Minorities And The Mortgage Crisis

Unless you recently awoke from a coma, you know that the US is mired in an economic stupor, centering around the availability of credit, a situation engineered by overly-smart "master of the universe" types, clustered close to the corner of Broad and Wall Streets in Lower Manhattan.

And unless you've been ignoring the hullabaloo surrounding the causes, you also know that mortgage-backed securities, and their many derivatives are the proximate cause of the near-death experience capitalism is going through at the moment.

But what you probably don't know is that it's all the fault of Mexicans, Central Americans, and Black folks.

That's right. It's the niggers, spics, and wetbacks that have caused the meltdown of the world's premier economy.

Well, at least that's what some on the Right would have you believe.

There has been a pervasive, and seemingly coordinated effort of late to frame the cause of the mortgage crisis as overly-loose lending standards that disproportionately benefited people of color and low economic means. Then -- of course -- those low-capitalized cretins defaulted, throwing the greater economy into complete disarray.

Poppycock.

Here's the highly condensed version of events. The beginning of this foolishness hearkens back to FDR, and the creation of The Federal National Mortgage Association (FNMA) otherwise known as Fannie Mae and Freddie Mac, its legal name being The Federal Home Loan Mortgage Corporation (FHLMC). These government-sponsored entities provide a secondary market for "mortgage liquidity." That's a fancy way of saying they buy, insure and sell packaged bundles of mortgages to investors, freeing banks of consumer mortgage debt and enabling them be able to loan more money. The upshot was (and is) that more people can purchase homes, because mortgage money is more available. That was the goal, and it's worked fairly well.

Along the way, as racial discrimination became illegal, it was determined that banks, insurance companies and savings and loans were systematically denying services (retail accounts, branches, policies and mortgages) to certain geographic areas in something called "redlining." Thus, people of color, predominantly, were either unable to get these financial services, or they were paying prices (interest) for money inordinate to the actual risk they posed the financial institutions.

Jump to 1977. The Community Reinvestment Act of 1977 (CRA) was passed and signed into law. CRA made illegal redlining. It also mandates that banking institutions be evaluated to determine if they are meeting the credit needs of their entire respective service areas. CRA did not force banks to allocate credit disproportionately (in other words, there was no "credit affirmative action") and it provided for flexibility in evaluating compliance.

In 1992, George H.W. Bush proposed and signed a law that, in part, directed Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing. Sounds fair, as bank mergers and the rise in interstate banking permitted by a law change in 1994 was balanced by helping more monies to be funneled into affordable housing.

In 1995, Bill Clinton signed into law new regulations for CRA to increase access to mortgage credit for inner city and distressed rural communities.

And so, we're now here, in 2008, with foreclosures representing about 3-5% of American mortgages, depending on who you ask, and multi-trillion dollar losses by banks worldwide as a result of those foreclosures. Predictably, everyone from the Wall Street Journal ("[CRA] compels banks to make loans to poor borrowers who often cannot repay them"), Ron Paul ("[CRA] forcing banks to lend to people who normally would be rejected as bad credit risks"), and even Minnesota Senator Michelle Backman (http://www.digitaljournal.com/article/260547) blamed minorities and the lower-middle class for the catastrophe.

But not so fast.

The only problem with all this speculation is it's completely wrong. Neither CRA nor affordable housing goals set by the government forced any lender to make loans they didn't want to. The lure of the subprime market was high yields and healthy profit margins -- it's as simple as that.

And the lure for the buyer was keeping up with the Jones', and making a killing at resale.

Consider that rigorous research has identified declining lending standards, an increase in loan incentives such as easy initial terms (like no money down with low "teaser rates"), and a long-term trend of rising housing prices which encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms.

A 1997 research paper by economists at the Federal Reserve showed that "[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks," meaning that there was no greater risk of foreclosure among CRA beneficiaries that any other market. Janet L. Yellen, President of the Federal Reserve Bank of San Francisco pointed out that independent mortgage companies -- not regulated by CRA -- made "high-priced loans" at more than twice the rate of the banks and thrifts. And a law professor at the University of Michigan, Mike Barr stated that in his opinion, "the worst and most widespread abuses occurred in the institutions with the least federal oversight". None of those things seemingly have any correlation to the race or ethnicity of the borrower.

And then there is the unspoken factor of a speculative fever that gripped housing sales. In Florida for example, "flipping" -- that is, the purchase and near-immediate sale for enormous profit -- of condos was so profitable entrepreneurs opened an internet exchange to take advantage.

Then there's the concomitant issue of ridiculously high home prices. Areas in which foreclosures are most prevalent -- California, Florida, Nevada, and Michigan -- have median home prices well above the national average, and anecdotal information suggests that the cause of the issue isn't low-income minorities, but mainstream buyers purchasing too much house for their incomes. In fact, an article in the October, 2008 issue of Condé Nast Portfolio quotes home mega-builder Bob Toll as saying that buyers "drove til they qualified," meaning, buyers, buoyed by cheap gas, drove further and further out to the exurbs hunting for larger, more expensive homes that they could qualify to purchase using cheap money.

Doesn't sound like the poor and minorities to me. 

The fact is, most of these buyers would have been decent risks had they had any money in downpayment. Most had jobs. And good or decent credit. What they didn't have was common sense. They bit off more than they could chew. When the rates on their zero-down, 1% APR Option-ARM started going up they simply couldn't afford their new payments. Add in millions of buyers who took interest only loans (a big seller in New York City) or even negative amortization loans, and a foreclosure tsunami was bound to occur.

The foreclosures started driving prices down which caused problems in the appraisals for people refinancing or trying to get cash out of their homes, placing them in jeopardy.

And once the cycle began, it was hard to stop.

Like most things American, crisis is always somehow laid at the feet of the person with color. This wasn't a crisis of color or class, it was a crisis of stupidity, and greed. And last I checked, greed and avarice had no discernible color.