000 from Nehemiah’s CEO in 2006) and other Democrats to protect the Nehemiah Project from oversight from the IRS and HUD.

Santorum wrote in It Takes a Family that until the project got underway in 1997, some of the experts at HUD considered buying a home without a down payment “unwise, even dangerous … They feared it would make it possible for so-called ‘unworthy’ people to buy homes, and, as a result, push up default rates.” (148)

But even as he scoffed at the old-fashioned idea, it was being vindicated. HUD had warned years before, in 2000, that borrowers who participated in the then-new Nehemiah Project had default rates well above average. Worse yet, a GAO investigation released in November 2005 concluded that the home builders who were part of the program were simply raising their prices to recoup the down-payment grants.

Santorum ignored such warnings. Borrowers through organizations like Nehemiah have since defaulted on $3 billion worth of loans, sticking the FHA insurance fund with $1 billion in losses. According to the Congressional Research Service, nonprofits like Nehemiah helped balloon the number of FHA loans from 2 percent in 2000 to nearly 38 percent in 2007, and these nonprofits’ revenues from the down-payment gifts increased from $18 million in 1994 to $162 million by 2002.

Those fees—after they were investigated by the IRS—dropped to $70 million in 2005, according to Horwitz and Jamieson, causing financial problems for these nonprofits.  At one point, Nehemiah had to let go of nearly all of its employees, thanks to President Bush’s decision to ban such organizations from serving as middlemen in October 2008. Unfortunately, President Obama gave these “nonprofits” a new lease on life when he signed the American Recovery and Reinvestment Act of 2009, which included a first-time home buyer’s grant of $8000. It was just the kick that Nehemiah needed to get back into business.

{snip}

{snip} In his book, he [Santorum] described visiting its Sacramento headquarters and meeting Nicole Learned, a down-payment assistance supervisor. Santorum’s naivete is clear from his own words:

The information on the screen in front of her includes data such as “income: $45,000; sales price: $150,000; # in house: 2; gift percent: 3; gift: $4,500; fee: $750.”

Without ever talking to that person making $45,000 a year buying that $150,000 home, and without ever talking to the lending institution, Nicole reviews the record in front of her, quickly whips her fingers across the keyboard, and makes what was the impossible possible: a new homeowner. In just a matter of moments, those keystrokes helped one American build wealth, wealth that just a few second earlier was beyond his reach. As Scott Syphax [CEO and president of Nehemiah] says, “America is blessed with an ever expanding pie. It’s getting people into the kitchen that’s the problem.

“Because property ownership is the primary asset development vehicle in this nation going back to its founding, by democratizing access to home ownership you are bringing more people into the civic and economic fabric of the United States,” he says. “Home ownership should not be a privilege reserved for those who merely had the good fortune to be born into a family of means who can loan or give them a down payment.”

And with that insight was born the down payment assistance program. Those numbers on the screen tell the story. The “3” next to “gift percent” means that Nehemiah is giving this homebuyer a gift of 3 percent of the purchase price, or $4,500. This gift goes right to the lending institution to pay all or some of the down payment. The fee of $750 refers to the amount the lender—not the homebuyer—will pay Nehemiah. That’s above the contribution the lender or builder will make to the Nehemiah Project for the exact same amount that Nehemiah paid for the down payment.

It is, frankly, just a circle of money, with Nehemiah ending up with a $750 fee and the homebuyer ending up with a home. The entire concept was created by the folks at Nehemiah to break down what they saw as one of the greatest barriers to wealth creation: the requirement that the homebuyer come up with a down payment. (159-160)

Santorum noted that after talking with Syphax, he, along with Senator Feinstein, helped pass the Down Payment Assistance Act in December 2003. The law, in Santorum’s words, allowed “down payment assistance programs like the Nehemiah Project that are directed toward low- or moderate-priced homes [to qualify as] permitted charitable activities under the IRS Code. This bill will ensure that the legitimate nonprofit assistance programs are protected while also providing some congressionally directed oversight to prevent abuses.”

The act provided more than $200 million, for fiscal years 2004-2008, in grants to low-income homeowners, further expanding the subprime housing bubble—a problem Santorum didn’t look into. Referring to Nehemiah, he said, “The good work being done here is happening without the government—and it is helping to stabilize the American family and provide for the common good.”

{snip}

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  • libertarian4339

    “Santorum is among the ranks of the “compassionate conservatives.”

