To create the meme that the mortgage crisis was caused by some misguided affirmative action program led by Fannie Mae, the authors of Reckless Endangerment invented a slew of false "facts."
Read the following passage, written by Gretchen Morgenson and Joshua Rosner in Reckless Endangerment, and ask yourself whether the authors engage in race-baiting:
To push back against the encroachments of private lenders and the work of critics like [GSE Report], Fannie increasingly relied on its powerful and wealthy foundation to fund both offensive and defensive moves. Jim Johnson had started the practice at his replacement as chief executive, Franklin D. Raines, knew better than to stop it.What ACORN "Seemed" To Be Doing
In May 2003, for example, housing activists at ACORN issued a press release for accusing Wells Fargo, one of the nation's largest banks, of predatory lending. Staging demonstrations of several high-profile locations across the country, ACORN's actions seemed coordinated with the help of Fannie and Freddie. Just before these demonstrations, ACORN had organized picketers in front of the homes of executives at Household International, another private lender that competed with the government-sponsored enterprises.
These were mere skirmishes in the on-again off-again war between the banks that underwrote mortgages and Fannie and Freddie, which financed them.
So "ACORN's actions seemed coordinated with the help of Fannie and Freddie," but based on what? What facts indicate that ACORN's actions are an example of indirect efforts by Fannie to limit competition or push back against critics? What facts are presented to suggest that ACORN had anything whatsoever to do with Fannie? What facts show that criticism of Wells' and Household's predatory lending practices constituted any kind of pushback by Fannie against its critics? Absolutely nothing. But facts are not going to get in the way of the authors' agenda.
This is how rightwing hacks pervert history, as noted earlier, here. First, they invent a bogus "fact," in this case the imaginary coordination between ACORN and Fannie. Second, they use the bogus fact as the predicate for inventing a bogus trend, in this case the unfounded claim that Fannie and Freddie were engaged in a stealth campaign to stifle competition and honest debate. And in so doing, they malign ACORN's honest efforts to curb illegality at Wells and Household.
Was there any reason to believe that the accusations against Wells Fargo and Household International were unfounded? Or unfair? Or overblown? Not according to government officials in Tennessee, Maryland, Illinois, Pennsylvania, the Justice Department, reporting in The New York Timesor elsewhere. Not according to Eliot Spitzer. The evidence of widespread criminality at both of these companies is pretty overwhelming.
But with zero evidence, Morgenson and Rosner pull out the stops to insinuate that ACORN, an organization devoted to protecting minorities and the poor, pursued some hidden agenda, to limit competition in the mortgage market. This is another red herring. HUD regulations prevented the GSEs from financing loans with predatory attributes, which were the bread and butter of subprime lending at Wells and Household international. The GSEs were specifically forbidden from including "B&C," loans, (i.e. subprime loans) to meet their affordable housing goals. And Fannie and Freddie's business model, financing mortgages as a buy-and-hold proposition, was starkly different from the originate-to-distribute model used by Wells and Household.
But if you read the passage quickly, you might not notice that the authors constructed their narrative out of nothing. Were they race-baiting? I'd be inclined to give the authors the benefit of the doubt, were it not for all the other lies and distortions in the book.
Substituting Maxine Waters For George Bush
One reason that progressives reviewed the book favorably was that they were unfamiliar with the standard paint-by-number template used by other conservative hacks. If you want a condensed Readers Digest version of the Reckless Endangerment, read the passage about Fannie in Charles Gasparino's The Sellout, or Chapter 11 of Michelle Caruso-Cabrera's You Know I'm Right.
However, these authors showed some limited respect for fact-checking. Caruso-Cabrera writes:
Down payments? We don't need any down payments. They were practically giving money away at this point. [In 2003] Bush asked Congress to find a program that would help low income homeowners receive a $10,000 or 6% of the purchase price, whichever was greater, to cover down payments, closing costs and even renovation. In his speech announcing the American Dream Down Payment Initiative, as it was called, [Bush] said, and "I'm proud to report that Fannie Mae has heard the call."The “American Dream Down Payment Initiative,” H.R. 1276, was a Republican effort, sponsored by Rep. Kathryn Harris, with few Democratic co-sponsors. (Maxine Waters was not one of them.) Caruso-Carbrera engages in the standard rightwing ploy, which takes a small inconsequential pilot program that would have no impact on the broader mortgage markets, as proof that the government assistance opened the floodgates to bad lending across the board. Somehow, she twisted a program to provide $10,000 in down payment assistance into, "Down payments? We don't need any down payments." The program's annual funding was $75 million dollars, a drop in the ocean of mortgage originations, which exceeded $2 trillion a year. Again, the bogus "fact," is used to justify the bogus trend, that government policy opened the floodgates to zero down payment loans.
