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HOUSE OF CARDS

LIBERALS FUELED WALL ST. WOES

By STAN LIEBOWITZ

 

September 24, 2008

 

HOW did America wind up in its worst financial crisis in decades? Sen. Barack Obama explained it this way last week: "When sub-prime-mortgage lending took a reckless and unsustainable turn, a patchwork of regulators systematically and deliberately eliminated the regulations protecting the American people."

 

That's exactly backward. Mortgage lending took that "reckless and unsustainable turn" because of regulation - regulation driven by liberals and progressives, not free-market "deregulators."

 

Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices.

 

The mortgage market was humming along just fine when, in the late 1980s, progressives decided that it needed to be "fixed." Their complaint: Some ethnic groups got approved for mortgages at lower rates than others.

 

In reality, mortgage lenders were simply being prudent - taking care to provide mortgages to those who could best afford to make the payments.

 

The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. By 1991, critics were using that data to paint lenders as racist by showing that minority applicants were approved at far lower rates. Banks were "Shamed By Publicity," as one 1993 New York Times headline put it.

 

In fact, they found a racial disparity only by ignoring relevant data on applicants' ability to make mortgage payments - such as their assets and credit history.

 

But the political pressure was intense - with few in politics or media eager to speak the truth. And then, in 1992, came a study from four researchers at the Boston Fed, which seemed to bear out the critics' contentions.

 

That study was, in fact, based on quite flawed data - but the authors' political, media and academic protectors stifled most serious criticism, smearing the reputation of one whistleblower and allowing the Boston authors to avoid answering serious academic challenges (mine included) to their work. Other studies with different conclusions were ignored.

 

The very next year, the Boston Fed announced new requirements for banks - rules that have now turned out to be monumentally catastrophic: Adopt "relaxed lending standards" or risk being labeled as racists, and face serious penalties under the federal Community Reinvestment Act.

 

Gone (as "arbitrary" and "outdated") were traditional lending requirements such as requiring a down payment or limiting mortgage payments to 28 percent of income. (Of course, the loosened lending standards weren't limited to poor and minority applicants - that would be discriminatory.)

 

The new standards performed as intended: Home- ownership rates, stagnant for 25 years, began a rapid 10-year ascent in 1995, with many new homeowners being lower-income and/or minority families.

 

The large rise in demand for houses, however, fed a run-up in prices starting in 1997 - the infamous housing bubble. And rising prices hid the great vulnerability of these loans to defaults and foreclosures, because refinancing or selling at a profit was the easy alternative.

 

Soon, these loans began to be sold in the secondary market. Fannie Mae and Freddie Mac were enthusiastic proponents of relaxed lending standards and purchased large swaths of these loans.

 

Time after time, Fannie and Freddie trumped criticism by pointing to how they were helping broaden homeownership. Because of the subject's racial overtones, they beat back calls for reform even after financial irregularities were found.

 

Rating agencies such as Standard & Poor's had no experience with such loans - and imprudently used the misleading bubble-induced performance to incorrectly judge the likely performance of financial instruments based on such loans.

 

In 2002, the "reformers" declared victory. In a Fannie report, four academic supporters of relaxed standards crowed how these changes were "fundamentally altering the terms upon which mortgage credit had been offered in the United States from the 1960s through the 1980s . . . These changes in lending herald what we refer to as mortgage innovation."

 

Lucky us.

 

Now that the popped bubble has left us swimming in foreclosures, the supporters of loosened credit standards seem shy about taking credit for their "mortgage innovations." Instead, they blame subprime lenders for becoming "predatory" - when they were simply taking the Boston Fed rules to their logical conclusion while broadening the mortgage market.

 

Investors holding mortgage-based assets now want out. Perhaps they deserve a $700 billion refund - since they were sold a bill of goods by "progressive" politicians, academics and government officials who, in the hope of remaking society, insisted that loans based on relaxed underwriting standards were sound.

 

Stan Liebowitz is the Ashbel Smith professor of economics at the Business School at the University of Texas at Dallas.

