Liberalism and Minorities Caused the Subprime Crisis, Not Greed
September 27th, 2008
by James Buchanan
The Democrats are desperately trying to distance themselves from the subprime crisis. They're claiming that it was "corporate greed" (not liberalism) that caused the mortgage industry meltdown. There's just one little problem with their claim; it's not true. The mortgage industry has traditionally made money by sticking to a rigid set of requirements for home loans that include a substantial down payment, a good credit history and proof of employment. Relaxing those requirements and making loans to high-risk groups like poor Blacks and Latinos was NOT in their interest if they wanted to stay profitable. The truth is that our government coerced the mortgage industry into making these high-risk subprime loans to minorities, which has caused our current subprime crisis.
A A New York Post article reports that "a 'landmark' 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic. That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination. Yet the political agenda triumphed - with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion. No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: 'discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.' Some of these 'outdated' criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt. Sound crazy? You bet. On the Web, you can still find CRA loans available via ACORN with '100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns. "
So a fabricated "study" by the Boston Fed claimed that minorities were being discriminated against for home loans. In reality, Blacks and Latinos were failing to qualify for home loans because their average income is lower, their average credit history is worse and their ability to make a down payment is worse than the average for White people. Unfortunately, liberals entrenched in powerful positions in our government chose to ignore all the evidence that ordinary Blacks and Latinos have certain inherent, persistent flaws that make them bad candidates for home loans.
Not only did the Feds demand that more loans be made to minorities, they insisted that traditional criteria like proof of employment and the ability to make a down payment should not be used to disqualify loan applicants. Lending to unqualified minorities was the first big reason for the subprime crisis. Eliminating down payments was the second big reason. The down payment is critically necessary in the mortgage industry. By forcing people to make a 20 percent down payment, the chances of the borrower "walking away" from a home loan (if the housing prices start to drop or the monthly payments increase) are greatly reduced.
A frequently-mentioned problem with these subprime loans was the tendency for some mortgage lenders to use extremely low "teaser rates" to draw in incredibly naive borrowers, who apparently had no understanding of how a variable rate loan works. It appears that a large number of minority loans fell into this category. In many cases, the borrowers appear to have had little clue that the interest rate and monthly payments would go up after the first year. It's hard to imagine people so clueless that they would not know the consequences of taking a variable rate loan. Clearly these borrowers had to be the most dim-witted of the subprime crowd. Once again we're dealing with people, who probably put nothing down on the house and who should never have gotten a home loan in the first place.
So what happened to mortgage lenders who didn't want to make these high risk subprime loans with no down payments to minorities? A New York Post article reports "Banks that got poor reviews (for making home loans to minorities) were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department. Flexible lending programs expanded even though they had higher default rates than loans with traditional standards."
During the first few years that these new subprime loans were made, disaster was avoided because the houses could be sold at a profit and the high failure rate was not costing the mortgage companies money. The potential for disaster however was huge and a few wise men in the financial industry warned of a looming subprime collapse. The quantity of subprime loans continued to grow, right up until 2006 when housing prices topped out and then started to fall.
So it wasn't greed that drove mortgage companies to make these high-risk loans to poor minorities, it was a liberal agenda from our federal government that compelled banks to make loans, that were not worth the risk. The "good years" (when housing prices were still going up) created a false sense of security and allowed the total quantity of bad loans to grow to truly staggering dimensions. Now we're finally paying the price for enforcing liberal loan policies. The least we should do now is tell the truth and point the finger of guilt back at the liberals and not let them weasel their way out of responsibility for a disaster that could easily plunge us all into a Second Great Depression.