I’m not going to quote George Santayana tonight, as much as his famous saying verging on cliche fits. But will some people never learn?
Another useful cliche is that politics makes for odd bedfellows. But that notion is misapplied in a New York Times article tonight, which tries to convince readers that affordable housing advocates and mortgage financiers playing on the same team is a new development. Huh? Per the Times:
The weight of the mortgage crisis fell heavily on lower-income and minority communities…..That left consumer advocates and civil rights groups frequently at odds with bankers, mortgage lenders and their lobbyists during the debate over the financial regulation act last year, which aims to rein in the subprime mortgage excesses that inflated the housing bubble.
Now, as banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans…
“I think everybody agrees that the enthusiasm for promoting home ownership went way too far,” said David Stevens, chief executive of the Mortgage Bankers Association. “But now the risk is that we go too far the other way. We still need to be able to make affordable mortgages that don’t just go to the wealthy, who can afford the biggest down payments and who have the most positive credit ratings.”
So let’s parse the obfuscation, which the Times repeats uncritically, and see what is really going on here. Everyone with an operating brain cell understands that having creditors make sounder loans than they did in the runup to the great financial meltdown means they will make fewer loans. That means home ownership will in theory be less affordable not just to lower income types, but for everyone. (Of course, one can argue, as Dean Baker, ironically following Mark Zandi of Moody’s has, that this will really just be a wash, since home prices would adjust to reflect the generosity of the financing on offer).
But making lending safer for everyone (including taxpayers) is contrary to the objectives of the mortgage industrial complex, which wants as much credit as possible on the most generous terms possible to as many people as possible. So to mask how the goal is really to fatten industry wallets, the real estate cohort long ago figure out that the best cover for their real objectives was to get the affordable housing types to be their front men.
With investors still reluctant to go into a pool full of pond scum and alligators buy uninsured mortgages in the absence of serious reforms, if the banking/affordable housing coalition prevails, that means we will continue to have housing finance on government life support.
And contrary to the Times’ bizarre assertions, this alliance is long-standing. The new Gretchen Morgenson-Josh Rosner book Reckless Endangerment, is in large measure a political story, of how the head of Fannie Mae, Jim Johnson, created a new template for lobbying, greased by the government-subsidized profits of the GSEs. One of the building blocks for this alliance was a 1992 Boston Fed study which found that black and Hispanic mortgage applicants were far more likely to be rejected than whites. The study created a firestorm, and the press discussing the problem of discrimination drowned out criticisms of the study, for instance, that it failed to consider whether the applicants met the lenders’ criteria. And the fact that minority borrowers and whites defaulted at similar rates suggested that there might not be anything amiss (if borrowers of color were facing unduly stringent lending standards, they should show lower defaults). But Fannie, concerned about being tarred as promoting discriminatory practices, reached out to minority and affordable housing leaders, initially defensively, and then quickly spearheaded an effort to create “new, innovative” products to increase homeownership, which was institutionalized in Clinton’s 1994 National Partners in Homeownership.
As a paper by Tom Ferguson and Rob Johnson, “Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown,” describes how this alliance became an inexorable political force:
The campaign to save the GSEs enjoyed a singular advantage: It could tap a broad, preexisting network of allies for help. For many years, a network of community organizations including parts of ACORN (Association of Community Organizations for Reform Now) and small, local businesses had functioned as a loose, decentralized, and pluralistic support network for the GSEs. The original inspiration for many participants appears to have been the cause of low-income housing. But as the neoliberal Democratic tilt in the GSEs increased, the network’s uses for broader campaigns that profited the GSEs and allied mortgage bankers became apparent.
The result was a political movement and ideological syncretism that has not received the attention it deserves. The mostly neoliberal business executives and their friends in Congress reached out to community activists who were hungry for funds and meaningful roles in a social system that increasingly exalted business as the speculum mentis, the highest activity of the human mind. As they became comfortable with casual references to “working-class housing,” mortgage bankers often joined the GSEs in picking up the tab for community “housing campaigns.”