    He also favored allowing black felons to vote.  In one debate he turned to Romney and said that Romny wasn’t in favor of it, even though most of the felons are black, because blacks make up a “dispropotionate” number of inmates.

    He said he was for it and chastized Romny, because he doesn’t support.

    When I heard him say that I wondered to myself if this egghead realized what he was saying.  I’m just wondering if he thinks the blacks in prison didn’t deserve incarceration, because they were all framed.

    He’s just another incompetent, brain-dead Republican who is just the type the Republican management loves to see run,  just like Bob Dole and John McCain.

    The group they have now are a mess.  They couldn’t stop arguing and shooting each other down long enough to discuss the issues and take the opportunity to say what Obama was doing wrong.

    It’s no wonder they can’t hold on to the White House.   I’m fairly certain they lose again this time.

    • tickyul

      Yep, the Republirats are looking really pathetic…………Mr H will get back into the WH with ease.

      • Zorro

        Ron Paul is the only one in all the Polls that can beat Barry, but apparently we don’t want to win, again. 

  • ncpride

    “Home ownership should not be a privilege reserved for those who merely had the good fortune to be born into a family of means who can loan or give them a down payment.”

    That statement makes me furious and is like a slap in the face to people like me and my husband who scrimped and saved every penny for a down payment on our home. I assure you RICK, there was no privilege and no one offered us a loan or gave us a down payment. We earned what we have the old fashion way… you know, hard work. I knew I didn’t much like this guy.

    •  it irritates the hell out of me too! since when is going to work everyday and living responsibly the result of  “good fortune”? very few hardworking citizens come from “families of means”.  that’s why they are referred to as “the one percent”

  • bluffcreek1967

    A while back I looked at Rick Santorum’s voting record, and it wasn’t pretty. He is right on some moral issues, but he is truly just another big government Republican who wants to continue supporting the Black and Hispanic masses on welfare and other forms of tax payer assistance. Whenever I hear someone described as a ‘compassionate conservative,’ it instantly tells me that such person will do relatively nothing to curb or end welfare. It tells me that he/she will be ‘soft’ on the Black and Hispanic underclass, that new government ‘programs’ will enacted ‘help the underprivileged,’ and that an exorbitant amount of public funds and resources will be squandered in its effort to accomplish such foolish goals.

    • An early 21st Century “compassionate conservative” = A big government diversity loving tax-and-spend liberal of 1960.

  • I suppose I’ll have to e-mail Rickroller II my mortgage rant that I had on AR several months ago.  Don’t worry, I’m not going to re-post it.

    Seriously, Santorum is a lawyer, and on his way to earning a J.D., he had to have gone through a few economics classes.  Either he fell asleep during them, ditched most of the lectures, or just plain forgot everything he was supposed to learn after the final.  Anyone who has enough common sense, and has passed Macro and Micro 100-level classes, would have enough sense not to say and advocate the things he did here.

    But…when your goal is racial pandering, all facts, reason, logic and evidence go out the window.

    • convairXF92

       Do a google on “Catholic economics”. 

      (Horror story:  MIT had two Catholic priests who found the material in “Macro and Micro 100-level classes” offensive.  One was an outright commie, praised the Socialist Labor Party in sermons, etc.  He left MIT to work for a think tank.  The second one had the gall to organize a *for-credit* freshman seminar on Catholic economics to oppose the approach taken by the Nobel-heavy MIT economics department.  Do note that MIT economics and economists, particularly Paul Samuelson, were already significantly left-of-center; not leftist enough for this priest though. 

      Then there was the MIT Lutheran-Episcopal minister who told the student congregants, after the sermon on the camel and eye of needle, that they had to give up ALL THEIR MONEY in order to attain salvation.  She repeated the phrase a number of times.  She said that the [shocked] students in Liturgy Planning asked her, do we really have to give up every last penny, and she said yes, one must give up ALL ONE’S MONEY to be saved.  

      This was real.  I kid you not.  If one finds this at a school with a top-5 econ department, I hate to think about what has gone on at the Catholic schools.)

      • Do a google on “Catholic economics”.

        PJB is big on them, but I think the Catholic economists he reads are way different.

        It’s probably that a lot has changed since I was in college.  All I remember is that my texts and profs presented multiple viewpoints, “fair and balanced,” to borrow that network’s canard.  But my point was that it hardly takes a genius to understand why you need to require substantial down payments for real estate, and why it’s folly not to require them.  I’m not a genius, just your typical suburban know-it-all who doesn’t really know half of what he thinks he knows, but even I could figure this all out.  A distinguished two-term U.S. Senator and serious Presidential candidate couldn’t?

