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.