Wednesday, October 1, 2008

Democrats Fail to Admit Complicity in Subprime Mortgage Crisis

Many poor decisions by the federal government ultimately led to the crisis our economy faces today. Chief among these failures of judgement were the modifications Democrats made to the Community Reinvestment Act during the Clinton Administration.

The truth is social engineering by the Democrats set the stage for the financial system's break down. Though the evidence is clear, Democrats still fail to admit their complicity. As long as they continue to fail to do so, any action by the fed to "bailout" the financial system in this country will also fail because the system will still be subject to the same affirmative action-based regulations that put the color of a borrower's skin ahead of their ability to pay.

Thomas B Edsall, of the Huffington Post, recently wrote:
"[A]n argument popular (who could be surprised?) among besieged conservatives, that "social engineering" is the root cause of the current economic crisis -- in the form of a 31-year-old law passed during the Carter administration by a Democratic Congress.

[C]onservatives have initiated a racially explosive argument, shifting the blame for the current economic crisis to legislation designed to improve access to mortgage financing for African- Americans, other minorities and residents of low-income neighborhoods generally."

He goes on to quote some liberal economists:
"CRA was enacted more than 30 years ago. It would be quite odd if this 30-year old law suddenly caused an explosion in bad subprime loans from 2002-2007."

It's obvious by the way Democrats are shaping their responses that they have chosen to be less than honest about the roll they played in this crisis. In all of the analysis of the "Diversity Recession," none have blamed the Community Reinvestment Act as it was originally enacted in 1977. They point to the modifications to the act made by Democrats during the Clinton administration in the 90's that instituted de facto race-based quotas on mortgage lenders.

Immediately following the date the Clinton administration's modifications to the CRA went into affect in 1995 (not 2002, as Edsall would have you believe), the nearly 30 years of stability in the level of home ownership in the U.S. gave way to a dramatic increase in minority ownership that grew overall levels by 5%.

The race-based quotas rose as a result of the modifications from the CRA through annual adjustments by the Department of Housing and Urban Development from 21% during the Clinton administration to 39% today. To compound the issue, the federal Reserve in 1999 declared the use of outdated criteria, like the ability of borrowers to make their payments, to determine credit worthiness may constitute discrimination.

While there may be no more worthy endeavor than to increase home ownership levels among America's poor, it can not come at the expense of sound economic policy. In an erie prediction come true, a 1999 NYTimes article warned of the consequences of doing just that.

So, for Democrats to know full well the consequences of their blind, ideological actions and still try and use half truths and straw men arguments to deny any responsibility is despicable, if not treasonous.


Anonymous said...

It totally amazes me that Dems won't own up to their mistakes. They know damn good and well the root of this problem lays at their feet from 1995 and they just ignore it and try to distract regular folks to look elsewhere.

It's a lot like an automobile accident my mother got into several years back: a teenager ran a stop sign and hit her and even in front of the cops he proclaimed over and over that the stop sign wasn't there even when he was standing right next to it. The police proceeded to give him a test for narcotics...

Sometimes a person's pride is about as transparent as a brick wall and that's all they see and care about.

chris said...

The trouble is no one will hold them accountable except guys like the kansascitian, who unfortunately, no one reads.

Look at how the MSM scared the heck out of the nation on Monday and is now singlehandedly going to get the bailout passed because john q. public is afraid his credit card won't work, or that his boss will not pay him on Friday without a loan from the bank.

The MSM won't cover this issue because it will hurt dems and they are in the tank for Obama and company.

smrstrauss said...

Yes, but you are blaming the pimple for the disease.

So Fannie and Freddie were not well regulated? Well, neither were Bear Sterns, Lehman Brothers, Washington Mutual or AIG.

Let us remember that some of these firms (and others who have not failed, but have suffered losses) took in vast amounts of suspect paper at high leverage (extreme debt/equity ratios, like 33-to-1) and in some cases hid that investment in off-balance sheet companies, AND NO ONE IN THE REGULATORY BODIES, not the Fed, not the SEC, not the FDIC, found out about it. So to say that if Fannie and Freddie had had a better regulator all this would have not occurred, is absurd.

