United Liberty
Can We Finally Place The Blame Where It Actually Lies?
Thu, 09/18/2008 - 8:05pm | posted by Brett Bittner
I have had enough. Every story with even a hint of financial or economic news in the last six months has placed blame for the mortgage industry collapse on the propensity of mortgage companies to seek out “risky” borrowers to which they could loan money for a home. I must note here the reason for a business’s existence. Despite all of the “feel good” corporate speak espoused by the public relations department about the good, service, technology or information and how it benefits the world, their end goal is to return a positive gain for the owners. Without the profit motive, business would cease to exist.
So, in a free market, why would some of the biggest names in the mortgage industry, like Countrywide, Bank of America, and Wells Fargo, purposely seek out the highest risk borrowers to loan money to? Quite simply, they would not. Specialty finance companies with strong collection and repossession teams are better suited for these loans.
The National Homeownership Strategy: Partners in the American Dream
In 1994, the Clinton administration blew the dust off a twenty year old law and began strong enforcement of the Community Redevelopment Act. This act was passed during the Carter administration to encourage greater home ownership rates among minorities. The newly revitalized enforcement of the act was branded as “The National Homeownership Strategy: Partners in the American Dream” as President Clinton worked to expand that legislation’s reach in 1990s America. He linked increasing home ownership to the challenge of expanding opportunity for working families as he addressed the National Association of Realtors in 1994 by stating “more Americans should own their own homes, for reasons that are economic and tangible, and reasons that are emotional and intangible, but go to the heart of what it means to harbor, to nourish, to expand the American Dream.”
At the time, the idealistic statement almost made sense as the housing bubble was forming. With three million full-time workers involved with the on-site construction of residential property and another three million employed in ancillary industries, the multiplier effect of a growing housing industry could build a very strong economy, so long as property values did not decline.
Carter-Era Economics
In the 1970s, banks were far smaller and retained the notes of up to three-quarters of the residential mortgage loans they originated. The Community Redevelopment Act could only affect a small part of the nation’s economy should a single bank Housing Slumpmake too many risky investments. Only that bank or chain of banks in an area would fail, leading to merely a localized economic decline.
Changes in housing sector investments and banking
In the late 1980s, Fannie Mae and Freddie Mac became the holder of more than half of all newly-originated home mortgages. These quasi-governmental agencies backed over half of the mortgages, as they issued bonds in financial sector markets and used their earnings to supply funds to the mortgage market economy. These mortgages were then pooled together with other mortgages as “safe” mortgage-backed securities, since they are secured by the properties purchased with the loan. These packages were then re-sold in the secondary market to mutual funds, pension funds, and a wide range of other institutional investors as they were deemed among the safest investments.
The expansion into the other aspects of investment and the economy as a whole negate the logic behind the Carter-era economics’ Community Redevelopment Act, as the economy had progressed beyond the simpler financial times.
Yes! You Can Own the Home You Want summarizes the six topic areas covered by President Clinton’s “partnership.” (p. 225) Areas 2, 3, and 4 illustrate the expansion of the mortgage market and lowered requirements specifically targeted toward low-income and minority borrowers.
2. Financing: Increasing the availability of home financing and lowering its costs.
3. Building Communities: Working locally to identify and revitalize home ownership opportunities in underserved geographic communities.
4. Opening Markets: Reaching out to minorities, immigrants, single-parent households, and other people whose rates of home ownership fall below national averages.
To me, this sounds like coercion of a free market to loosen lending restrictions to loan-seekers that would not normally qualify. Since this was an initiative of the Federal Government, it is very likely that the enforcement of these topics would have severely punished any lender who did not follow the plan. I place the blame with the government’s intervention into the housing industry as the first step down the path we are now regretting.
Brett, this is a great article and one of the most clarifying that I have read about the current housing crisis. It’s unfortunate that many in the media seem convinced that the government, which helped cause the problem, is somehow also the one who can solve it.
Wait, you are saying the cause of the financial crisis is looser lending restrictions? And on a Libertarian blog no less. You have to be kidding.
The federal government didn’t ask banks to give out the ridiculous array of highly risky loans like interest only loans and loans to people without verifying their income. In the free market there is a balance of risk and reward and the risks were completely underestimated or ignored.