Countrywide’s drive on behalf of “homeownership for all” brought this impeccably
politically correct movement to a new level of refinement. Fannie Mae, Freddie Mac, Countrywide, Washington Mutual, Ameriquest, New Century Financial, HSBC, and other mortgage firms joined leaders from nonprofits and the Hispanic Political Caucus to support an organization to promote homeownership called Hogar (Spanish for “home”). Mozilo himself actively preached the gospel, and his activities were widely appreciated. In 2004, the National Housing Conference declared him “Person of the Year” for his efforts to advance homeownership among minority and low-income families. As the Bush administration moved to cut the GSEs down to size in the wake of the scandals, Mozilo and like-minded private sector supporters closed ranks with the network to beat back attacks on the GSEs. Democratic congressional leaders were willing to consider certain reforms, but they wanted safeguards on subprime mortgages. They also drew the line at eliminating GSE support for programs promoting public and low-income housing that nourished the activist network. The administration, the financial industry, and the Federal Reserve all strongly opposed restrictions on subprime mortgages.
As we know well, monied interests were at best fair-weather friends of poor communities. Ironically, not for profit groups also provided mortgages in these neighborhoods but unlike their better-heeled competitors, theirs showed default rates comparable to those of prime loans. Has the mortgage industrial complex shown any interest in teaming up with groups that have figured out how to screen among these borrowers successfully? The answer is no. And that strongly suggests that the skepticism of investors is fully warranted: that with the bad incentives of the securitization system still very much intact, originators have every reason to do what they did in the last cycle: crank up volume, secure in the knowledge that the risk of the loan does not sit with them, but with a chump further down the food chain.
It’s revealing that the fight that the bankers have enlisted the affordable housing types to lead is on the so-called 5% risk retention rule, which means originators will have to keep 5% of the loans they make, unless they are “qualified residential mortgages,” which typically means the borrower has made a 20% down payment. Your humble blogger is not alone in saying that the 5% risk retention is too small to make any difference in originator behavior. Yet the banks, which have increasingly adopted a stance of seeking total victory, are taking this one on, even though, as the Times makes clear, investors and regulators are opposed to the changes as not only reducing the odds that a non-government guaranteed market will ever come back, but also as being anti-consumer:
Some regulators say that the coalition of consumer and industry groups is jeopardizing rules that could, in the long run, protect borrowers from risky lending practices. In private meetings, some top agency lawyers now refer to the partnership as “the unholy alliance.”
It’s pretty clear that lavish donations have turned groups claiming to represent minorities and the economically disadvantaged into mere camp followers of powerful banking interests. Where have they been on ideas like own to rent, or on measures to help the earning power of the groups they say they stand for? Equal access to jobs and education, affordable health care, and better labor protection are all worth fighting for. By contrast, throwing your weight behind access to more credit as a right isn’t a boon, it’s tantamount to selling your base into debt servitude.
Update: Dean Baker calculates the impact of adopting the 5% risk retention rule on mortgage yields as….drumroll….0.13%. So this fight is all about the imperial right of banks to do as they please rather than any real economic issue.
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This reminds me of Milton Friedman’s admonition that government should shrink. The more things the government tries to do, the more it exposes itself to bribery, fraud, inefficiency, and misallocation of resources. Yes, interest groups can bribe politicians to get their favoured laws passed. The best counter to that is to remove government from being involved in those things in the first place (including state and local gov’t).
Yes, the market’s medicine can be harsh at first (low income individuals probably wouldn’t be able to inflate their lifestyles as they did in the past decades), but it’s better in the long run than our present situation. It’s amazing how much more scrupulous individuals can be when they actually have to pay for making bad decisions.
“It’s amazing how much more scrupulous individuals can be when they actually have to pay for making bad decisions.”
When will we get to see if this is true? So far the engineers of the vast stupidity that has killed most of our real economy have had to pay nothing as their nefarious constructions have been repaired (or was it rewarded?) with huge piles of free money.
What could be the outcome when making bad decisions costs you nothing and in fact your losses are covered, you get an open line of credit, and you get to stay in the same game?
Was there even any scolding to be more careful? I don’t remember it.
