Friday, September 14, 2012

The Looming Mortgage Meltdown 2.0


"Those who cannot remember the past, are condemned to repeat it." ~ George Santayana

After the biggest economic collapse since the Great Depression was triggered by the collapse of the mortgage bubble, you'd think the federal government would have learned their lesson.  It's been well documented that the economic collapse was not brought on by Wall St's attempts to mitigate mortgage risks through bundled derivatives, though they certainly didn't help matters, but, the real cause was borrowers walking away from sub prime mortgage loans they never could have afforded to begin with.

This economic crisis that brought pegged economies throughout the world has become known as the Diversity Recession, because the mortgage bubble was created by social engineering efforts during the Clinton and Bush administrations to increase minority home ownership.
''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.''
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...

In 1999, the New York Times foretold what was to become from Clinton's efforts:

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.''
To help reach these race-based mortgage goals the Department of Housing and Urban Development along with the Federal Reserve changed the process of issuing credit ratings to financial institutions by making the number of minority loans issued by the bank a key factor.  Together with the threat of lawsuits alleging redlining and disparate impact, along with the Bush administration placing pressure on Fannie and Freddie to remove all down payment requirements, banks began making riskier and riskier loans.  

Borrowers who were given the loans they never could have afforded to begin with began walking away.  The rest, as they say, is history.  So, why then is the federal government continuing to sue banks for not making enough loans to minority borrowers?
Luther Burbank Savings will spend $2 million to settle a federal lawsuit accusing the Santa Rosa lender of discriminating against African-American and Latino borrowers with a jumbo loan program that targeted wealthy individuals.
How exactly did the bank discriminate?  Well, the bank specializes in making loans to apartment complex owners, so naturally the amount they are willing to loan is going to be higher than a traditional mortgage lenders.  In this case, they only issued loans in the amount of $400,000 or more.  The justice department found no wrong doing in the banks method of qualifying borrowers for these loans, but since fewer minorities are able to qualify for such large amounts, the loans have been deemed racist because of their disparate impact.
The bank chose to offer only "non-traditional" loans -- including interest-only and stated-income loans -- to high-income borrowers for amounts greater than $400,000. Such loans, when offered by other institutions to first-time home buyers, have been faulted for helping lead to the subprime loan crisis. Historic numbers of borrowers were unable to make their loan payments or keep their homes, resulting in huge financial losses at banks and a sharp downturn in the housing market. 
The Justice Department lawsuit alleged that because Luther Burbank would lend no less than $400,000, very few African-American and Latino borrowers were able to qualify for its loans.
By targeting the bank for the desperate impact of lending large amounts of money, they are punishing the bank for potential borrowers who lack the credit worthiness to qualify for the loans, whether those potential borrowers have ever actually showed in interest in taking out the loan or not. 

Luther Burbank Savings isn't alone.  The Obama administration has stepped up efforts to go after banks on the so-called disparate impact of traditional credit-worthiness based lending practices.
The settlement, filed Wednesday in U.S. District Court in Los Angeles, is the latest to emerge from an Obama administration task force searching for fair-lending violations during the housing boom. It has reached settlements in 18 cases for $370 million, including agreements in July with Wells Fargo and in December with Bank of America.
"The Department of Justice will not allow financial institutions to have in place residential lending practices that illegally impact minority communities," André Birotte Jr., the U.S. Attorney in Los Angeles, said in a statement.
Attorney's for the bank criticized the practice of putting race above the ability of borrowers to pay back the loan:
Luther Burbank's attorney, Andrew L. Sandler, said the case represented the Justice Department's "most aggressive use of the disparate impact discrimination theory." He was referring to the use of a statistical analysis to allege discrimination.
Worse is the disparate impact of the federal governments actions.  Luther Burbank Savings only lends to apartment complex owners, making the majority of their loans issued for properties in traditionally minority neighborhoods.  Because of the federal government's pressure to make these loans to high risk borrowers, the bank is now left with two options moving forward.   Either they will go along with being forced to make more risky loans, putting at significant danger of foreclosure the homes of hundreds of low income families or because the risk of making these loans is so high, they will stop issuing them altogether making it virtually impossible to renovate, sell or build new complexes.

2 comments:

Anonymous said...

Most Americans have heard of the term Affirmative Action. Almost none have heard of disparate impact. Yet probably very few even realize what these policies are and how damaging they can be.

Affirmative action has now been so abused that it no longer even resembles what it was originally intended to do, namely, assist the descendants of slaves in the US. Now immigrants fresh off the boat, whose ancestors never endured discrimination at the hands of the US government are suddenly eligible for this program's benefits if their skin is not white.

Disparate impact doesn't even pretend to be in line with the traditional US definition of equality, in which all people are equal in the eyes of the law and have equal opportunity. Instead, disparate impact enforces equality of outcomes and doesn't even consider whether or not an institution's policies are discriminatory or not. All that matters is the results. If at the end of the day, there are not enough non-whites receiving jobs, loans or admissions, etc., then that institution must be guilty and corrective action is needed.

Of course disparate impact is only used as a tool against acceptable targets. You don't see disparate impact suits against news organizations like MSNBC for not hiring enough nonwhite on-air talent. You don't see it going after Hollywood or any other protected turf of good SWPLs.

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