March 1, 2009

Why complaints about predatory lending usually lead to more predatory lending

My new VDARE.column:
Was the mortgage meltdown the fault of Republicans or Democrats? Was it caused by the ideology of deregulation or of regulation?

Questions like that are fun to debate because they follow the usual fault lines that divide the country into fairly equal and thus intensely rivalrous halves.

But let’s think about the Housing Bubble from a more general standpoint for a moment. Is it terribly likely that a disaster that long gestated and then ran amok in plain sight for over three years (from 2004 into early 2007) would turn out to be overwhelmingly the fault of a single party or ideology?

Why wouldn’t the opposition have sounded the alarm? Don’t the Republicans and Democrats, as well as the free marketers and the leftists, all have well-oiled publicity machines for pointing out the shortcomings of their enemies?

Isn’t it more plausible that a vast, slow-motion catastrophe would be the result of a noncontroversial bipartisan consensus?

In particular, the more everyone agrees that dissent on a particular topic is unspeakably evil, if not unthinkably unimaginable, the more likely the country is to stumble over exactly that blind spot.

When everybody tells you, “Pay no attention to that man behind the curtain,” you really, truly need to start paying attention.

In recent decades, “diversity” has become one of America’s sacred mantras, propagandized relentlessly in the schools and the press. Expressing skepticism about the diverse within internal business communications has become, in effect, a civil offense, punishable in anti-discrimination lawsuits.

Not surprisingly, self-interested manipulators learned to play the race card to justify their machinations.

Thus, the universally-endorsed societal necessity of lending more money to minority homebuyers was used to justify both regulation (such as the Community Reinvestment Act) and deregulation (such as the hands-off approach to subprime bucket shops). Any practice positioned as helping minorities achieve their fair share of the American Dream had the wind at its back.

Consider, for example, three huge Southern California originators of dubious debt—Ameriquest, New Century, and Countrywide—all of which collapsed in recent years when Wall Street and the big banks finally wised up to the mortgage-backed securities they peddled.

Yet, on the retail side, these were not new-fangled scams. As Elvis Costello pointed out, there’s no such thing as an original sin. They operated old-fashioned boiler rooms employing high-pressure salesmen to talk people who had no business being homeowners into taking out huge high-interest loans. ...

We’ve been down this path of fishy finance before. That’s why most states have usury and other laws on the books to prevent lenders from targeting marginal borrowers. Whether these laws are kept up to date and whether they are enforced are different questions, however.

It doesn’t matter whether you call them anti-predatory lending laws or pro-prudent lending laws. The point is that loans that are unlikely to be paid off hurt everybody. Wise public policy attempts to balance off Type I errors of excessive credulity versus Type II errors of excessive skepticism.

So, surely, the rise and fall of the subprime peddlers demonstrates the iniquity of the rightwing ideology of deregulation? We needed more regulation, not less!

Wrong! Please notice that minority lending regulations primarily pushed in what turned out to be the wrong direction: too much gullibility. When it came to mortgage lending to minorities, as regulated by the Community Reinvestment Act and other anti-discrimination laws, excessive skepticism was made illegal. Lenders and investors were only allowed to err in one direction.

Not surprisingly, excessive credulity came to dominate the system.

By no means were all the subprime peddlers sincere believers in the dogmas of multiculturalism. Instead, they knew they could wield political correctness like a club to scare off regulators.

Thus, to avoid inconvenient investigations, the owners of subprime mortgage originators tended to present themselves to politicians and the press as financial statesmen, moral leaders in the war on bigotry against minority borrowers.

20 comments:

RKU said...

I dunno...

Offhand, it just looks like Arnall, Mozilo, and all the other "predatory lenders" just bribed the politicians and activists---including the black and Hispanic ones---to bless their "predatory lending" practices...

So who won? The "predatory lenders" in a big way, since they got really rich. Also, the bribed politicians/activists, in a little way, since they got a little rich.

Who lost? The "predatory lendees", who paid usurial rates, and now are losing their homes and downpayments.

It's totally, totally shocking that these black+Hispanic politicians and activists would betray their constituents in exchange for bribes from rich businessmen.

By contrast, white American politicians and activists would never, never, NEVER betray their constituents in exchange for bribes from rich businessmen.

Which once again demonstrates the vast difference between American whites and American NAMs...

rightsaidfred said...

Museum of Tolerance?

I guess it's a real thing.

"What's HOT at the MOT"

"Through powerful interactive exhibits, arts and lectures, special events and customized educational programs for youths and adults, the Museum engages visitors' hearts and minds in a journey of discovery to inspire change."

Is that change we can believe in?

Mark said...

Offhand, it just looks like Arnall, Mozilo, and all the other "predatory lenders" just bribed the politicians and activists---including the black and Hispanic ones---to bless their "predatory lending" practices...