”
remove government from being involved in those things in the first place (including state and local gov’t)
”
~~Richard~
On second thought, should we encourage state governments to use housing subsidies but discourage Federales to do anything more than stop taxing the hell out of the housing industry, title search industry, etc.? When half the state governments do but other half don’t subsidize things we have The Adam-Smith Operating System to boot up our computers for maximum evolution of efficiency. We have competition among the states. With competition, states quickly see from results that most subsidies explode into the marksman’s face. States then quickly reduce crime-ridden immortal-government-tax-and-blow-programs. Hey! When Congress wants the homeless off the streets they can stop the hidden taxation on home industry. They can legalize drugs just long enough to drop drug prices for the homeless. Increase savings rate for homeless. Make drugs cheap enough for lethal overdose into pusher’s hungry veins.
Tell me something! What is state tax on you for selling your home? What is your state tax for buying a home? Is that a negative subsidy? Negative subsidy with overhead
whoops! It will never fly. Vested interest in overhead will complain.
Scusi
!
“This reminds me of Milton Friedman’s admonition that government should shrink. The more things the government tries to do, the more it exposes itself to bribery, fraud, inefficiency, and misallocation of resources.”
“Shrink the government” just means eliminate things that Pete Peterson won’t benefit from. Short of true anarchy the government always has plenty of power to provide favors for those with plentiful bribe money. Look at our wonderful minimal government of the Gilded Age. It still had the power to serve up The Great Barbecue:
http://www.nationaljournal.com/njonline/no_20100312_8760.php
The short barbecue teaser article was not good enough to justify clicking into
w-w-w.nationaljournal-com
I can’t remember ever being attacked by a stronger swill of incessant java-scripted annoyances. Not to say it is malware, but it was painful enough rejecting all the things the page wanted to do with my browser that I don’t want to go back there again.
Sorry, all you have is belief, not data. There are plenty of countries with larger government sectors than the US and little corruption. Start with Australia, New Zealand, and the Nordic countries, clearly well above. Europe ex Greece and southern Italy is cleaner. And Russia and Chile, when they both tried Friedmanite experiments, fell into a sea of self-dealing and looting of the public purse.
You’ll have to do a lot better than that to persuade anyone here.
Sorry, but his suggestion is so much worse than that. Yes, obviously, there are the clear counterexamples of larger governments with less corruption, but *on top of that*, there appear to be no examples of societies with smaller governments and less acquisitive, coercive behavior by the powerful.
This is the flaw in logic that so many people fall prey to with so many things. They think that because they have found a problem with a policy (corruption can sometimes grow with a larger government), they think they have disposed of the issue. But they haven’t. Not at all. The proponent has to show that his proposed alternative is *better* or *free from any problems*. Obviously, Richard has not done that. In fact, almost all available evidence would tend to support the belief that, despite problems with large governments, his alternative is much, much worse for most citizens.
And also, Richard, sorry if you’ve heard this before (but weren’t really listening), but the world is not fair. If you think people really pay for bad decisions on a consistent basis under any sort of governance regime, you don’t understand anything about reality, decisions, consequences, or probabilities.
Hey Richard,
How about if we get rid of inherited wealth and the ability to use that wealth to exert worldwide economic and social control.
Tell us more BS about “The Market” Richard.
Nope, liars like that only want to get rid of half or the rentier-government nexus, because the goal isn’t freedom (the way they fraudulently claim) but rentier tyranny.
The best counter to that is to remove government from being involved in those things in the first place (including state and local gov’t).
Of course Richard can prove I’m wrong in his particular case by agreeing that “removing government” includes the artificial government programs establishing corporations and propertarianism.
Yes, the market’s medicine can be harsh at first (low income individuals probably wouldn’t be able to inflate their lifestyles as they did in the past decades)
And upper income individuals (by definition having lifestyles inflated beyond their social value) would be even less able. Indeed, in a human community where lifestyles couldn’t inflate beyond the level of one’s just share of the social production, there could and would be no such thing as upper incomes, let alone wealth concentrations.
So for anyone who truly cares about lifestyle inflation, there’s the real task, not engaging in the cowardly bullying of lower income individuals.
I forgot to add, by just share I meant not only a moral connotation but the practical fact that how the market would truly distribute if left to itself would be radically different from how the government-commanded “market” of corporatism and propertarianism distributes.
Of course when our market fundamentalists say “free market” they really mean this corporatist command economy.
