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Tuesday, September 30, 2008

Here beggineth the lesson: why Fanny and Freddie didn't do it Part 2

A very good friend of mine in the legal profession emailed me recently with a ten year-old article he'd been forwarded that ostensibly helped lay blame for the current mess at Clinton's feet. (A note: he's got solid blue bona fides -- he's just too scrupulous to dismiss it out of hand. Admirable after the floor fight today, but I digress.)

It's an argument that's being made a lot recently, whether directed and Fannie and Freddie, or ACORN, or the CRA. I've provided my lengthy and increasingly bombastic response. Let's just say that research comes in handy for a chest-thumping, anti-Grinch smackdown.

Dear D,

It's not a bad article, but there are two key problems with the Rightward argument that Fannie and Freddie/Acorn/the CRA are responsible for the mortgage crisis. The first, and most obvious (to me) problem is that it confirms what we can call basic class-based stereotypes that just happen to break down along white/minority lines. Note that while the article you sent me talks about the growth in the rate of home ownership of whites versus minorities, it says nothing about overall rates or total numbers. I think it's still fair to assume that whites received a plurality of these loans, if not a majority, in the 90s, due to the fact that they outnumber minorities (by definition) and traditionally were more likely to receive loans in general (see above regarding prejudice). The CRA was designed to attack precisely that problem -- it was a law that insisted banks had to give loans to the populations that they served (you couldn't have branches in black and white communities, but give loans almost exclusively to the white community).

So much for my first quibble -- but one that doesn't matter much. My biggest problem with this line of argument is the timing. The extremely high-risk mortgages, particularly the explosion in Adjustable Rate Mortgages, came well after Clinton's term in office. The CRA was a piece of legislation that Carter enacted. But, as this article makes clear, the expansion under Clinton was not into ARMs, and certainly was not into deposit-less mortgages.
M's mom is a mortgage broker -- unfortunately at WaMu -- and as she points out, the banks that were subject to CRA or Fannie and Freddie have been in better shape as a whole during this crisis, because the standards which these regulations created were higher. For one, if it was a government backed loan, you still had to *prove* your income, because the paperwork went back to Fannie and Freddie for review. Below is an article from The American Prospect that debunks the conservative argument in respect to the CRA.

The other problem is that the government programs were more careful than the private ones. Note that the article you sent me isn't about subprime loans at all -- which typically are prime +3 or 4, not +1. Even more damning to the right-wing argument is that subprime loans were originally defined as those that don't fit Fannie and Freddie guidelines -- the ones Fannie and Freddie wouldn't take because they were too risky.

The takeaway for me is that you *could* argue that Carter and Clinton had some effect, in that they encouraged some of the first experimentation with these new mortgage vehicles. But all of their programs were vastly more conservative than the bizarre shit that banks like WaMu (who largely operated outside of the CRA and Fannie/Freddie) were doing. My sense is that what happened was the "liberal" mortgage programs showed that minority default rates were lower than people expected, and hence good business. So some entrepeneurs decided to get ahead of the curve with some radically more risky vehicles -- which Greenspan decided to support and explicitly refused to look at regulating. The private sector cowboys rode the bubble, and then Fannie and Freddie got involved under the Bush Administration because they were agressively deregulating them and the CRA, and F&F were losing market share (remember--they were private entities with a bottom line). The upshot is that, as far as I can tell, the policies which Democratic administrations enacted were actually pretty solid because they were careful. But when the Bush administration embraced much higher-risk lending combined with shredding oversight, a solid policy spun out of control.

At the end of the day, you're right, no one will ever be able to say with full certainty what the cause is. But it's no surprise that the bash CRA/Fannie Freddie club are people who hate entitlements, affirmative action, etc., etc. They forget how many bad credit/poor whites were out there receiving these loans, too. I haven't been able to find any national statistics. But the Furman center in NY does an annual review of the NYC housing market that has some fascinating findings. It shows that the total percentage of loans that were subprime, after holding at 3% in the 90's, skyrockets after 2001 to over 20% in 2005-6. I don't see how you can pin that on anyone but Bush and his Fed+Treasury. Further, the study shows that black subprime lending was a much higher total percentage of subprime loans in 2005 -- around 44% versus 16% to whites of all subprime home purchase loans. But let's dig deeper -- it's important to remember that a quarter of N.Y is black, and less than half white. To get close to a national statistic (demo 76% white vs. 12% black), if these rates hold, you do simple math, (.16*.76/.44 vs. .44*.12/.25). That works out to 24% of subprime mortgages nationally going to whites, versus 21% going to blacks. If you figured hispanics the same way, given that their rate in NYC fell between whites and blacks, I think you'd see a similar figure. Which is to say that white people contribute as much to this mess as any individual minority.

Which I guess goes to say, that the next time someone sends you a ten-year-old article as evidence that their Limbaugh talking points are true, (and especially if they are fellow members of the legal profession) please tell them for me, "Your shit is weak. Go do some actual research." I mean, what are interns for?

Damn, that felt good. Please feel free to forward this -- and I hope you don't mind if I post it.


P.S.> Republican word on why they didn't back the bailout: Nancy Pelosi hurt my feelings. Wow.

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