But Reckless Endangerment went further:
[Rep. Maxine] Waters's "American Dream Down Payment Initiative," would free a borrower from having to put any money down when buying a house. Never mind that history showed borrowers who had no investment in their homes defaulted far more frequently than those who had built up equity in them.So suddenly President Bush morphed into a black congresswoman, and government assistance, which was no more than 6% of a home's purchase price, morphed into a policy of zero down payments. As for the bogus trend:
Waters’ plea was music to [Countrywide CEO Angelo] Mozilo's ears. Although her initiative would never get off the ground, within two years Countrywide would be writing no-money-down mortgages with abandon.Somehow, a Democrat's "initiative would never get off the ground" was "music to Mozilo's ears." But based on what? Back in 2003, Countrywide was a non-bank lender, exempt from oversight by any federal regulators. And Angelo Mozilo, whose company was a major contributor to Republican causes, knew that Republicans, not Democrats, controlled the House and the White House. Once again, the bogus "fact" supports the bogus trend.
Do you believe that all this revisionism was some kind of innocent accident, that anyone, even a reporter at The New York Times, would make? But wait, there's more.
Falsifying A Boston Fed Study On Minority Lending
"The Boston Fed was making a fool of itself on the subject of home-mortgage discrimination," write Morgenson and Rosner, referring to a 1992 study about discrimination against minorities in Boston. More specifically:
In October 1992, “Mortgage Lending in Boston: Interpreting HMDA Data” was published by the Boston Fed… Although the title was dull and the writing dry, its conclusions were explosive.OK, now the truth. The actual study was far more sophisticated than Morgenson and Rosner insinuate, which is why the racial disparity was never 2.8 to 1. From the text of the report:
Racial bias by mortgage lenders [Boston Fed economist Alicia] Munnell and her colleagues wrote, not only existed, it was pervasive. HMDA data showed that black and Hispanic loan applicants were for far more likely to be rejected by banks than whites. The rejection ratio for minorities was 2.8 to 1 compared with white applicants.
There was only one problem. The methods used by the Boston Fed researchers to prepare the report were flawed, according to a throng of critics in it out of academia, who questioned the paper’s findings the following year. Its claims a bias we're by no means proved, these people contended. The analysis did not consider whether an applicant met the lenders’ credit guidelines, one researcher noted, while others pointed out that the type of model used by the Boston Fed oversimplified the complex mortgage lending process.
Forbes magazine was one up among the few media outlets to question the study's findings. For an article published on January 3, 1993, staffers Peter Brimelow and Leslie Spencer interviewed Munnell, who revealed yet another problem with the analysis. Munnell told Forbes that in preparing the study, Fed researchers looked at default rates o'clock across census tracts and found that minorities do not tend to fail more often on their loans to whites.
The results of this study indicate that minority applicants, on average, do have greater debt burdens, higher loan-to-value ratios, and weaker credit histories and they are less likely to buy single-family homes than white applicants, and that these disadvantages do account for a large portion of the difference in denial rates. Including the additional information on applicant and property characteristics reduces the disparity between minority and white denials from the originally reported ratio of 2.7 to 1 to roughly 1.6 to 1.So, contrary to the book's dissembling about a failure to, "consider whether an applicant met the lenders’ credit guidelines," or about the the Boston Fed oversimplifying the the complex mortgage lending process, the actual study considered these issue in depth. And it withstood considerable scrutiny. Writing in The New York Review of Books, Frank Partnoy and Jeff Madrick write:
The mortgage application and approval procedure is complex and far from mechanical. It generally consists of three steps - a quick review of the application for viability, verification of the information and an appraisal of the property, and an evaluation of the numbers and consideration of any "compensating factors."
[Morgenson and Rosner] don’t point out that the Boston Fed’s study was later subject to a stringent peer-review process and was published in 1996 in the respected American Economic Review. Indeed, few research papers have been as closely scrutinized. The published results, which corrected some methodological errors, showed persuasively that there was in fact a bias in the mortgage markets. In 1998, another peer-reviewed paper—also ignored by the authors—analyzed the criticisms of the Boston Fed study, as well as other research on mortgage bias, and concluded that the study was fundamentally correct. “The bottom line is that the results related to race are extremely robust,” wrote the author.
Also you won’t find names Brimelow or Spencer in the book’s index, for obvious reasons. Peter Brimelow is one of America’s most preeminent White Nationalists. As for the Forbes criticism--here we may be delving into distinctions far too subtle for Morgenson and Rosner--the issue of mortgage default rates is somewhat off topic. The Boston Fed study addressed a threshold question, whether or not someone’s mortgage application is denied. The issue of whether minorities attain mortgages when banks apply more stringent credit standards is a different, albeit related, question. And since minorities do not necessarily live in minority neighborhoods, Brimelow's observations did not refute the study's findings. Also, as Prof. John Yinger of Syracuse University has pointed out:
The most fundamental problem with this argument is that it confuses averages and margins. The default rate for a group of borrowers is an average that reflects the entire distribution of credit characteristics for those borrowers—not just the characteristics of the least creditworthy borrowers in that group.Brimelow still posts the article on his White Nationalist website, and you can judge for yourself if you suspect that his reporting was slanted.