It didn’t help that the fed kept interest rates so very low for such a long time that led markets to use securitized mortgages as a “safe” investment with better return. If you want to place some blame on the government, look there.
The blame though goes to the people who put up the money for all these bad loans without adequately accessing the risk and the people who took loans they knew they could not afford. I have no sympathy for the lenders and borrowers who took on more risk they they could handle and lost. (I do have a problem though with those lenders passing on this risky loan as AAA rated.)
Forrest,
Further regulation of the mortgage market is to blame. Not once did I say that the manipulation of the market was to loosen restrictions. The Federal coercion of the housing market to go against viable business practices is the cause, as they prevented day-to-day business unless the Federal Redevelopment Act was followed.
So you seem to be blaming Carter (!) and Clinton for this mess, hmmm? Nice try, boyo, but it’s all come to a head during the last eight years, and finally burst in the faces of the public - under the careful tending of Bushco.
Did you know that ex-governor Eliot Spitzer was trying to expose the whole financial house of cards and impose stricter lending standards, at least within the State of New York, when his personal life was exposed and made “The Issue” by the mainstream media? That sudden change of subject smells a lot like the Outing of C.I.A. agent Valerie Plame, who was exposed to extreme danger and put out of operation to punish her husband for contradicting the Bush Crime Family’s lies regarding Weapons of Mass Destruction.
Face it: this financial feeding frenzy was a huge game of Musical Chairs, in which borrowers were flat-out LIED TO by lending agencies, and the loans were then sold to other agencies as if they were secure. But when the music stopped, there turned out to be NO CHAIRS, and whoever was left holding the bag fell down. Hard. And Bushco was in it up to their pointy little ears (still are, in fact; bailing out the miscreants as long as it’s in the Bushies’ interest) - they encouraged it, and even punished people like Spitzer, who tried to impose some sort of rule on the melee it finally became.
They have a history of this: look up Neil Bush’s involvement in the Savings and Loan fiasco, and how his Daddy [Emperor Bush I] covered up for him and his fellow thieves. It should warm the heart of every lying little neo-conservative wannabe who thinks he or she could be the next multi-millionaire by pushing deregulation and then using the lack of protective laws to bleed the public dry with impunity.
Presidents don’t make laws, that’s the job of the Legislative Branch. Presidents can only recommend legislation and lobby for it.
So it’s true Bill Clinton is partly responsible for the deregulation of banking and finance, but the lion’s share of the blame belongs on Phil Gramm’s head, and at the time there was a majority of Republicans in Congress. Even then, it’s wasn’t only Republicans, a lot of Democrats in Congress voted for Gramm’s crap law too, though it is true that those opposed to it were mostly Democrats.
But Clinton was President some years ago, Bush has had plenty of time to fix what needs fixing. There’s blame enough for all but the preponderance of it is with Republicans.
Ran across this via Reddit.com & left this comment on the submission (reposted):
Very silly article.
The author supposes that the Community Redevelopment Act (Carter’s - Clinton reintroduced the use) is responsible for the current crisis. Funny… the gigantic wave of foreclosures that he is trying to blame - they didn’t originate under either President’s watch.
While far from flawless, the Act was just about helping people own houses that would normally not be able to (not by giving loans to people who couldn’t prove their ability to repay, but by investing in underdeveloped communities & attempting to defray some of the federal fee related costs involved in purchasing a home, etc).
The author opines that the Community Redevelopment Act was built for times with smaller bank when defaults’ impact would be contained… and just leaves it at that.
What isn’t mentioned in the article are Acts like 1999’s Gramm-Leach-Bliley Act. This removed a great deal of the regulation in place for banks & helped pave the way for these gigantic financial institutions that are ‘Too Big To Fail’. (As an aside - also responsible for the Enron loophole.) Another contributing Act - Commodity Futures Modernization Act (also Gramm’s) which opened the floodgates for futures trading, fueled speculation, and kept several investments types from being properly regulated.
The mythical self correcting market has imploded - largely & simply due to a lack of significant regulation. It isn’t surprising to see champions of deregulation scurry to misdirect the blame.
This article is a particularly weak example.
Legislation that handcuffs lenders into certain lending practices is DE-regulation?
Hoover was responsible for the Great Depression?