 

http://www.nypost.com/seven/09242008/posto...0479.htm?page=0

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You know what amazes me about the conservative movement? It can't be wrong. Ever. Nothing is ever ever ever its fault or goes wrong. If something goes wrong, people just weren't conservative enough or its the fault of liberals. It's pretty much a self-fullfiling vision.

 

I give them credit. When I know I f*** something up, I can't look someone in the eyes with a straight face and then actually say it was their fault.

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You know what amazes me about the conservative movement? It can't be wrong. Ever. Nothing is ever ever ever its fault or goes wrong. If something goes wrong, people just weren't conservative enough or its the fault of liberals. It's pretty much a self-fullfiling vision.

 

I give them credit. When I know I f*** something up, I can't look someone in the eyes with a straight face and then actually say it was their fault.

 

 

:blink: actually after reading the bullpen forum you would think that conservatives were to blame for everything and that democrats are just innocent little bystanders :whistle

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That article is full of crap. It's totally backward. The deregulation of the market coincided almost perfectly with the major financial problems. Look at the S&L crisis of the late 1980s, and now this all-too-similar repeat of that crisis, magnified 100 times.

 

The article's source doesn't surprise me either (Murdock's rag, the NY Post again).

 

I also have to agree with F_M once again that conservatism has always labeled liberalism as the enemy, at least since the '80s.

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That article is full of crap. It's totally backward. The deregulation of the market coincided almost perfectly with the major financial problems. Look at the S&L crisis of the late 1980s, and now this all-too-similar repeat of that crisis, magnified 100 times.

 

The article's source doesn't surprise me either (Murdock's rag, the NY Post again).

 

I also have to agree with F_M once again that conservatism has always labeled liberalism as the enemy, at least since the '80s.

 

Actually, we liberals have been trying to destroy America since the 50's, at least.

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That article is full of crap. It's totally backward. The deregulation of the market coincided almost perfectly with the major financial problems. Look at the S&L crisis of the late 1980s, and now this all-too-similar repeat of that crisis, magnified 100 times.

 

The article's source doesn't surprise me either (Murdock's rag, the NY Post again).

 

I also have to agree with F_M once again that conservatism has always labeled liberalism as the enemy, at least since the '80s.

 

Actually, we liberals have been trying to destroy America since the 50's, at least.

Sorry, I can't say I was around destroying America in 1955. :confused

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I don't think the resp is on one party or one individual....

 

but Bill Clinton just said this --- ""Dems has been resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac"

 

http://blogs.abcnews.com/politicalradar/20...clinton-do.html (around 2:40)

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1999 NYT article anticipating the meltdown.

 

http://query.nytimes.com/gst/fullpage.html...agewanted=print

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

 

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

 

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

 

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

 

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

 

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

 

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.''

 

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

 

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

 

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

 

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

 

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

 

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

 

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

 

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

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You are so full of it. There are so many factors involved here and yet you keep on harping on this point and never provide any f-ing facts to back up your assertions. I know you want to blame black people, but damn! You need to be more objective and realize this is not a simple problem.

 

Bottom line:

 

1. Many homebuyers took out loans they couldn't pay back

2. Many banks gave out loans to people they shouldn't have given loans to

3. Many banks created loan programs that were too good to be true (the "you only pay 2 percent interest for 5 years and then start paying principal and interest" loans). Many mortgage brokers PERSONALLY tried to sell me these mortgages.

4. Fraud. I spent a summer (2005) closing loans and purchases of condos in Miami for a major firm and I saw the mortgage brokers LIE to their clients right in front of me. LIE. And many times the buyers seemed reluctant to go along with it, but really did not know what was going on. Sometimes they walked out of the room, but only because I informed them that the information the mortgage broker had provided them was FALSE. If I hadn't been there, they would have been duped.

5. Investment banks took on this debt knowing it was bad debt.

 

And that's just the beginning. To blame Fannie Mae and completely ignore these other factors (particularly the ones I noted above) is just illogical. But keep dreaming.

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