And once again, the bogus "fact" serves as the predicate for the bogus trend:
[Munnell said,] “It was not that they were doing bad things to black people, they were doing nice things for white people so when you look at it statistically, right race becomes a factor. We were never arguing that you should give loans to people who don't qualify.”And what, if any, facts demonstrate that result? Nothing. More on that later.
Still, that was the result.
If You Don't Like A Study's Conclusion: Invent a Different One
When “A Study of the GSEs’ Single-Family Underwriting Guidelines,” was published by the Urban Institute jn April 1999, the report issued a disclaimer up front:
The study's results rely heavily on the third source, the perceptions and opinions of national and local key informants. Thus, the results presented here should be interpreted with care, since the opinions and perceptions of the informants may not be representative of all individuals who work with the GSEs' guidelines.With that important caveat, the study noted that, according to these informants, the GSE's tougher credit guidelines tended to exclude minority applicants:
Informants did express concerns about some of the GSEs' practices. The GSEs' guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities. Informants said that some local and regional lenders serve a greater number of creditworthy low- to moderate-income and minority borrowers than the GSEs, using loan products with more flexible underwriting guidelines than those allowed by Fannie Mae or Freddie Mac.But the authors of the study made it clear that they were not persuaded by this anecdotal feedback:
This raises the possibility that the GSEs' current guidelines may have a disparate impact on minority borrowers if the guidelines have disproportionate effects on minority borrowers but do not serve a business necessity by accurately predicting loan performance. However, none of the informants provided the evidence necessary to confirm this possibility. A disparate impact finding would have to be based on a detailed analysis of the relationship between underwriting guidelines and loan performance, but none of the informants presented any specific empirical data about the performance of loans issued with underwriting guidelines more flexible than the GSEs'.Consequently, 'in order for HUD to systematically address the concerns raised by the informants," the study's key recommendation was for HUD to, "develop an enhanced loan-level database."
None of this supported the Morgenson/Rosner agenda, so they lied. Morgenson/Rosner took the informants' anecdotal feedback and presented it as the conclusion drawn by the authors of the study. They write:
The authors nevertheless concluded that Fannie and Freddie were not doing enough for low-income borrowers.And, Morgenson/Rosner insinuate that the authors of the study came up with this phony "conclusion" because they were on the take from Fannie Mae:
"The GSEs' guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities,” the study said. [Here the study was relaying what the informants said, not what the study concluded.] “Informants said that some local and regional lenders serve a greater number of creditworthy low- to moderate-income and minority borrowers than the GSEs, using loan products with more flexible underwriting guidelines than those allowed by Fannie Mae or Freddie Mac.”
The message was clear: Fannie and Freddie’s underwriting standards were too high; low-income originations were too low.
Of the four authors on the report, three had extensive ties to Fannie Mae: [Kenneth] Temkin, [George] Galster, [Roberto] Quercia. Galster was a consultant to the company and all three had been on the receiving end of research money from the Fannie Mae Foundation.At the risk of being didactic, note the rightwing technique first identified here: The bogus "fact," is used as a pretext to slime others. And the bogus "fact," is used as a predicate for the bogus trend:
The report, like the questions Boston Fed study before it, made political waves, upping the pressure on Fannie and Freddie to lower the stnadards of mortgages they would buy.Is there a pattern here? So let's recap.
First, the authors invent some kind of coordinated effort, between ACORN, an organization devoted to protecting minorities against various abuses, and Fannie Mae. And this invented coordination is used to justify the unsubstantiated claims that Fannie used ACORN to limit competition in the mortgage markets, and that ACORN's opposition to predatory lending was less than legitimate.
Second, the authors cite a small, inconsequential $75 million program, the American Dream Down Payment Initiative, as a spark that triggered an explosion of no-down payment loans. But since an inconvenient fact--the legislation was initiated and sponsored by Republicans--interfered with the Morgenson/Rosner agenda, they substituted an African American woman for the actual GOP sponsors.
Third, a 1992 Boston Fed study tentatively found some statistical evidence of disparate treatment for mortgage applications by minorities. To slime the study, Morgenson/Rosner mischaracterize the study and cite a Forbes article, by a White Nationalist, as proof that, "the Boston Fed embarrassed itself." And with no supporting facts, Morgenson/Rosner assert that the study led to the practice of extending mortgages to unqualified borrowers.
Fourth, Morgenson/Rosner falsify the conclusions of an Urban Institute Study about GSE lending to minorities, in order to slime the study's authors, by claiming that their work product was tainted by affiliations to Fannie Mae. And then they cite the falsified conclusions to make the false claim that the GSEs responded by lowering their credit standards.
Any other false and misleading claims made in the book? We've only just begun.
Wed Jun 13, 2012 at 4:59 AM PT: Today, yet another story in the Washington Post, "Ex-loan officer claims Wells Fargo targeted black communities for shoddy loans," http://www.washingtonpost.com/... which once again vindicates ACORN's position and illustrates why the book's claim, that ACORN was acting in tandem with Fannie, seems ever more specious.