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This is an excerpt from my new book,  The Fifteen Biggest Lies about the Economy (And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America).


Perhaps the most pernicious right-wing lie of late is that the Wall Street hustlers who came close to bringing the global economy to its knees in 2008 were just innocent victims of government-sponsored programs that forced them to lower lending standards in a misguided effort to increase home ownership among the poor (read: dark-skinned).

It’s an alluring story line for those who are ideologically predisposed to blame “inner city” people instead of MBAs in suits roaming the executive suite. It’s also patent nonsense—a Big Lie that has nonetheless become an object of almost religious belief for some on the Right.

Jeb Hensarling, a notably obtuse Republican back-bencher from Texas, wrote that "the conservative case is simple":

The [Community Reinvestment Act] compelled banks to relax their traditional underwriting practices in favor of more "flexible" criteria. These subjective standards were then applied to all borrowers, not just low-income individuals, leading to a surge in lower-quality loans. . . . Blame should [also be] directed at Fannie [Mae] and Freddie [Mac], and their thirst for weaker underwriting to help meet their federally mandated "affordable housing" goals. . . . This distortion has had seismic consequences as market participants, wrongly believing GSE-touched loans were sanctioned by the government and therefore safe, began to rely on a government mandate as a substitute for their own due diligence.

This tale has everything a conservative could want—Big Government overreach, well-intentioned but out-of-touch liberals causing devastating unanticipated consequences with their social tinkering, and even their favorite bogeyman, ACORN, and other low-income housing advocates that have pushed for increased home-ownership among the poor.

The narrative gained steam with an influential op-ed in the Wall Street Journal by Peter Wallison, a fellow with the American Enterprise Institute (who, according to his bio, "had a significant role in the development of the Reagan administration’s proposals for the deregulation of the financial services industry"). Wallison found that "Almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations."

The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.

The sleight-of-hand here is pretty straightforward. The U.S. government regulates lenders and provides deposit insurance to banks, which means that a large chunk of all home loans—good, bad, and in between—have some connection to a government program. It’s like saying that the government is responsible for pollution because the EPA regulates industrial emissions.

Yet no bank has ever been "forced to comply with government mandates about mortgage lending." There are no "government mandates," and there never were. In order to qualify for government-backed deposit insurance—a benefit that banks aren’t forced to accept but enjoy having—the Community Reinvestment Act and similar measures designed to prevent discrimination in lending (to qualified individuals) only encourage banks to lend in all of the areas where they do business. And Section 802 (b) of the Act stresses that all loans must be "consistent with safe and sound operations"—it’s the opposite of requiring that lenders write risky mortgages.

There are no penalties for noncompliance with CRA guidelines. The only "stick" hanging over banks that fail to meet those standards is that their refusal might be taken into account by regulators when they want to open new branches or merge with other financial institutions. What’s more, there are no defined standards for CRA compliance, and within the banking community, the loose guidelines are considered to be somewhat of a joke.

As Sheila Blair, the chairwoman of the FDIC, asked in a December 2008 speech, "Where in the CRA does it say: make loans to people who can’t afford to repay? Nowhere! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth . . . pure and simple."

Fannie and Freddie: Tempted by Easy Profits

Fannie Mae and Freddie Mac were created by an act of Congress, but they are (or were, until being taken over in the wake of the housing crash) private, for-profit entities whose dual mandate was to increase the availability of mortgages to moderate- and low-income families, and at the same time turn a profit for their shareholders. Fannie and Freddie did end up with a very large portfolio of subprime loans, with a high rate of default, but they didn’t get into the market because the government mandated it. They dived in deep because there were profits to be made as the housing bubble expanded. As Mary Kane, a finance reporter for the Washington Independent, put it:

Neither the Community Reinvestment Act—the law most cited as the culprit—nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins—it’s as simple as that.

Contrary to the conservative spin, University of Michigan law professor Michael Barr told a congressional committee that although there was in fact quite a bit of irresponsible lending in low-income communities in the late 1990s and the early 2000s, "More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts [subject to CRA standards]." Barr concluded, "The worst and most widespread abuses occurred in the institutions with the least federal oversight [italics added]."

