Wednesday, April 3, 2013

Obama Determined to Re-inflate Housing Bubble

Perhaps the economic devastation of the past 5 years wasn't enough for the oligarchs to learn their lesson, because President Obama is back pushing banks to make loans to those with weak, or as some would say bad, credit.

The president's plan calls for the FHA to back more risky loans, leaving tax payers on the hook should borrowers default.  Some banks are pushing back, saying fool me once shame on me, fool me twice shame on you.

Banks shouldered the bulk of the blame for the diversity recession thanks in part due to the Democrats wanting to deflect blame from its rightful place with the government, aided by the mainstream media, and the refusal of establishment Republicans to press the facts for fear of being labelled racist.  To help ease banks' concerns Obama administration housing officials are urging the Department of Justice to provide amnesty to the banks that employ risky loan practices to meet the government's requirements should the borrowers later default.

“The financial risk of just one mistake has just become so high that lenders are playing it very, very safe,” said David Stevens, chief executive of the Mortgage Bankers Association and former Obama FHA commissioner.

These banks continue to play it safe for good reason.  The Obama administration has continued to file suit against banks it accuses of redlining, a term for the observed racial disparity created by making loans based solely on credit worthiness.
The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program’s standards later default. Officials hope the FHA’s actions will then spur Fannie and Freddie to do the same.
The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development, agencies that investigate wrongdoing in mortgage lending.
When the subprime mortgage crisis began to emerge in 2005, I began calling for congressional investigations into these loans.  From time to time some information did sneak out, but until recently, very little data was available about which banks and mortgage brokers were making these loans, what borrower profiles looked like, and what the default rates were for those protected classes the government was pushing banks to loan to.

Earlier this year a study National Bureau of Economic Research found that threats of government sponsored lawsuits and changes to critical mortgage lending regulations were primarily to blame for the mortgage crisis that crippled the western world's economies.  But the story doesn't end there.  It seems that even when credit worthiness is similar, minority borrows default at significantly high rates than whites.

Various micro studies have been conducted to test default rates among racial/ethnic borrowers with similar income levels.  A study of lending to high-income borrowers in Prince George's County, Maryland released by the Race Matters Institute found that Hispanic (6.42%) and Black (3.62%) borrowers defaulted at statistically significant higher rates than whites (1.91%).  A George Mason University study of mortgage defaults by middle-income borrowers in Atlanta, GA delivered similar results.  White default rates were 1.74%, while black and Hispanic borrowers defaulted at rates of 5.82% and 4.65% respectively.

This data suggests that not only should race not be used as a reason to ignore credit worthiness, but that a larger, cultural issue exists that warrants further study.  Why do minority borrowers default at 3 to 5 times the rate of white borrowers with similar credit worthiness?

Those who press for more minority lending suggest these higher default rates are because minorities are given worse loan terms, being charged higher rates and fees, than their white counterparts, a practice they say is a result of racist lending practices.  This analysis ignores the data that reveals even when minority borrowers had the means to pay these higher rates and fees they still defaulted at statistically significant higher rates than whites.  The accusations also imply minority borrowers are incapable of understanding the terms of the loans they were taking out, an assertion any thinking person would find patently racist in and of itself.

But again, there is data that suggests minority borrowers weren't being exploited by "evil" white lenders, but by lenders/brokers who are members of their own race.  A working paper by the Federal Reserve Bank of San Francisco interviewed 80 home buyers in Stockton (Foreclosureville, USA) and Oakland, CA.  Sixty-six of those interviewees were minorities.  A glaring statistic emerged from the report, 84% of those borrowers were serviced by brokers of the same race or ethnicity as them.
The anecdotes also provide insight into why so many borrowers ended up in loans that they could not afford over the long term, and why borrowers with prime credits cores—particularly among Hispanic and Black borrowers—received a subprime loan. Did borrowers actively “seek” out subprime loans, or were they “sold” loans by unscrupulous brokers and lenders? 
In the interviews, three key themes related to social embeddedness emerged. ... social networks to help them identify mortgage brokers and lenders, and particularly for the immigrant and African‐American respondents, revealed a strong preference for brokers who were part of the local  community [i.e. those who were of the same racial community]. This preference was driven by perceptions that outsiders would not treat them fairly, and that a broker who “understood” their situation would be more likely to result in a positive outcome.
If Obama administration officials, and those in the Clinton and Bush administrations who previously implemented these reckless practices, were serious about fixing the minority lending problem, instead of pushing banks to make more risky loans, they would be exploring the cultural issues at work that have minority lenders exploiting minority borrowers and why those minority borrowers are so susceptible to default even when they have the means to fulfill the terms of their loans.

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