Now that the long predicted dubious mortgage crash has finally arrived, I keep remembering that going back to the early 1990s, the government has been twisting the arms of private lenders to get them to lend more mortgage money to minorities than the private firms believed was justified by colorblind principles of creditworthiness.
This history seems to have disappeared down the memory hole because it's all in the sacred cause of fighting discrimination (real or imagined), but I recall it distinctly from when I was a daily reader of the Wall Street Journal in the 1990s.
For example, there was a celebrated 1993 study by the Boston Fed showing that minorities' mortgage applications were rejected at a higher rate. (Peter Brimelow pointed out in Forbes that minorities did not have lower default rates, suggesting that lenders were behaving in a rationally colorblind manner, but that was not a popular view at the time.)
Have the chickens finally come home to roost?
I'm sure the private financial markets were quite capable of blowing up a big bubble by themselves in the eternal see-saw struggle between greed and fear, but this political pressure for lending to minorities with doubtful credit must have exacerbated the problem. About half of all mortgages for blacks and Hispanics are subprime, versus about one-sixth for whites.
A reader has sent me some links to articles from 5 to 9 years ago to show me I'm not hallucinating about what I remember. The first are from early in this decade about Fannie Mae's big plans for boosting mortgages for minorities. Now, I don't pretend to understand what Fannie Mae is (but does anybody?). It's some kind of quasi-governmental publicly-traded for-profit thinga-ma-bob, but Fannie Mae's past pronouncements do make interesting reading at present.
Straightforward tax-and-spend programs were out of favor in the 1990s, but lean-on-lenders for the benefit of your political constituents is always in season.
Fannie Mae Bending Financial System to Create Homeowners, Says Raines
Yet home ownership is unevenly distributed in society, [Fannie Mae head Franklin] Raines said. He quoted the famous pronouncement by W.E.B. Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th century is the problem of the color line. Du Bois also observed that the size and arrangement of people's homes is an index of their condition.
"We have made great progress since then," Raines said, but "minorities have yet to achieve parity in home ownership in America."
Raines said 70 percent of white people own a home, but the figure is less than 50 percent for minorities, female headed households, and others, despite the current period of "unprecedented prosperity." Minorities, he said, are still often unserved and overcharged.
In the past 30 to 40 years, he said, various approaches have been tried to increase affordable housing for minority and lower income families.
In the early days of the movement, he said, there was a significant commitment of government funds. The state of Connecticut, for example, built and managed 8,000 units of affordable housing, including Stowe Village and Charter Oak Terrace in Hartford. But later, all over the country, government pulled back and eventually thousands of units of housing had to be torn down because they had become uninhabitable.
In the 1980s, public-private partnerships were seen as more effective.
Now, said Raines, more money is being invested in community development through private mechanisms, including Fannie Mae, which works through mainstream lenders to reach out to underserved communities.
During the 1990s, Fannie Mae pledged $1 trillion in capital over seven years to boost home ownership among underserved populations. Last spring, said Raines, the commitment was completed ahead of schedule, and Fannie Mae pledged a further $2 trillion to assist 18 million families during the next decade.
And from Jet in 2002:
Fannie Mae to invest $700 billion in minority housing -
Business Jet, Oct 28, 2002
Fannie Mae, the nation's largest source for financing home mortgages, plans to invest at least $700 billion through 2009 to provide financing to 4.6 million minority households.
News of the breakthrough came during the New Orleans conference of the National Bankers Association (NBA).
Franklin D. Raines, Fannie Mae's chairman and chief executive officer, told the audience that the NBA was uniquely focused on lending to underserved, minority and immigrant families.
"Through this agreement," said Raines, "we hope to extend the benefits of the housing finance system to more Americans in underserved communities and boost minority home ownership rates closer to the national rate of 60 percent."
From Insight on the News back in 1999:
Easy Credit Turning into Hard Times? -
Brief Article Insight on the News, Nov 8, 1999 by Patrice Hill
Analysts worry that banks are too quick to give credit where credit isn't due ... and will pay the price during the next recession.
The easy flow of credit during the 1990s has helped to fuel a nationwide housing boom and spending spree that has kept the economy humming. But analysts say banks have lowered their lending standards, particularly to tap into the fast-growing minority markets, and have been under strong political pressure to do so despite studies showing minorities are more likely to default than whites. The result of this largess may be soaring levels of bankruptcy and default during the next recession.
"We have created a tremendous amount of risk," says Cynthia Latta, economist with DRI/McGraw-Hill in Boston. "At some point, the economy is going to turn down. There will be large numbers of defaults that will trigger a lot of political heat."
Politicians have pushed for the lower standards out of a legitimate desire to spread today's prosperity to groups that previously were on the margin, says Latta. "Banks are under a great deal of pressure to lend in these communities," she says. "It is very political. But I still have reservations about whether you're really doing anyone a favor by letting them borrow 100 percent of the cost of a home. It makes it so easy for them to get in over their heads." If the economy turns sour and unemployment rises, minorities will be the first laid off -- paving the way for a wave of defaults.
Federal laws on fair lending and community reinvestment require bankers to reach out to minorities, notes David Lereah, chief economist with the Mortgage Bankers Association. The record rates of homeownership among minorities as well as the rest of the population shows that these reach-out programs are working.
Nevertheless, Lereah agrees that banks and the economy will pay a price in the next recession. "If the economy goes into a tailspin and experiences recession, then I do worry about some of the low down-payment loans," he says. "The borrowers don't have that much at stake, don't have that much equity in the homes. If they lose their jobs, they could walk away from the homes."