That’s not to say that millions of Americans didn’t bite off more than they would eventually be able to chew in the housing market. A lot of people looking to turn a quick buck by capturing the booming value of real estate in the mid- to late 2000s bought property with "teaser" loans that offered very low rates for the first few years; the investors assumed that they’d be able to turn a tidy profit before higher interest rates kicked in. Many of those individuals have since found themselves "under water"—owing more on their homes (and investment properties) than they’re worth.

Yet it’s worth noting that most of the experts also didn’t identify the real estate bubble as a problem, even as home prices far surpassed values that could be reasonably explained by the laws of supply and demand. Irrational exuberance was the theme of the day. In 2006, David Learah, the former head of the National Association of Realtors, wrote a book titled Why the Real Estate Boom Will Not Bust—And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market. The book made quite a splash at the time.

In 2010, former Fed chairman Alan Greenspan offered a bit of historical revisionism to a House committee investigating the causes of the financial crisis, telling lawmakers, "In 2002, I expressed concern . . . that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely. . . . I warned of the consequences of this situation in testimony before the Senate Banking Committee in 2004."

Writing in the Washington Post, Dana Milbank offered a corrective with some of the highlights of Greenspan’s congressional testimony at the peak of the housing bubble. In 2005, Greenspan told lawmakers, "A bubble in home prices for the nation as a whole does not appear likely." He added, "Home price declines . . . were they to occur, likely would not have substantial macroeconomic implications," and explained that "nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired."

In English, that last bit meant "Banks won’t get into serious trouble even if things do go to hell," and we know how well that prediction turned out. If Greenspan could be so wrong and the smart people at the Washington Post and the New York Times couldn’t see this huge, dangerously inflated housing bubble, how was your average couple trying to get a place to live or the small investor looking for a few bucks in rental income supposed to make a rational decision about how much debt to take on? That’s not a defense of individuals who got in over their heads; it’s simply an important bit of context. 

The narrative that the real estate crash and the subsequent recession were the fault of borrowers, especially poor and middle-income borrowers—while members of the financial community were innocent victims—is not only revisionism of the worst kind, but it’s an especially egregious lie.

The obvious sin of this claim is that it shifts responsibility for the mess away from those who created it, but what makes it even more disgraceful is that conservatives have long argued that efforts to increase home ownership among low-income families and communities of color was the "free market" thing to do (and have, to some degree, negated the need for a decent social safety net). It was George W. Bush, not Vladimir Lenin, who said in a 2002 speech, "We have a problem here in America . . . a homeownership gap," and said, "we’ve got to work together to close [the gap] for the good of our country." This was standard American Enterprise Institute–quality conservative fare.

Blaming individuals is easy—it’s not hard to understand how people could borrow a bunch of cash they were later unable to pay back. The real cause of the housing crash is, of course, a far more complicated tale. And it’s a story that ultimately represents the abject failure of conservative economic mythology.

Clear here for a copy of The Fifteen Biggest Lies about the Economy (And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America).

Originally posted to Joshua Holland on Mon Oct 11, 2010 at 01:52 PM PDT.

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Comment Preferences

  •  Good writeup. (9+ / 0-)

    However, this lie is not recent; conservatives have been peddling it since the market crashed in 2008.  The most obvious omission in the conservative lie is the absolutely critical role of private, non-governmental bond ratings agencies giving their stamp of approval to CDOs, MBS's and similar time-bomb instruments.

  •  Maybe he should look into the Gramms (6+ / 0-)

    Phil and his lovely wife, Wendy pushed for every goddamned law that made it possible for the housing bubble AND the fraud that went with it.  They were proponents of every one including MERS!  This was not a freaking accident people.  This was a fraud perpetrated on the American public to the tune of trillions and counting.  What happens when it is found that MERS mortgages are frauds and nobody can attain clear title because they clouded it?  Check your county clerks office and you will find your mortgage is assigned to MERS at the clerks office.  So if MERS were to you know, screw up, there is no record of who owns the note.  That's about 8 trillion in mortgages.  I guess the Fed will have buy them all...Print baby..PRINT!

    ~War is Peace~Freedom is Slavery~Ignorance is Strength~ George Orwell "1984"

    by Kristina40 on Mon Oct 11, 2010 at 02:11:39 PM PDT

  •  OK, so why didn't market collapse in 80's? (5+ / 0-)

    Even if you take a hit of RepubliCrack TM and believe morans (sic) like Hensarling, ask yourself how come the Carter era law didn't cause the housing market to crash in the late 70s/early 80s?