Ken Lay went to jail. Bernie Ebbers went to jail. So why aren't we hearing about jail time for these guys? Are they really free and clear? There's not an unpaid parking ticket we can get them on? Or have they bribed Congress that well.

If you never thought there was honor among thieves then you should have no doubt about it now. Clinton and Gore, who made tens of millions after leaving office, got paid off after the fact. Congress is still paying off these schmucks for their campaign contributions.

hcl said...

Steve:

The essential dynamic of the mortgage collapse remains unaddressed by pundits, or barely. I have commented it on other sites, but no one seems to catch on. I think you will, though.

Example:
Goldman creates a $500,000 loan out of nothing (fractional reserve banking) to some Mexican the banker knows can't make good. Goldman confederate at rating agency stamps loan AAA+, and sells mortgage, now securitized, to some foreigner, maybe a German bank which relies on the credit rating.

Goldman has made $500,000 out of nothing, Mexican and schmuck German bank suffer the losses.

And I'll stop there.

CJ said...

Just one quick nitpick for RKU and HCL ... many of these "homebuyers" never made any down payments, and many of them only paid the low "teaser" rates of their ARM mortgages for a year or two. They haven't lost anything, other than possibly a credit rating. It's basically as if they rented a house cheaply for a couple of years.

The rest of your observations seem pretty sound.

Anonymous said...

So when you relax mortgage lending standards to accommodate NAMs, the whole economy suffers.

When you dumb down educational standards to accommodate NAMs, academic performance suffers across the board.

When you tolerate lower standards of behavior and performance in the workplace to accommodate NAMs, productivity in general suffers.

When the criminal justice system becomes more lenient to appease NAMs, general public safety is comprimised.

Tell me again how my life has been enhanced by diversity.

nit said...

hcl said:
"Goldman confederate at rating agency stamps loan AAA+, and sells mortgage, now securitized, to some foreigner, maybe a German bank which relies on the credit rating.

Goldman has made $500,000 out of nothing, Mexican and schmuck German bank suffer the losses. "


hcl is onto something. Steve has been dealing with the mechanisms in place in the US society which even made this fraud possible (diversity). But in WS there are similar mechanisms (no regulation). Steve's buddy Dellinger deals with some of this. And maybe the point of Steve's post was exactly this comming together of crazy regulation and even more crazy deregulation.

I have been pondering why the US gov. is adamant that corrupt institutions lik AIG and Goldman get bailed out, even if it leads to a depression. Is it only the ethnic angle? Mabye, but then why did Lehmann get wacked?

I have a feeling that the AIG execs cashed their interest, boni, fees and whatever else on hcl's leveraged USD500000 and now the Saudi's, Chinese, Germans and Japanese are sitting on the rot. Maybe they have threatened that if they do not get their CDO's exchanged for real money, which is what would happen if AIG and Goldman went belly up, that they will no longer buy US treasury bills? If so the US would default in an instant and its rating tank. The US gov should really go to the corrupt execs and strip all their assets to pay off the foreigners who got suckered. But that won't even help. Only a little. And considering who the execs are, it will not happen.

Anonymous said...

"Goldman has made $500,000 out of nothing, Mexican and schmuck German bank suffer the losses."

That may be so, but scoundrels are nothing new. The real question is why the US (and the world) were blindsided by this mess.

Steve's argument, in essence, is that most people were afraid to say "Hey, we're lending an awful lot of money to people who are poor credit risks." Why were they afraid to say it? Partly because they did not want to be accused of racism. Arguably.

Robert said...

H.L. Mencken said: "Each major party says the other is unfit to rule. Both are correct."

Henry Canaday said...

Dean Baker of the Center for Economic and Policy Research spoke at our Local Lefty Bookstore last night. He can legitimately claim to be one of the many people who warned of the housing bubble as it was developing. But his explanation of why it happened apparently reduces to the Federal Reserve keeping interest rates too low for too long.

Baker is much more expansive on what we must do now to counter the collapse. He estimates the loss of wealth, from lower housing prices and the stock market, will cut consumption spending by about $1.4 trillion a year. He says the Obama stimulus package falls about a trillion dollars a year below that demand deficit.

We do seem to be pre-occupied these days with proposals for extraordinary remedies, unimaginable in normal times, rather than a complete and honest explanation of what went wrong.

Pat Shuff said...

Another in the series teasing out from nuance valid points for but not allowed in debate, amongst polite company, before children are in bed. And after bedtime just more tiptoeing around.

Lying on a mortgage application is a federal crime, felony offense. Not to absolve the miscreants up and down the mortgage origination chain, surely pursuable under the broadranging RICO act, originally targeting gangsterism.

Picking and choosing which laws to enforce is bad enough. Subsidizing the criminality on the lending side through banking bailouts, and borrowing side through housing bailouts,
well....