A recent study by Freddie Mac, the federally chartered Federal Home Loan Mortgage Corp. that buys mortgages from banks to resell to investors, documents the shaky financial standing of minorities. The study found that nearly half of black borrowers and a third of Hispanics have "bad" credit records -- that is, they have a record of delinquent loans or bankruptcy -- compared with a quarter of whites. Moreover, income does not explain the disparity, according to the study. Among people with incomes of $65,000 to $75,000, 34 percent of blacks have bad credit, compared with 20 percent of whites.
Apparently, the Fed pumped so much money into the system after 9/11 that, with stocks in disfavor after the Internet bubble burst, that the liquidity flooded into the home market, postponing the day of reckoning in housing until now.
Adversity.net has collected some articles from 1999:
Mortgage Lenders to Step Up Pursuit of Minorities (10/13/99)
BOSTON, Oct. 13, 1999 (Reuters) - "The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups.
"'We need to push into these underserved markets as much as we can,' said David Glenn, president and chief operating officer of Freddie Mac. Glenn made his remarks at the annual convention of the U.S. Mortgage Banker Association of America (MBA) this week.
"Freddie Mac, like its sister agency Fannie Mae, is a government-chartered corporation that buys mortgages from banks and packages them into securities for investors.
"In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.
"The call for greater efforts to broaden minority home ownership comes at a time when interest rates are pinching mortgages. A record $1.5 trillion mortgages were granted in 1998 in a refinancing boom fueled by the lowest interest rates in nearly three decades.
"The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.
"Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets."
Utah (Salt Lake City): Companies Help Minorities With Home Mortgages (05/01/99)
"Premier and M&T Mortgage in Midvale this week agreed to work with the U.S. Department of Housing and Urban Development (HUD) to make an even deeper commitment to helping minorities buy homes. Both companies already seek out low-income and minority customers, especially Latinos, through Spanish-speaking loan officers.
"But they also now have signed formal agreements with HUD to conduct second reviews when loans are declined and to help those who don't qualify address the factors that led to loan denials. "It basically requires lenders to go the extra mile," said Richard Bell, community representative at HUD in Salt Lake City. "It's sometimes hard to persuade them to agree to something like this."
"The agreements do not require lenders to change their underwriting practices. Each applicant still must have a satisfactory credit history, manageable debt load, be employed, and in most cases, have some type of down payment. About 20 Utah lenders have signed HUD agreements in the past two years, but Bell said Premier and M&T have perhaps taken the concept of marketing to minorities and helping them qualify for loans the furthest. (The Salt Lake Tribune, Sat., 05/01/99, by Lesley Mitchell)
[link http://www.sltrib.com/1999/may/05011999/business/101982.htm ]
Wisconsin (Milwaukee): Racial Lending Gap Here Still Too Wide, But There's Hope (04/11/99)
"Ironically, whites may have directly benefited from efforts to expand the number of minority people who receive home loans. After all, making the application process fairer could expand the pool of eligible whites as well as eligible minorities. Hence, such efforts may help explain why the rejection rate has not soared among whites here as it has across the nation." (Milwaukee Sentinel Journal 04/11/99)
[link http://www.jsonline.com/news/editorials/0411loans.asp ]
And nobody in the government seems to have learned a damn thing over the years. Here's an AP article from just a few weeks ago when the bad credit crisis was already severe:
Justice Dept. says it is investigating discrimination against minorities in home loans
By ALAN ZIBEL, AP Business Writer
WASHINGTON (AP) — The Justice Department is investigating several possible instances of discriminatory mortgage lending, and plans to open more probes soon, an agency attorney told lawmakers on Wednesday.
House members said at a subcommittee hearing that evidence of racial discrimination in the mortgage market is especially troubling given the surge in home-loan defaults that has showed signs of expanding beyond the market for borrowers with weak, or subprime, credit.
"There is no excuse, and no one should be at all willing to settle for a situation in which race of a borrower today makes so much difference for some people," Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said.
Grace Chung Becker, a deputy assistant attorney general, said several Justice Department investigations into discriminatory mortgage lending are ongoing based on the agency's own leads and referrals from banking regulators.
"We expect to initiate additional investigations in the coming months," Becker said.
Since last fall, the Federal Reserve has made three referrals of cases to prosecutors, with the Federal Deposit Insurance Corp. making two, Becker said. Two cases have been closed without charges, she said.
A Fed study last year found that 55 percent of blacks and 45 percent of Hispanics received home loans with rates that exceeded Treasury securities by at least 3 percentage points, compared with 17 percent for whites.
Consumer groups say this data provides evidence of discrimination in the mortgage market, while the banking industry says it can be misleading because buyers' credit scores, the quality of the home, the size of the down payment, and other variables are not taken into account.
At the hearing, consumer groups said banking regulators have not been aggressive enough in going after lenders that discriminate against minority borrowers. Ginny Hamilton, executive director of the Fair Housing Center of Greater Boston said they have displayed "minimal and halfhearted efforts" to prevent discrimination.
Banking regulators defended their track record, and several said they have investigations of discriminatory practices under way.
Earlier this month, a report by the Washington-based National Community Reinvestment Coalition found that higher income does not protect blacks and Hispanics from receiving mortgage loans with above-market rates.
The report, which analyzed federal data on home loans. concluded that in 2005 blacks in 171 metropolitan areas were at least twice as likely as whites to receive expensive loans, and said the trend was more severe at higher income levels, rather than lower ones. Similar trends were apparent for Hispanics as well.
It's common for low-wage workers in the Washington, D.C. area to be are steered into taking out loans for homes that cost $300,000 or more, on which they quickly default, said Saul Solorzano, executive director of the Central American Resource Center of Washington.