Patterico's Pontifications



Filed under: General — Patterico @ 12:48 pm

I started this blog 17 years ago today.

It still exists, largely due to the efforts of JVW and Dana. Other great folks have contributed to it in the past, including DRJ, Karl, JD, and others.

Thanks to them, and to you for reading.

Bloomberg Is (Partially) Right: Federal Housing Policy Did Contribute to the Housing Crisis

Filed under: General — Patterico @ 11:37 am

A video recently surfaced in which Mike Bloomberg blamed the federal government, and specifically a law called the Community Reinvestment Act, for the housing crisis. He’s (partially) right. It was (partially) responsible for the housing crisis.

You should know that the guy who wrote the law, Robert Kuttner, thinks his own law is not responsible. He has written a piece titled I wrote the law Bloomberg blames for the financial crisis. He’s wrong. Kuttner begins by setting out Bloomberg’s criticism:

Ever since the collapse of subprime mortgages took down the entire economy, the right wing has repeated a simple story: The government compelled banks to lend money to borrowers who were not qualified. When they defaulted on their loans, banks took big losses and the foreclosures cascaded into a general financial crisis.

That story has the cause and effect backward, yet former New York mayor turned presidential candidate Mike Bloomberg has embraced it. In a 2008 speech at Georgetown that recently surfaced, he attributed the collapse to “pressure on banks to make loans to everyone.” He defended redlining entire neighborhoods as sound banking practice. As Bloomberg explained it, “Redlining, if you remember, was the term where banks took whole neighborhoods and said, ‘People in these neighborhoods are poor, they’re not going to be able to pay off their mortgages, tell your salesmen, “Don’t go into those areas.” ’ ”

“And then Congress got involved — local elected officials as well — and said, ‘Oh, that’s not fair, these people should be able to get credit.’ . . . Banks started making more and more loans where the credit of the person buying the house wasn’t as good as you would like,” Bloomberg said.

Everything about that claim is wrong. I should know, because I wrote the law.

“I am biased towards a belief that the law I wrote did not contribute to the financial crisis. Turns out I do not believe it.”

Kuttner rests his defense on the fact that the CRA, which “created an affirmative obligation not to redline and to provide credit without regard to location,” had language that clarified that this obligation was to be met “consistent with the safe and sound operation of such institutions.” He explains: “We made sure to add that phrase so the legislation would neither pressure banks to make bad loans nor be faulted for doing so.”

What Kuttner ignores is that the language he cites fell by the wayside in practice. There is simply no disputing that the government used the law and similar policies to pressure and in some cases force banks to make loans that Democrat housing officials and the left-leaning media acknowledged carried a higher risk of default. For example, in 2008 Ed Morrissey posted a video in which Clinton’s HUD Secretary Andrew Cuomo proudly explained that a lawsuit settlement with a Texas bank would create “affirmative action” by the bank (compelled by the settlement) that would result in the bank taking a “higher risk” on mortgages that would result in a “higher default rate.” I can no longer find the video but here is Morrissey’s transcript of an excerpt:

CUOMO: To take a greater risk on these mortgages, yes. To give families mortgages that they would not have given otherwise, yes.

Q: [unintelligible] … that they would not have given the loans at all?

CUOMO: They would not have qualified but for this affirmative action on the part of the bank, yes.

Q: Are minorities represented in that low and moderate income group?

CUOMO: It is by income, and is it also by minorities? Yes.

CUOMO: With the 2.1 billion, lending that amount in mortgages — which will be a higher risk, and I’m sure there will be a higher default rate on those mortgages than on the rest of the portfolio

This was hardly the only such settlement, and the settlements were of lawsuits brought under the CRA regarding lending practices in CRA Assessment Areas.

Thomas Sowell explains the mentality behind these lawsuits and cites some facts you may not have heard:

A major factor in the housing boom and bust that created the present economic predicament was massive government intervention in the housing market, supposedly to correct discrimination in mortgage lending. How did they know that there was discrimination? Because blacks were turned down for mortgage loans at a higher rate than whites.

It so happens that whites were turned down for mortgage loans at a higher rate than Asian Americans, but that fact seldom made it into the newspaper headlines or the political rhetoric. Nor did either the mainstream media or political leaders mention the fact that black-owned banks turned down black mortgage loan applicants at least as often as white-owned banks did.

There was never the slightest reason to expect the different racial or ethnic groups in the United States to have the same credit ratings or the same behavior or performance in any other way, when both racial and non-racial groups of various sorts have for centuries had radically different patterns of behavior and performance in countries around the world.

The difference between per capita income in Eastern Europe and Western Europe has long been greater than the difference in per capita income between blacks and whites in America.

Sowell explains in another column that the notion that lenders were leaving money on the table that they could make from totally qualified black buyers strains credulity:

[L]enders are in the business of making money, and they don’t much care whose money it is, so long as they get paid.

Politicians, on the other hand, are in the business of getting votes, and they don’t much care whose votes it is — or what they have to say or do in order to get those votes.

It was government intervention in the financial markets, which is now supposed to save the situation, that created the problem in the first place.

Laws and regulations pressured lending institutions to lend to people that they were not lending to, given the economic realities. The Community Reinvestment Act forced them to lend in places where they did not want to send their money, and where neither they nor the politicians wanted to walk.

Now that this whole situation has blown up in everybody’s face, the government intervention that brought on this disaster in the first place is supposed to save the day.

That fact was recognized by none other than top Clinton housing official Henry Cisneros and the well-known right-leaning publication The New York Times, which once wrote: “As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.” The Times goes on to say that as a private developer (but also obviously as a housing official) Cisneros “encouraged the unprepared to buy homes” as “part of a broad national trend with dire economic consequences.” It says Cisneros “reflects often on his role in the debacle” and says I’ve been waiting for someone to put all the blame at my doorstep”:

Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.

He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too.

The Times tries to spin some of this by suggesting that Cisneros’s willingness to take blame is related to his private activities. But his reference to “all the blame” seems to make it clear that he is talking about his actions as a housing official rather than as one of a gazillion developers. And the debacle of which he speaks was one clearly set in motion by the federal government’s actions in loosening standards for first-time buyers in an effort to increase home ownership for low-incoming and minority homeowners:

Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.

It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance.

“You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.

From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.

“I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral,” Mr. Cisneros says.

. . . .

Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.

And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.)

Now people like Robert Kuttner are trying to whitewash this history, and suggest that greed by banks (which was certainly a factor) was the entire story, and that the federal government’s loosening of standards for minority ownership had no effect.

Was the CRA the whole problem? No. Did it contribute to the housing crisis? Yes.

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