Monday, June 23, 2008

Neat Expose of Housing Crisis

Lots of blame to go around, but the effect of targeting minority communities was a train wreck waiting to happen. In 2000 the Head of Fannie Mae bragged about pledging $1 trillion in capital to 'underserved' populations. in 2004 Bush promoted a Zero Down Payment Program, designed to help minorities who often couldn't afford down payments. The US Department of Housing and Urban Development put pressure on lenders to purchase home loans for 'low-income and minority' families. Groups like ACORN would demand loans to poor areas, and via the Community Reinvestment Act, these shakedowns would work (Obama is a big friend of ACORN). Read this fascinating narrative.

The key is a little Boston Fed piece that alleged housing discrimination way back in 1992, based on the simple fact that blacks have fewer homes than whites. That article has been widely criticized but it was the right message and the right time, and regardless of quality has been used to buttress an agenda (criticisms are 'details'). The article was not so important in itself because something like it was inevitable given the zeitgeist considered this a cheap and easy fix: give poor minority groups homes via mortgages. It wouldn't cost the government a dime. The problem of giving people homes who could not afford them would only be exposed when the collateral prices fell, but it is interesting how long this can take. In effect, this cake took 15 years to bake, and critics who might have pointed out the problem in 1993, by 2006 would have been 'proven wrong' (back in the nineties advocates of giving the poor loans via special treatment was considered empirically refuted).

The head of the Boston Fed around that time (1993), Richard Syron, gave a statement to Congress that proved how guilty lenders were. He noted that minorities were rejected for loans at higher rates than whites. He then noted, that if you adjusted for some of the underwriting criteria, like credit history and employment, this gap narrowed, but was not eliminated. But he did not control for everything a bank looks at, so, if you have 7 criteria, and look at 4, and find this does not cover the gap, maybe, just maybe, the other three criteria are not neutral? Nope. Clear evidence lenders hate disadvantaged minorities more than they like profits. Later, more indepth studies by the Fed found no evidence of discrimination, especially when one looks at defaults, as opposed to rejections(eg, Berkovec et al, Review of Economics and Statistics, 1994). But the politics were obvious. Unlike the 1992 research finding discrimination, however, the avalanche of latter null results by Fed researchers were always accompanied by strong wording that the results were too preliminary for any action (eg, slowing or stopping their aggressive lending programs targeted at minorities and minority communities). The Fed commissioned a set of special pieces on the 'debate', with the clear implication that 'experts disagree', and so best to assume from a policy perspective that racial discrimination is real. The Fed was defensive about their research that banks did not discriminate. One government official prominently noted that as the loan application view is more agreeable to the view this is discrimination, then obviously then it must be that application rejection rather than default rates, are better tests of lender discrimination.

In 2008, ex-Boston Fed Chief Richard Syron, now paid off with the ultimate Washington patronage job in the USA (CEO of Freddie Mac), noted:
It's `perverse' that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged `to put people into homes that they end up losing'

Gee, Richard, where did they get that idea?

1 comment:

Anonymous said...

what would be interesting is to control for the factors lenders look at and then compare default rates among various groups. Oh no, wait, that would be about as politically correct as suggesting such demographic data could possibly be one of the more effective predictors of how well an area handles a crisis/natural disaster. Like that earlier notion, is important that such subjects are never studied and that anyone that suggests such studies be shouted down and called names.