WORTH READING Subprime Suspects: The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.

[David Farber <dave () farber net>]

Begin forwarded message:

From: "David P. Reed" <dpreed () reed com>
Date: October 8, 2008 9:51:21 AM EDT
To: dave () farber net
Cc: ip <ip () v2 listbox com>
Subject: Re: [IP] Re:   Subprime Suspects: The right blames the credit  
crisis on poor minority homeowners. This is not merely offensive, but  
entirely wrong.

Funny story.   A number of months ago I gave a talk at a banking  
event, and got to talking to the bankers (I am not one) about their  
big problems.  As I was led to understand, the problem was that they  
were limited in how much money they could make by a lack of assets  
against which to lend.   In a "liquid" economy - any newly discovered  
large pool of untapped assets would be "gold" to the securitization  
factories, which were honed o a fine pitch.

Since second mortgages and home equity loans were tapped out, it seems  
that one of those untapped assets that could inject new "capital" into  
the system turned out to be the homes of the poor who could be sold a  
dream.

The political stars lined up - you could sell this to Congress, you  
could sell it to the homebuyers, you could create a new class of high- 
pressure mortgages salespeople for small upfront commissions ... as a  
win-win.   What's not to like?  :-)

Financial engineers, being information technology professionals,  
physicists who couldn't get academic jobs, and game theorists, found  
it unnecessary and distracting to investigate the "reality" of the  
underlying assets - they were busy turning their magic technology  
crank on maximizing the return on this new "liquidity pool" (to use  
the insider slang).  At best, they used statistical modeling of  
dubious extrapolatory value to "predict" the high-sounding probability  
distributions of loan defaults that allowed them to *avoid*  
understanding the borrowers' likelihood of repaying and the homes'  
likelihood of declining in value.

It was all beautiful mathematics, and wonderful computerized trading,  
along with clever legal securitization documents.  And the trading  
systems worldwide would have been Enron's dream.

At heart a Ponzi scheme.   But who the hell cares when the bonuses  
roll in?  Everything is OK.  Until it isn't.