It does serve to whitewash and sweep under the rug the collusion and complicity spanning aisles, branches, departments and election cycles. A pattern of venality and corruption having nothing to do with minority lending in previous bailout incarnations...
S&Ls, Latin American debt crisis, LTCM/Asian Contagion...1873 rail bond fiasco and ensuing depression. Same ever popular tired old script.

This latest plague of politicians and banksters is sourced the same as producers of dope, child pornography and similar ilk, in the demand for it.
Freely elected, poetic justice one guesses.

Anonymous said...

I tend to believe that even the story of forced equality through lending isn't even the biggest story, but it is the largest symptom of what I believe is: below replacement birthrates due to materialism and liberalism, the inevitable outcome of a centuries' long experiment with liberalism.

Whether you're a Malthusian, Leftist, etc., our way of life depends on people: quality and quantity, and problems will result. What to do?

The importation of third-worlders, whether high or low I.Q., has been the choice of those who don't believe in sovereign nations (Leftists and shallow businessmen) and are desperate to plug in the holes caused by the collapsed birthrates. One of the biggest things recommending this approach is that the education and upbringing of third worlders is far cheaper than a native American's would be.

I believe the growth and success of the past forty years has been a pyrrhic victory.

Which leads ultimately to this: people *always* get the government they deserve and the outcomes that come with it. The First World is no different. The liberalism of the politicians comes from the people themselves becoming more liberal; we moved rapidly from intermediate liberalism (Classical liberalism reigned from the American Revolution until about the Civil War) to radical liberalism in the post-war era until the late 60's. The collapse was inevitable.

ben tillman said...

Was the mortgage meltdown the fault of Republicans or Democrats?

Yes!

Isn’t it more plausible that a vast, slow-motion catastrophe would be the result of a noncontroversial bipartisan consensus?

Yes, exactly!

Anonymous said...

"
Ken Lay went to jail. Bernie Ebbers went to jail. So why aren't we hearing about jail time for these guys? Are they really free and clear? There's not an unpaid parking ticket we can get them on? Or have they bribed Congress that well.
"

Both of those men were outsiders. Top investment bankers are far more ensconced in elite institutions. They don't just bribe congress they know lots of people in Washington from their days at elite prep schools and at Harvard. These type of men don't go to jail. Nor are they going to have to give a cent back.

Steve-O said...

The HHH Institute at the University of Minnesota has been pushing the line that minorities are being disproportionately forced into subprime loans. The study is remarkable, because it doesn’t account for borrower’s credit scores. They seem to use income as an indicator of credit worthiness:

http://minnesota.publicradio.org/display/web/2009/02/11/minority_housing_loan_study/

So the study accounts for income disparities. Problem is that many people fudge their income on loan applications, ESPECIALLY when dealing with shady subprime lenders!

Am I reading this correctly?

Predictably, they argue that the answer is more lending in local minority communities.

Ronduck said...

Isn’t it more plausible that a vast, slow-motion catastrophe would be the result of a noncontroversial bipartisan consensus?

That sounds like a good explanation for the decline of Western Civilization: it is based on a broad consensus that no one considers to be the problem.

That’s why most states have usury and other laws on the books to prevent lenders from targeting marginal borrowers.

I'm going off memory here, but I remember reading that the Supreme Court ruled in the late 1970's that state usury laws were an infringement of the federal government's power to regulate interstate trade. The wiki page on usury has a good explanation of what happened and links to better sources.

Anonymous said...

He estimates the loss of wealth, from lower housing prices and the stock market, will cut consumption spending by about $1.4 trillion a year.

Yes, because that wealth was never there from current production and prior savings to begin with. Americans have been using bank created credit-out-of-thin-air to finance their lifestyles. Now they have to go back to eating what they kill.

He says the Obama stimulus package falls about a trillion dollars a year below that demand deficit.

Again, this is more money-that-isn't-really-there, and can only create subsequent bubbles that will be liquidated in their turn.

--Senor Doug

Anonymous said...

"the inevitable outcome of a centuries' long experiment with liberalism."

Looks like in the West, with Obama and socialists posed to win in Germany and other European nations, we are moving into gear 5 to get even more of this.

Svigor said...

Tell me again how my life has been enhanced by diversity.

Heh, took my words. :)

One of my themes is that the west is insane, in a literal sense.

But has anyone noticed how public discourse and policy are approaching the Einsteinian definition of insanity?

Why complaints about predatory lending usually lead to more predatory lending

Jun said...

Ex-Leaders of Countrywide Profit From Bad Loans

"...Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect....

"As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.

"They include big investors who are buying up failed banks taken over by the federal government and lobbyists. And there is PennyMac, led by Mr. Kurland, 56, once the soft-spoken No. 2 to Angelo R. Mozilo, the perpetually tanned former chief executive of Countrywide and its public face...."

Bunch o' shysters. :-/