    Note that the securitization of mortgages with exotic transactions like credit default swaps didn't begin until GWB instituted the ownership society in 2005-6, which is when the bulk of all those bad loans were written.

  •  A borrower... (2+ / 0-)
    Recommended by:
    The Nose, jfromga

    cannot contract for a specific loan product unless that product is being offered by the lender. You know the old rule "he who has the gold makes the rules." Those crazy "no doc", 100% financing loans were simply a foreclosure waiting to happen. But who cares, the lender got their fees and we got the shaft. Now it looks like the big lenders are throwing us down the shaft. Oh my :-(

  •  how many people own their own homes (0+ / 0-)

    what are the incomes of those people and the value of the real estate by income group.   Facts. Simple, counting questions with simple straight forward answers.

    You can't find that information easily however. Nevertheless, its pretty clear if you are below the poverty line, the percentage of home ownership is basically non-existant.  Are people below the poverty line the definition of poor people?

    A 2004 chart, 11.7 billion of house values owned by 0-50% income percentiles; 22.8% of mortgage and home equity debt owed by the 0-50% income brackets.  I couldn't find numbers broken down that way for years after 2004.

    If the bottom 50% defaulted, all of them, the lenders could lose the value of their houses if they were 100% financed or about 12 billion or so dollars.  Those would be the people who would have been helped by most government lender programs aimed at increasing home ownership.   We could pay that off.   We had to subisidize banks for several multiples of that.   There is no way that people who owned 12 billion dollars worth of homes (not all of whom defaulted by a long shot) caused the government and the federal reserve to lay out trillions of dollars.  It can't happen.   Math doesn't work that way.

    So its a lie.  Its a lie that defies logic and addition and even multiplication.  The fact that it has hung on this long defies all logic unless one concedes that the lie provides cover for the  people who had trillions to play with and lose.  And that's the top 5% of income earners.   Based on the same charts.

  •  I've become a big fan of Bank Lawyer's Blog. (1+ / 0-)
    Recommended by:

    At any rate, here's an extended excerpt of a post knocking down the right wing CRA narrative:

    I find the argument that the CRA caused, or even substantially contributed to, the subprime mortgage crisis to be not only unconvincing, but counterproductive to any movement to "correct" the real abuses of the CRA. I was an in-house counsel for a large thrift institution when the CRA was enacted, and had primary responsibility for considering its impact on the operations of the thrift. One of the expected impacts was that consumer advocacy groups would use it to hold branch and merger and acquisition applications hostage by unjustifiably challenging those applications until the applicant "paid off" the advocacy group with a "contribution" to some housing-related fund or project of the group. That expectation was shown to be justified.

    That said, the CRA did not "require" a bank to abandon sound underwriting requirements and make loams to borrowers who had no hope of repaying the loans. I served on a loan committee during the first four years of the CRA's existence, and I can testify that such a consideration was never raised. As to the application of the CRA in the decade of 1995 to 2005, a period singled out by critics for much of the CRA "abuse," I've polled many compliance officers of commercial banks and thrifts on this contention, and every single one of them scoffed at the notion. Not that university professors and political ideologues with absolutely no experience in mortgage lending or consumer lending will be deterred by the views of those who have actually served in the trenches. Still, non-Kool-Aid drinkers might take note.

    There's enough to dislike in the CRA, and there are sufficient legitimate reasons to seek to reform it, without raising bogus "problems" that do no more than rally supporters and discredit opponents. When you make Sheila Bair look like a disinterested observer, you're not doing yourself any favors.

  •  Also Fannie Freddie didn't buy subprime till 06 (1+ / 0-)
    Recommended by:
    happy camper

    Before that Fannie Freddie didn't buy any subprime mortgages. Now it was definitely a bad decision for Fannie to Freddie to buy subprime, but they didn't start that trend.

    The real crime was Nixon's privatization of Fannie/Freddie. It should have stayed a public corporation. Privatizing Fannie/Freddie means that the sotck/ bond holders get all the proftis when FF is doing well, and the taxpayers get the shaft whe FF does badly. This is a terrible, no good model.

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