David Farber wrote:
> Begin forwarded message:
>
> *From: *"Dave Wilson" <dave () wilson net <mailto:dave () wilson net>>
> *Date: *October 8, 2008 7:43:53 AM EDT
> *To: *dave () farber net <mailto:dave () farber net>
> *Subject: **Re: [IP] Subprime Suspects: The right blames the credit  
> crisis on poor minority homeowners. This is not merely offensive,  
> but entirely wrong.*
>
> This revolting lie (that policies aimed at giving minorities the  
> chance to own a home have brought the world to economic collapse) is  
> particularly egregious given the data (from Fannie Mae) proving that  
> about half of all the subprime loans given to minorities were issued  
> to people who actually qualified for standard, prime mortgages. Yes,  
> it seems that if you showed up at Countrywide with a credit score of  
> 760 or better but happened to be black, you were offered a predatory  
> adjustable rate loan; if you were white, you at least had the option  
> of getting a traditional 30 year mortgage at a 6 percent fixed rate.  
> Put simply, when controlling for such factors as income, credit  
> history, and property location, non-white mortgage seekers have  
> received a disproportionately higher share of these predatory loans  
> (adjustable, high interest rates combined with things like  
> penalities for refinancing that make it nearly impossible to get out  
> of the agreement) that companies like Countrywide have been  
> repeatedly fined for issuing.
>
> So while it's true that subprime mortgages held by minorities are  
> failing at a significant rate, it's also true that many if not most  
> of those mortgages would have been just fine if they did not have an  
> adjustable interest rate, an option that was not offered to many of  
> those families seeking homeownership simply because they were black  
> or latino. This attempt to hang the collapse on minority  
> homeownership is beneath contempt.
>
> For just one of the many excellent analyses available on this issue,  
> please see "Unfair Lending: The Effect of Race and Ethnicity on the  
> Price of Subprime Mortgages" which was issued in 2006, long before  
> the current crisis.
> www.responsiblelending.org/pdfs/rr011exec-Unfair_Lending-0506.pdf <http://www.responsiblelending.org/pdfs/rr011exec-Unfair_Lending-0506.pdf 
> >
>
>
> On Wed, Oct 8, 2008 at 6:05 AM, David Farber <dave () farber net <mailto:dave () farber net 
> >> wrote:
>
>
>
>    Begin forwarded message:
>
>    From: Barry Ritholtz <ritholtz () optonline net
>    <mailto:ritholtz () optonline net>>
>    Date: October 8, 2008 6:00:48 AM EDT
>    To: David Farber <dave () farber net <mailto:dave () farber net>>
>    Subject: Subprime Suspects: The right blames the credit crisis on
>    poor minority homeowners. This is not merely offensive, but
>    entirely wrong.
>
>    Dave,
>
>    In Newsweek/Slate, Dan Gross does a nice job explaining why Fannie
>    Mae and the CRA were not the proximate causes of either the
>    housing crisis or the credit crunch.
>
>    Its important to understand how this situation occurred in the
>    first place, if we want to be able to fix it.
>
>
>
>    Barry L. Ritholtz
>    The Big Picture
>    http://bigpicture.typepad.com
>
>
>    ~~~
>
>
>    Subprime Suspects The right blames the credit crisis on poor
>    minority homeowners. This is not merely offensive, but entirely  
> wrong.
>    By Daniel Gross
>    Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET
>    http://www.slate.com/id/2201641/
>    We've now entered a new stage of the financial crisis: the ritual
>    assigning of blame. It began in earnest with Monday's
>    congressional roasting of Lehman Bros. CEO Richard Fuld and
>    continued on Tuesday with Capitol Hill solons delving into the
>    failure of AIG. On the Republican side of Congress, in the
>    right-wing financial media (which is to say the financial media),
>    and in certain parts of the op-ed-o-sphere, there's a consensus
>    emerging that the whole mess should be laid at the feet of Fannie
>    Mae and Freddie Mac, the failed mortgage giants, and the Community
>    Reinvestment Act, a law passed during the Carter administration.
>    The CRA, which was amended in the 1990s and this decade, requires
>    banks—which had a long, distinguished history of not making loans
>    to minorities—to make more efforts to do so.
>
>    The thesis is laid out almost daily on the Wall Street Journal
>    editorial page, in the National Review, and on the campaign trail.
>    John McCain said yesterday, "Bad mortgages were being backed by
>    Fannie Mae and Freddie Mac, and it was only a matter of time
>    before a contagion of unsustainable debt began to spread."
>    Washington Post columnist Charles Krauthammer provides an
>    excellent example, writing that "much of this crisis was brought
>    upon us by the good intentions of good people." He continues: "For
>    decades, starting with Jimmy Carter's Community Reinvestment Act
>    of 1977, there has been bipartisan agreement to use government
>    power to expand homeownership to people who had been shut out for
>    economic reasons or, sometimes, because of racial and ethnic
>    discrimination. What could be a more worthy cause? But it led to
>    tremendous pressure on Fannie Mae and Freddie Mac—which in turn
>    pressured banks and other lenders—to extend mortgages to people
>    who were borrowing over their heads. That's called subprime
>    lending. It lies at the root of our current calamity." The
>    subtext: If only Congress didn't force banks to lend money to poor
>    minorities, the Dow would be well on its way to 36,000. Or, as Fox
>    Business Channel's Neil Cavuto put it, "I don't remember a clarion
>    call that said: Fannie and Freddie are a disaster. Loaning to
>    minorities and risky folks is a disaster."
>
>    Let me get this straight. Investment banks and insurance companies
>    run by centimillionaires blow up, and it's the fault of Jimmy
>    Carter, Bill Clinton, and poor minorities?
>
>    These arguments are generally made by people who read the