This reminds me of Milton Friedman’s admonition that government should shrink. Richard
Government should shrink – starting with government privileges for the rich such as the government enforced and backed counterfeiting cartel otherwise known as our banking system.
And after the looting by the rich is eliminated then the need for socialism should “wither away”.
One should remember that the need for socialism in the US came after the fascist banking system wrecked the economy in the 1920’s and 30’s.
Milton Freedman et al are complete idiots whose perverse notions about economy and their holas bolas adoption by the mainstream has condemned our economy to the ruin which is befalling us.
If government was so useless why would Republicans, conservatives, corporations and wealthy individuals spend billions yearly to corrupt politics and politicians? These are individuals who wouldn’t spend a penny unless there was a dollar in it for them.
Morality is comprised of human and social values – none of which can be measured in dollars.
Morality has three positions. Moral which means that one knows what it is and does it; Immoral which means one knows what it is and doesn’t do it; and Amoral which means that one never considers morality in the first place.
There can never be a more practical example of amoral than one for whom dollars are the only, final and deciding value considered before decision or action.
Corporations, Republicans and wealthy elites are amoral – they use only dollars to take decisions or action and they have no ability to consider human or social values.
Democratic government on the other hand is elected by the majority of voters to represent their human and social values and therefore has the ability to be moral (if it is uncorrupted by Republicans, corporations, and wealthy elites who have been exercising a vicious class war on working people since Nixon and have used their ideology to transfer wealth from workers to themselves) – but the real kicker is that governments have the ability when they are not stalemated or corrupted to force corporations, capitalists, wealthy elites and Republicans to act morally. This is why corporations, Republicans, and wealthy elites all HATE government – it can effectively force them to be moral and consider human and social values and consequences.
Capitalists, corporations and their sycophants like Milton Freedman and Von Hayak would rather cut off both arms than be forced to consider human and social values and be moral – and they hate government because it can in fact force them to be moral. Since 1970 more money and wealth has been transferred from workers to wealthy elites then at any previous time including the run up to the 1930’s great depression.
Socialism is when the government takes the risk and gets the reward; capitalism is when the individual takes the risk and gets the reward, fascism is when the government takes to risk and the individual gets the reward.
Currently in the USA the government (middle class taxpayers) have been put on the hook for losses while financial corporations and their wealthy owners have reaped the rewards – this is fascist and you are a fascist if you promote more of the same.
The description here of how the mortgage lenders basically pimp the Affordable Housing types synchs with what I’ve observed in my little region. And the Affordable Housing types never seem to have a clue.
‘Human shields’ just sums the dynamic up perfectly, but the ‘human shields’ are woefully unaware they’re actually the cannon fodder, in my experience.
Most “progressive” NGOs are in on the scam, for whatever wretched little crumbs they get for their treachery.
In this case the human shields are the poor themselves, not the “activists”.
Sourcewatch occassionally reveals the funding. Following the money, it’s been said, is the way to discover the modus operandi.
The business plan of the TBTF banks seems to consist largely of making imprudent loans using other people’s money. Just keep those fees coming. That seems to be true whether they’re making loans to homeowners or to sovereign nation states.
Ives,
You have scratched the surface of the “low income housing sector” and its ties to the big guys.
Much of the low income development is done via two instruments a.) Tax Credits and b.) 501 (C) 3 Bonds. The white shoe law firms and bond firms, underwriters and developers all love this. You can do a deal with 501 (c)3 bonds, investors pay no taxes on bond interest and then you get section 8 recipients to insure a steady stream of income. Oh, and if its a 501 (c) 3 deal in most states you are exempt from property taxes (servers to augment equity after a fashion or at all events reduce expenses). there was a huge bubble in low to mod development using both Tax credits (banks, investors put into a deal and write off taxes from earnings–nice huh) or 501 (c)’s. Many involved in low income housing have made a lot of money. Hell, major law firms have highly paid partners that specialize in low income, banks and insurance companies have departments. Its the least covered scandalous aspect of the housing mess. Hope this gets some discussion started as a follow on to you great post.
