Stan J. Liebowitz
While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn’t too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.
“Home mortgages have been a political piñata for many decades,” writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.
Liebowitz puts forward an explanation that he admits is “not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown.”
In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country’s financial foundation to achieve its goal.
“In an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s,” Liebowitz writes. “The decline in mortgage underwriting standards was universally praised as ‘innovation’ in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists.”
He continues, “Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise.”
“As homeownership rates increased there was self-congratulation all around,” Liebowitz writes. “The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership.”
An article in the Los Angeles Times from the late ’90s praised the sudden surge in homeownership among minorities, calling it “one of the hidden success stories of the Clinton era.”
John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.
According to Lott, the Federal Reserve Bank of Boston produced a manual in the early ’90s that warned mortgage lenders to no longer deny urban and lower-income minority applicants on such “outdated” criteria as credit history, down payment or employment income.
Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and praised lenders – like Countrywide and Bear Stearns – for adopting the slackened policies toward minority applicants.
“Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac,” writes Lott, “the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising.”
Liebowitz’ contention that lenders were under pressure to loosen their standards for racial and political goals was confirmed years ago by the companies at the heart of today’s crisis: Fannie Mae and Freddie Mac.
A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
An ominous paragraph of the article reads, “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
Liebowitz likewise predicted in a 1998 paper the risk of sacrificing sound financial policy for social activism.
“After the warm fuzzy glow of ‘flexible underwriting standards’ has worn off,” Liebowitz wrote, “we may discover that they are nothing more than standards that led to bad loans. … It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on a badly mangled idea.”
And though some have speculated that lenders in the ’90s dove into sub-prime mortgages in an effort to gouge new markets, the president and chief operating officer of Freddie Mac in 1999, David Glenn, confessed his company was pushed by a federal agenda.
“The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership,” Glenn said in his remarks at the annual convention of the Mortgage Banker Association of America.
“The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories,” Glenn said. “Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low- and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets.”
In that same year, Freddie Mac warned of the logical pitfalls of pursuing loans on the basis of skin color and not credit history.
The Washington Post reported that the company conducted a study in which it was found that far more black people have bad credit than white people, even when both have the same incomes. In fact, the study showed a higher percentage of African Americans with incomes of $65,000 to $75,000 had bad credit than white Americans with incomes of below $25,000.
Such data demonstrated that when federal regulators demanded parity between racial groups in lending, the only way to achieve a quota would be to begin making intentionally bad lending decisions.
The study, however, came under brutal attack in the U.S. Congress and was ridiculed with charges of racism.
A few years later, when Greg Mankiw, chairman of President Bush’s Council of Economic Advisers, voiced a warning about weakened underwriting standards, Congress rebuffed him as well.
The Wall Street Journal quoted Congressman Barney Frank, D-Mass., in 2003 as criticizing Greg Mankiw “because he is worried about the tiny little matter of safety and soundness rather than ‘concern about housing.’”
Frank, chairman of the House Financial Services Committee, rejected a Bush administration and Congressional Republican plan for regulating the mortgage industry in 2003, saying, “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis.” According to a New York Times article, Frank added, “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”