>    editorial page of the Wall Street Journal and ignore the rest of
>    the paper—economic know-nothings whose opinions are informed
>    mostly by ideology and, occasionally, by prejudice. Let's be
>    honest. Fannie and Freddie, which didn't make subprime loans but
>    did buy subprime loans made by others, were part of the problem.
>    Poor Congressional oversight was part of the problem. Banks that
>    sought to meet CRA requirements by indiscriminately doling out
>    loans to minorities may have been part of the problem. But none of
>    these issues is the cause of the problem. Not by a long shot. From
>    the beginning, subprime has been a symptom, not a cause. And the
>    notion that the Community Reinvestment Act is somehow responsible
>    for poor lending decisions is absurd.
>
>    Here's why.
>
>    The Community Reinvestment Act applies to depository banks. But
>    many of the institutions that spurred the massive growth of the
>    subprime market weren't regulated banks. They were outfits such as
>    Argent and American Home Mortgage, which were generally not
>    regulated by the Federal Reserve or other entities that monitored
>    compliance with CRA. These institutions worked hand in glove with
>    Bear Stearns and Lehman Brothers, entities to which the CRA
>    likewise didn't apply. There's much more. As Barry Ritholtz notes
>    in this fine rant, the CRA didn't force mortgage companies to
>    offer loans for no money down, or to throw underwriting standards
>    out the window, or to encourage mortgage brokers to aggressively
>    seek out new markets. Nor did the CRA force the credit-rating
>    agencies to slap high-grade ratings on packages of subprime debt.
>
>    Second, many of the biggest flameouts in real estate have had
>    nothing to do with subprime lending. WCI Communities, builder of
>    highly amenitized condos in Florida (no subprime purchasers
>    welcome there), filed for bankruptcy in August. Very few of the
>    tens of thousands of now-surplus condominiums in Miami were
>    conceived to be marketed to subprime borrowers, or
>    minorities—unless you count rich Venezuelans and Colombians as
>    minorities. The multiyear plague that has been documented in
>    brilliant detail at IrvineHousingBlog is playing out in one of the
>    least-subprime housing markets in the nation.
>
>    Third, lending money to poor people and minorities isn't
>    inherently risky. There's plenty of evidence that in fact it's not
>    that risky at all. That's what we've learned from several decades
>    of microlending programs, at home and abroad, with their very high
>    repayment rates. And as the New York Times recently reported,
>    Nehemiah Homes, a long-running initiative to build homes and sell
>    them to the working poor in subprime areas of New York's outer
>    boroughs, has a repayment rate that lenders in Greenwich, Conn.,
>    would envy. In 27 years, there have been fewer than 10 defaults on
>    the project's 3,900 homes. That's a rate of 0.25 percent.
>
>    On the other hand, lending money recklessly to obscenely rich
>    white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of
>    Bear Stearns, can be really risky. In fact, it's even more risky,
>    since they have a lot more borrowing capacity. And here, again,
>    it's difficult to imagine how Jimmy Carter could be responsible
>    for the supremely poor decision-making seen in the financial
>    system. I await the Krauthammer column in which he points out the
>    specific provision of the Community Reinvestment Act that forced
>    Bear Stearns to run with an absurd leverage ratio of 33 to 1,
>    which instructed Bear Stearns hedge-fund managers to blow up
>    hundreds of millions of their clients' money, and that required
>    its septuagenarian CEO to play bridge while his company ran into
>    trouble. Perhaps Neil Cavuto knows which CRA clause required
>    Lehman Bros. to borrow hundreds of billions of dollars in
>    short-term debt in the capital markets and then buy tens of
>    billions of dollars of commercial real estate at the top of the
>    market. I can't find it. Did AIG plunge into the
>    credit-default-swaps business with abandon because Association of
>    Community Organizations for Reform Now members picketed its
>    offices? Please. How about the hundreds of billions of dollars of
>    leveraged loans—loans banks committed to private-equity firms that
>    wanted to conduct leveraged buyouts of retailers, restaurant
>    companies, and industrial firms? Many of those are going bad now,
>    too. Is that Bill Clinton's fault?
>
>    Look: There was a culture of stupid, reckless lending, of which
>    Fannie Mae and Freddie Mac and the subprime lenders were an
>    integral part. But the dumb-lending virus originated in Greenwich,
>    Conn., midtown Manhattan, and Southern California, not
>    Eastchester, Brownsville, and Washington, D.C. Investment banks
>    created a demand for subprime loans because they saw it as a new
>    asset class that they could dominate. They made subprime loans for
>    the same reason they made other loans: They could get paid for
>    making the loans, for turning them into securities, and for
>    trading them—frequently using borrowed capital.
>
>    At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin
>    Lehman's demise on Fannie and Freddie. After comparing Lehman's
>    small political contributions with Fannie and Freddie's much
>    larger ones, Mica asked Fuld what role Fannie and Freddie's
>    failure played in Lehman's demise. Fuld's response: "De minimis."
>
>    Lending money to poor people doesn't make you poor. Lending money
>    poorly to rich people does.
>
>    Daniel Gross is the Moneybox columnist for Slate and the business
>    columnist for Newsweek. You can e-mail him at moneybox () slate com
>    <mailto:moneybox () slate com>. He is the author of Pop! Why Bubbles
>    Are Great for the Economy.
>    Article URL: http://www.slate.com/id/2201641/
>
>
>
>
>
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