Clinton was responsible for the economic upturn during the 1990s?
Truman won World War II?
George H.W. Bush tore down the Berlin Wall?
Another stupid spin - Blame the Dems for all the major economic problems while looking away from the fact that Republicans have been in charge most of the time.
Oh and by the way - 8 years of tax cuts under Bush administration and where are we today??
yea, lets just forget what made this pyramid scheme work for as long as it did was bundling high risk mortgages as investment grade securities. Lets just forget that many people including ron paul and warren buffet have been sounding an alarm on this for years and no one in the white house,the fed, the treasury, or the sec bothered to deal with it. Lets just blame it on the last two democratic ex-presidents. lets just pretend that every one who visits united liberty is as vapid and uninformed as the average sarah palin supporter and won’t bother to question the sheer stupidity of the premises presented!
No.
No to your questions.
No to your dullard of an article & flailing response to my addendum for your fanciful tale.
You do your philosophy & fellow Libertarian acolytes an injustice. You don’t sound nearly as Libertarian as you do standard Republican, though.
Brett,
But you did say “To me, this sounds like coercion of a free market to loosen lending restrictions to loan-seekers that would not normally qualify.” Loosening lending restrictions is removing regulation. In a true libertarian utopia there would be no restrictions imposed by the government at all. Allowing and even encouraging behavior are very different from requiring behavior.
Either way, I think it is irrelevant because if the Community Redevelopment Act had any part in this mess, it was a small one.
Look, the bottom line is that during the Clinton years there was a mass of economic expansion and people were able to actually afford their payments. During the bush years people lost their jobs, the government is all but going bankrupt and losing credibility in the international community and spending trillions on an illegal war…. so get your facts straight.
And let’s not forget that the CRA does not even apply to the vast majority (we’re talking 75%-80%) of the financial institutions involved in this mess.
And we should also remember that the market is not some benevolent deity that works on its own accord, but is the product of the decisions of many human actors…human actors who, like all humans, are sometimes very greedy and very, very stupid (looking at you Fannie and Freddie).
I got this argument from a conservative friend back in December. It’s a great twist to try & place blame for all this on the Democrats, but it ultimately fails.
First, and most obvious point is the demonization of the Community Reinvestment Act. To start with, in the 70’s, the CRA was put in place to stop redlining. Or denying people loans for non-financial, non-objective reasons. (ie. men pay 8.7% interest, but a woman with the same income, fewer kids, & better credit score pays 10.5% because she’s a woman) Irrational lending practices are bad for the economy and keep money in the hands of the… well… oligarchs (hate to use that term but can’t think of a better one. go look it up).
While it’s true that the Dems monkeyed with it in the 90’s to get more lending to poor & minority communities, the argument that this caused the implosion falls a little flat when you consider that something like 50% of the sub-prime loans came from banks not regulated by the CRA.
The other problem here is that if important regulations had been kept in place, and other reasonable regulations had been enacted the damage caused by the sub-prime lending would have been limited.
If it was just mortgage lenders failing, we could go ahead & let capitalism run it’s course.
As it is, we have to step in because we let AIG form as a bank & then let it bet trillions of dollars on un-regulated credit default swaps that these mortgages would fail so that when they did the entire world economy is in jeopardy. (CDAs account for $58 trillion in notional value worldwide - image having to pay THAT out).
I think you can pin a lot of responsibility for this on the Democrats, but you ultimately lose your tidy libertarian/objectivist argument that (as my friend puts it) “un-regulated capitalism always works to the extent that it is tried.”
No. Sorry. It’s the lack of regulations that made a routine market correction a worldwide catastrophe.
Darn. Now I need a new ideology….
Financial crisis has been one of the major quandaries around the country. President Obama together with his administration is working on the economic stimulus package. But, crisis still exists. We all have financial challenges from time to time. during financial challenges present themselves in many ways, most of which present themselves at the most inopportune moments. Occasionally, it isn’t something that we budgeted for so we need financial help now and cannot wait for a paycheck. Some people just don’t want to use credit cards or banks, and don’t have rich friends or parents to help them, but there are still options available.
Here is the full text of the document above: The National Homeownership Strategy: Partners in the American Dream.
http://rapidshare.com/files/380163749/TheNationalHomeownershipStrategy.p…