Moreover, the relatively few loans that Fannie and Freddie made to the minority area did not touch off the crisis. It was caused mainly by the Real Estate Bubble, which was caused by millions of us middle class people flipping homes and buying second homes as investments and buying homes bigger than we could afford.

Here’s an excellent article from the Wall Street Journal that shows that the high rate of defaults is mainly caused by real estate speculation:

The Wall Street Journal February 6, 2008
Speculators May Have Accelerated Housing Downturn:Rising Number of Defaults
Also Could Complicate Effort to Help Homeowners
By RUTH SIMON and MICHAEL CORKERY February 6, 2008; Page B8

As lenders pore over their defaulted mortgages, they are learning that the number of people who bought homes as investments is much greater than previously believed. Such borrowers turn up frequently in analyses of loans that defaulted within months after origination.

In many cases, these speculators lied on loan applications, saying they intended to live in the homes in order to obtain more favorable loan terms or failed to provide the requested information. Roughly 20% of mortgage fraud involved “occupancy fraud,” or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif.

Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in. Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers. The high number of hidden speculators helps explain some of the problems roiling the housing and mortgage markets.

The loans backing these speculator purchases turned out to be riskier than ratings agencies and investors who bought mortgage-backed securities once thought. Investors tend to be more likely than borrowers who live in the homes to walk away from their purchases when home prices fall. “We couldn’t understand what was driving so many borrowers to default so early in the life of their mortgage,” said Glenn Costello, a managing director at Fitch. Much of the occupancy fraud was concentrated in markets such as Florida, Nevada and Arizona, where prices were appreciating by double-digit percentages annually, said Kevin Kanouff, president of Denver-based Clayton Fixed-Income Services, a unit of Clayton Holdings Inc. that reviews about seven million loans a month on behalf of investors.

In Las Vegas, as many as 60% of the foreclosures last year involved non-owner-occupied homes, according to Applied Analysis, a real-estate-research firm.

End quote

So clearly the mass of home mortgage defaults is not from the poor. Poor people are naturally more at risk that richer people one a one-to-one basis. And many have defaulted on their mortgages, naturally. But that’s not surprising. During economic downturns that always happens. But the reason that this is worse than a normal economic downturn as it affects defaults is the enormous number of mortgages taken for investment (or speculation) purposes.

Fannie and Freddie had little to do with this. This trend was fueled by commercial mortgage brokers, who were desperate to lend money with the cost of their money so cheap. Many even borrowed on the “carry market,” meaning that they borrowed in Japan at interest rates well below even our low interest rates.

So all these loans made to middle class homeowners and speculators were bundled up and sold as “securitized” packages to banks and insurance companies around the world. I see that even the Bank of China took $9 billion worth of sub-prime loan backed securities. And who else? UBS (formerly Union Bank of Switzerland) has been burned so far on $30 billion, and many of these investment banks hid these risky assets in off-balance sheet companies.

Where US companies are concerned, they are regulated, we suppose. But were they? Who was looking out for the investor and the bank depositor, and since bank deposits are insured by the federal government, for the taxpayer? No one.

So why blame the pimple for the disease?

James said...

So let's take your arguement to another issue. If a person who dies after smoking for 50 years, it's not the cigarettes that killed him, it's Republicans failure to pass national healthcare... please.

Had the changes to the CRA not had been made, we would not have had millions of new home buyers enter the market and consequently artificially drive up home values.

When it turned out that the vast majority of these new home buyers couldn't actually afford the loans they had been given, since banks failed to use "outdated criteria" at the behest of the fed, they defaulted. Had freddie and fannie also not backed these high-risk loans with government guarantees, wall street investors never would have purchased the mortgage backed securities they sold.

The actions by the fed to force diversity at the expense of sound economic policy caused the whole mess. Over regulation, not deregulation was at fault. The failure of the fed to enforce anti-trust laws further exasberated the problem by creating banks that purchased the faux government insured securities that were "too big to fail."

As for speculators, speculation has accounted for less than a fraction of a percentage of the overall foreclosures. The two examples you site, Las Vegas and California, are the illegal immigrant capitals of the U.S. and those were the ones who walked away from their loans, not house-flippers.

Get the facts and stop listening to talking points.