A nice piece on one of the causes of the US housing debacle

Revisiting the role of regulation and intervention in causing the bubble (attributed by Obama and the Democrats to not enough regulation and intervention). ht Andrew Parle on the qskeptics email list.

Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

Bubble? Regulators Blew It

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

Ludwig at the time stated the ruling would be used by the agen cies as a fair-lending enforcement “tool,” and would apply to “all lenders” — including banks and thrifts, credit unions, mortgage brokers and finance companies.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.

Unbelievably, the taskforce is still in place!  Proving yet again that fact can be stranger than fiction.

Clinton’s task force survived the Bush administration, during which it produced fair-lending brochures in Spanish for immigrant home-loan applicants.

And it’s still alive today. Obama is building on the fair-lending infrastructure Clinton put in place.

As IBD first reported in July, Attorney General Eric Holder has launched a witch hunt vs. “racist” banks.

“It’s a more aggressive fair-lending enforcement approach now,” said Washington lawyer Andrew Sandler of Buckley Sandler LLP in a recent interview. “It is well beyond anything we saw during the Clinton administration.”

This entry was posted in Uncategorized. Bookmark the permalink.

22 Responses to A nice piece on one of the causes of the US housing debacle

  1. THR

    The role of ‘regulation and intervention’ in causing the bubble was trivial. Lenders had strong incentives to loan due to profits from securitisation of the loans. Investors had strong incentives to buy in as it was, after all, a bubble. The banks weren’t lending to blacks because they had some government gun to their heads, but were rushing around as fast as possible to lend to whomever was sufficiently uneducated to buy in at the end of the cycle.
    Blaming the poor for the GFC (or tepid regulations intended to protect the poor) is a particularly dishonourable lowlight, even for a ‘classic liberal’.

  2. .

    No one has ever blamed the poor for the GFC.

  3. THR

    Right. They blamed it on regulations for the poor:

    Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender

  4. .

    Completely different things. Now you’re actually admitting the laws encouraged, nay, enforced, irresponsible lending.

  5. sdfc

    Leave THR. It’s been debunked on numerous ocassions.

    The GFC was just the result of another of a long line of credit bubbles that have bust.

    If Rafe hasn’t got it by now he never will.

  6. Peter Patton

    THR outed!!! Clearly he is a Harvard undergrad, enrolled in Greg Mankiw’s Economics 10 course, but has boycotted class.

  7. .

    sdfc yes that is correct but all of these “one cause” explanations are wrong. Dead wrong.

  8. Peter Patton

    I have to say that as an historian reading all these monocausal analyses of the ‘GFC’ is worse than listening to finger nails run down a blackboard. insufferable ignorance!

  9. sdfc

    Dot

    Loose money has a long history of causing credit bubbles. The GSE’s may have distorted the market but it was by no means the major driver of the credit boom.

    The CRA did not require private sector lenders to lend to poor credits. However, let’s just say for argument though that some lenders did engage in poor lending practices as a result of the CRA. That in no way explains the scale of the lending.

    What does explain the scale of the lending was the Fed’s inappropriate monetary policy between 2003 and 2006. That and the erroneous belief that house prices don’t fall.

  10. sdfc

    Peter

    We could pick anyone of a number of contributing factors, poor regulation, the GSEs, financial innovation etc. Pick your favourite poison. However at the end of the day none of these explain the extent of the credit boom.

    At the end of the day we can finger one major cause because without super-cheap money there would not have been the incentive to drive lending to the extreme levels we saw during the height of the credit boom.

  11. .

    The CRA did not require private sector lenders to lend to poor credits. However, let’s just say for argument though that some lenders did engage in poor lending practices as a result of the CRA. That in no way explains the scale of the lending.

    No. The stats were juked. CRA enforced loans were MUCH higher than on paper. The GSEs had a directive to refinance them.

    What do you think of FHA PMI? I think it is the key to all of this, short of the sheer volume of loose money since Greenspan went off the rails.

  12. Rafe

    The title of the post is “one of the causes”. Some folk list five or six, with this one well down the list. Still it demonstrates again that the US has a regulation problem as well as a debt problem.

  13. sdfc

    GSE market share of mortgages fell during the boom.

    Private label securitisation was behind the ramp up in mortgage lending. Private label loans defaulted at 5 to 6 times the rate of GSE loans.

    The losses that nearly brought down the financial system were private label. As we know the GSEs were bailed out by the government.

  14. JC

    SDFC

    The legal claims are higher from the GSE’s than private label.

  15. Mother Hubbard's Dog

    Anyone denying the contribution of race based regulation on the US housing crisis should check out Thomas Sowell’s The Housing Boom and Bust, which examines its contribution in some detail.

  16. .

    GSE market share of mortgages fell during the boom.

    …and the way they were accounted for was bogus, if the bank/customer went through a mortgage broker to organise a loan, it “didn’t count”. Janet Yellen should know better but didn’t.

    Private label loans defaulted at 5 to 6 times the rate of GSE loans.

    We know this is rubbish because of the poor accounting and GSE refinancing of CRA loans.

    The losses that nearly brought down the financial system were private label. As we know the GSEs were bailed out by the government.

    So all we needed in 2007 was a ultra massive TARP?

  17. Stephen Williams

    Russ Roberts asks why investors continued to place money in Institutions that were making so many risky loans such as those you write about. He agrees that the loans were politically driven however the people who loaned the funds to the banks were not compelled to do so. Would they have invested their funds with the banks if they thought they would lose the money? No. So why didn’t they look at where their money was being invested? Because they had good reason to believe that if the loans turned bad (which they did), they would be ‘Bailed Out’ by the government (which they were). In other words what created the problem was not the bad loans but the implicit guarantees to the bond holders. In all the bailouts it wasn’t the stockholders who were bailed out it was those who loaned the money to the banks. If you are guaranteed that no matter how risky your bets are you will get your stake back well then you will begin making extremely risky bets because there is no downside.

    Seems like a good argument to me see here – http://www.econtalk.org/archives/_featuring/russ_roberts/

  18. Capitalist Piggy

    “GSE market share of mortgages fell during the boom.”

    Yet by the time the housing bubble burst, 71% of sub-prime mortgages were underwritten by the GSEs.

  19. sdfc

    JC
    The legal claims are higher from the GSE’s than private label.

    We know that private label mortgages went bust at a greater rate than GSE mortgages and we know that private label loans were the major reason for the ramp up in lending during the boom. So no I don’t think so.

    Dot

    That’s bullshit. We know private sector lending took market share from the GSEs. We know that no-one expected the GSE to buy all those loans. It’s rubbish perpetrated by ideological warriors with a need to blame the government for everthiing.

    Yet by the time the housing bubble burst, 71% of sub-prime mortgages were underwritten by the GSEs.

    Bollocks.

  20. Peter Patton

    sdfc

    Oh, oh. It’s Friday, which means you left work at noon today, to stock up for a weekends boozing. That was 10 hours ago, you must be on fire by now. Post away, dear boy, I need the laughs! 🙂

  21. sdfc

    You cut me pete. If I started drinking ten hours ago I would long be in bed.

Comments are closed.