Wednesday, December 12, 2012

Revisiting the mortgage crisis

Blaming the other side for the mortgage crisis is an ongoing game, though at a lower pitch than before. A newly published economic study is again focusing attention on the causes, though the study fails to look at the whole picture.

The good thing about this study is that it's gotten people commenting again. That's given me the chance to learn more. This post was my gateway to looking at the issue again, and deserves a mention. However, it is also too narrow in scope-- it focuses only on the thesis that banks should have priced risk better, and it's not the fault of CRA that they didn't.

The real feast is in the comment page of this brief post. Especially worthwhile are the comments of Steve Sailer, a journalist/blogger who frequently writes about the preferable outcomes and values of white American culture and provides evidence to back it up. To some, that makes him a racist. Maybe he is, but he still has points that are important to consider.

These are some facts (or possible facts) that I learned from his comments:
  1. The Clinton administration "threatened" Countrywide, a mortgage lender, with heavy regulatory pressure if they didn't lend to more low-income borrowers. 
  2. The regulatory environment favored robust low-income lending when mergers were evaluated for approval. Bankers who were sceptical were effectively weeded out.
  3. Steve Sailer isn't an ideologue who is trying to put all the blame on one quarter.
These comments discuss how CRA and similar policies changed mortgage lending practices to make it easier for low-income and minority borrowers to get home loans. These changes are part, but only part, of the huge developments in mortgage lending, including all kinds of new mortgages and the packaging of mortgages as securities.

It is clear that the Democrats liked the outcome of more minorities getting home loans. Republicans liked it too, and "the ownership society" became one of their slogans. It was good that more minorities and lower-income people were able to become homeowners and enjoy those benefits such as building equity.

What is unfair is how some conservatives are now trying to place all the blame on Democrats and their policies. This is a lie. Though there definitely was pressure from Democrats, including the Clinton administration, to increase minority lending, it is hardly the largest cause of the crisis. A fair accounting looks at many factors, not just CRA, Fannie, Freddie, and what Dems did. This was only part of the action, not even close to the whole rotten edifice.

We should be trying to figure out what policies were good or neutral, while identifying others that were problematic. This applies to all areas, including low-income lending, underwriting standards, rating agencies, and securitization. However, we may not be able sort the good practices from the bad because the horribly overheated housing market confounded everything.

Most important, let's all learn some lessons from this horrible crisis. And please, let's not use it just to bash "the other side."

Untold suffering

Update 1/24/14. "The Dems caused it" is still a favorite claim. So in arguing it yet again, I found this great article about how the Bush administration and the Supreme Court hampered states from trying to prevent the crisis they foresaw. Also, here's a good exchange between two data heavyweights, though there's no resolution of their differences. [Sadly, those comments are no longer available.]

Let me say clearly: Dems made this worse, Republicans made this worse, Fannie and Freddie made this worse, but most of all it was the Wall Street banks. Anyone who ignores some of the players is lying and it's probably for political reasons.

Update 3/27/14. Still a favorite claim. I tried to find out how 'liar loans' [stated income loans] started. I didn't find the answer, but I found this testimony from 2006.

Update 3/28/14. More great testimony here, but don't stop at the title because it's misleading. Follow-up post here.


Anonymous said...

It's important to note that during the Clinton years, home prices in general were not over-valued nor subject to rapid increases based on speculation in an overbought market. That happened later as lenders found that they could make a lot of money lending to less-than-stellar borrowers simply because if they had to foreclose, they would get their money back from rising home prices. Those loans therefore looked less risky -- as long as home prices continued to climb.

And it wasn't only low-income home loans that suffered. Lots of middle and upper-middle income refis got those lenders in trouble once their re-mortgaged home values fell below their market value. That was particularly true for vacation and investment properties that the go-go 2000s brought to the fore.

Looser standards to low-income borrowers may have started the ball rolling, but the opportunity to make money with little perceived risk is what led to the crisis. In the environment we had in 2002-2008, lenders would have loaned to low-income and marginal borrowers with relish for profit, not simply to satisfy government regulators.

ModeratePoli said...

@Anon, absolutely agree, but I'll raise you. Lenders were heavily involved not just with "marginal" borrowers, but many were actively seeking dupes for fraudulent loans. I had such a sick feeling at the time, even from a safe distance.

Anonymous said...

Wherever there are profits to be made, market players need little encouragement from the government. "Marginal" borrowers have to include all types of individuals and organizations. There were dubious operators in both buying and selling mortgages, in packaging and rating them, and in buying and selling the risk associated with them.

Attempting to blame Clintonian policies is an excuse and just another case of political spin by being highly selective in both facts and, particularly, analysis of cause and effect.

Thanks for bringing this topic back up.