  • Bon, From the Land of Babble

    Santorum supported the something-for-nothing policy.

    Something for nothing?  Just like the favors YOU received when you were in congress, right Santorum?  You weren’t called the King of Earmarks for nothing.

    How about we talk the special treatment YOU received on YOUR mortgage,  Santorum?

     Philadelphia Trust is a boutique bank that caters to ‘affluent investors and institutions,’ and offers special low mortgage rates to investors in the bank who have a quarter million dollars or more in liquid assets.

     Santorum’s financial disclosure filings prove that he did not meet either requirement at the time  but the bank still gave him a $500,000 five-year loan at the low rates. Officers of the bank also donated $24,000 to Santorum’s re-election campaign. 

    There was also this:

    Santorum introduced a bill that required the National Weather Service to keep collecting weather data, but said it couldn’t release the data to the public! They had to hand it to private weather companies who then would make a profit off of it.  Accuweather, a private weather company in Santorum’s state, gave him tens of thousands of dollars right during the time he promoted this absurd bill.

    Bon

  • Oil Can Harry

    Did it ever occur to this neocon buffoon Santorum that someone who can’t save enough for a down payment on a house probably won’t be able to make 360 months worth of mortgage payments?

    Then again this is the same geek who was conned into handing our tax $ to African dictators after being lobbied by U2 lead singer Bozo.

    • blight14

       And his first directive as ‘president’ would be to order the invasion of Iran…..he is truly disturbed….he is of the same ilk as John Hagee, brain washed beyond help.

  • ncpride

    You have my vote.

  • slobotnavich

    In fairness to Santorum and other largely clueless pols, the subprime as well as the general real estate market before the latest collapse was fueled mainly by the curious belief (cruelly refuted roughly every twenty years) that real estate can only apppreciate, and that even an out-of-equity position will be quickly righted by climbing real estate values.  Sub-prime black borrowers were still a relatively low percentage (total money-wise) of defaults.  After all, the average prices of homes bought by blacks were much lower than those of the population at large.  Santorum’s desire to make home-owners of blacks was both well intentioned and sound social policy.  It was just ill-timed.

    • schmenz

      Interesting, but I’m not certain that it was sound social policy.  It did look to me like a little more sophisticated application of the old “block-busting” techniques of the 50s-70s.  And the results were often the same: whites would move away because the new black homeowners would take some very bad habits with them into their new neighborhood: loud rap “music”, people going in and out of their houses all hours of the night driving up in cars with music so loud that neighbor’s windows would literally shake, litter in the streets in front of these newly-purchased homes, drinking parties every weekend or almost every weekend, etc.

      Most civilized people don’t like to live in such an environment.

      • slobotnavich

        Thanks for the comment. I certainly wouldn’t disagree with your observation that relaxing loan standards for minorities is not exactly sound social policy – even without interest rate dislocations it almost certainly drives home values down in participating neighborhoods, which drives the newly minted homeowners ever further under water, and thus increasing the likelihood that they’ll simply walk away and abandon the property if they start having problems meeting their loan obligations. I suspect that whole initiative to increase home ownership among minorities was at least partly based on the assumption that with something to lose (value) they’d take better care of the properties than renters. There might have been some basis for this theory, but with the crash in real estate prices the whole theory became a moot point and probably will remain so for the foreseeable future.

        The only instance in which I’ve seen inner-city neighborhood deterioration reversed has occurred when East Asian immigrants, the best being Koreans, moved in and actively restored value and law and order. I say the Koreans are the best because they’re tough SOBs and don’t take abuse from blacks or anybody else.

        Again, thanks for taking the time to write.

        John

    • Oil Can Harry

      Slobotnavich, it is never ‘well intentioned and sound social policy” when the gov’t gives houses to people who otherwise could not have gotten a bank loan because of their poor credit histories. These people are simply too great a risk to go under.

      Nor was this mortgage meltdown hard to predict; during the last ten years I recall Ron Paul and the bloggers at lewrockwell.com repeatedly warning that the housing bubble would burst.

  •  Don’t think this all happened in 2005,  the cause of the housing bubble dates to the early-mid nineties and bill Clinton and FNMA CEO Jack Johnson.  After Clinton began vigorously enforcing the CRA in 1994-5, both minority home ownership  rates and home prices began to rise simultaneously, and not coincidentally, with  the consequences realized in 2008