Ives,
In my prior note am refering to multifamily rental and mixed commerial and housing. Low to mod income rental development and finance is an amazing case of moral hazard and political favors among a few very well paid players. There are more than a few Mercedes benze driving non-profit developers–famous line—“Non-profit is a tax status not a business strategy”
OT sort of … Attached to an affordable housing legislation initiative, the MERS foreclosure amendment dies in Oregon House committee. “A late attempt by the finance industry to waive Oregon mortgage recording laws in most foreclosures is dead.
The Oregon House Judiciary Committee voted today to approve Senate Bill 519 without an amendment sought last week by loan servicers, title companies and credit unions. The amendment would have relieved lenders of ensuring a property’s ownership history is properly recorded in public records before foreclosing outside a courtroom”
http://www.oregonlive.com/business/index.ssf/2011/06/mers_foreclosure_amendment_die_1.html
Regarding Gretchen Morgenson and Josh Rosner: They were interviewed on Democracy Now! today, and spent some time giving a broader overview as well. Here’s a link: http://www.democracynow.org/2011/6/2/reckless_endangerment_how_outsized_ambition_greed
“But now the risk is that we go too far the other way. We still need to be able to make affordable mortgages that don’t just go to the wealthy, who can afford the biggest down payments and who have the most positive credit ratings.” David Steven
Good point! Either everyone should have access to so-called “credit” or no one should.
President Obama should withdraw Prof. Warren’s nomination, but offer up Prof. Black instead. I think she’d be cool with that.
However ….
Prof. Black seriously overstates how effective his S&L clean-up was. That episode was not nearly harsh enough as one of the initial targets, then chief funders/bribers/godfathers of affordable housing was then given the plum of Ambassador to the the birthplace of capitalism (properly understood) and Tulip-mania.
The Super Bowl ads were awesome. “Your more than a number.” Except to us: you just don’t understand what numbers we care about. Commissions, overrides, yield spread, service release premiums, volume bonuses, servicing fees, etc.
Then there’s that really wealthy Oompah Loompah (sp?) guy.
I’m pretty sure Prof. Black knew of both these characters back in the day. And seriously, I’m not ripping him. I’m just sayin’ follow the money – and I wouldn’t limit it to just these two ducks (in the Aristotelian sense), but maybe the top 25 to 100 folks around them.
My favorite class in college was taught by a guy named Trevor Melia, called “Rhetoric in a Free Society.” He had moon-lighted as a de-programmer for cult members (frequently technically kidnapped away from the mother-ship). He gave it up, as I recall, hinting that, in good consciense, he couldn’t give these desperate souls a better alternative.
I amaze myself daily with my sunny disposition. Seriously, I don’t get bogged down with debates about whether Gibsons or Fenders are better guitars: they’re both awesome, and I’m grateful nobody will buy my last cherished ax at a price that will give me a full tank of gas.
The affordable housing folks are good souls and I have come to believe that good intentions are at least as important as anticipating unanticipated consequences. But, they have mortgages to pay, too.
Isn’t Bill Black the guy who should be nominated?
Jack Straw:
The clean-up of the S&Ls was pretty effective. But that never stops a good banker!
The main sub-prime lending action went to the Shadow Financial System (New Century and their ilk). This Shadow system became very hard to follow and regulate. Wall Street funded these guys and securitized their effluence of shitty mortgages.
The Affordable Housing lobby should also spend effort on consumer education. It’s a gigantic problem.
We’re back to the fault-line WITHIN the financial reform community between the Systemic folks (the true reformers) and the “consumer” groups, or “community” investment groups, and “fair lending” groups, who frequently act as Human Shield for the Banking Cartel, usually unwittingly, and sometimes because their leadership has been bought-off by the big banking cartel
Bingo!
I don’t think it’s mostly a matter of corruption, although some affordable housing developers are less honest and decent than we’d like them to be. What’s going on is that there’s no affordable housing to be had, and getting people into owned housing is the only way to get them into decent housing at all. And it’s not as if they weren’t already paying high prices–half of California’s tenants pay more than 30% of their income for housing, and a quarter pay more than half.
A real conversation on the issue would look at the government’s malfeasance in providing funding for permanent affordable housing, not on the desperate measures taken by groups that want to get people into decent housing in any way possible.