Tuesday, September 28, 2010

Conventional Wisdom in 2003

Head of failed mortgage bubble bank CountryWide, Angelo Mozillo at Harvard:
While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 – an increase of 40 percent – the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households.

That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide.
One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers. Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan. It is the willingness and the ability of a borrower to make monthly payments that are the determinants of loan quality.
We must do this through improved automated underwriting models that take into account more variables, and measure true indicators of risk and willingness to pay. We need an ongoing educational process, not only at the primary market level, but also in the secondary markets and with mortgage insurers to help lead this effort to calibrate the scoring system. And finally, it must be recognized that borrowers with credit scores below what is currently defined as “creditworthy” levels can still be acceptable credit risks. Thus, the credit score bar dividing creditworthy from high-risk borrowers, must be substantially lowered by the GSEs, the secondary market in general, and with bank regulators. The GSEs have made good progress over the last few years in expanding their credit criteria, but I encourage them to become much more aggressive in this regard.

Back in the bubble, the one thing everyone (regulators, academics, politicians, journalists) thought banks were doing right, was mortgage lending. This conventional beltway wisdom now has more power.


Anonymous said...

Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan

I assume he is misquoted and actually said "10 percent or more". Either way, this was proved to be horribly wrong, not that it should have been surprising that elevating politics about sound business judgment results in disaster.

Patrick R. Sullivan said...

Mozilo is merely parroting a Boston Fed pamphlet written to bolster the belief--first propagated by Alicia Munnell--that the home lending industry had been racists, denying blacks access to loans by using unreasonable standards.

Absent that political pressure Mozilo almost certainly wouldn't have come up with this nonsense on his own.