June 27, 2009

The Great Divide

Popular liberal economics commentator Barry Ritholtz has posted what struck me originally as a curious response to Connie Bruck's New Yorker article on Angelo Mozilo, which touched in surprising measure on the sizable role that minority lending played in Countrywide's debacle. Ritholtz writes:

Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates.

There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s) amnd subprime lending (middle 90s):

“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing. As his sister, Lori, told me, “Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’

He was always this Italian guy people didn’t want to accept.” She went on, “When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”

And just what might have this done to Angelo’s world view later on? Alex, I’ll take pop psychology for $100:

Despite Mozilo’s ideals, Countrywide did not have a strong record of lending to minorities. In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. Robert Gnaizda, former general counsel of the Greenlining Institute, a nonprofit organization focussed on minority rights, sent the report to Mozilo and other mortgage bankers. “I received a harsh response from Mozilo,” Gnaizda told me.

Privately, however, Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. Then he dispatched African-Americans, posing as prospective borrowers—he called them “mystery shoppers”—to Countrywide branches, and concluded that they were indeed treated differently from white borrowers.

Countrywide opened new offices in inner-city areas, created counselling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and twenty-five per cent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.

“Countrywide went from close to the bottom in lending to minorities to near the top,” Gnaizda said. “I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ ”

Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished. “It was a careful entry, considered closely by those at the top of the company,” a former high-level Countrywide executive recalled. “We sat together and asked each other, ‘Would you make this loan with your money?’ ”

To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to thirty-five per cent. . .”

It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric . . .

This is representative of the quality of public debate over what caused the mortgage meltdown. In public, there are only two sides: the liberal (Corporate Greed!) and the libertarian (Government Interference!).

In contrast, the real divide is between the overwhelmingly dominant Diversity Dogmatists, liberal and libertarian, versus the tiny number of Diversity Heretics. Personally, I don't oppose government regulation of the mortgage business to prevent over-optimistic borrowers and lenders from causing defaults down the road, so I'm not a libertarian on this. But, in this case, the federal government was (and still is) regulating in the wrong direction: toward more risk.

Would minorities have ended up getting vast amounts of overly optimistic loans anyway even if the government had been neutral on the question? Perhaps -- the Diversity Dogma is so entrenched in our society that supposedly hard-headed businessmen like Mozilo believe it just as much as the politicians -- at least judging from their public statements. And, in the long run, few people have the strength of character to be hypocritical enough to act prudently when acting on the "ideals" you constantly extol (but don't actually believe) can you make a lot of money in the short run.

Finally, even if government and business had been sensible, the brute fact of population change in California, replacing middle class people with peasant class people, would have caused massive problems in generating enough productivity to repay debts.

But this way of thinking is so foreign, so unthinkable that almost nobody understands the catastrophe that just happened to us.

My published articles are archived at iSteve.com -- Steve Sailer

20 comments:

John Seiler said...

And we should remember that the homebuilding and mortgage industries manipulated the government to promote easy lending and easy credit. Should the Fed raise interest rates to a reasonable level and should banks do serious credit checks? How un-American!

The rights of life, liberty, and the pursuit of happiness have been replaced by the rights to easy money, home "ownership," and the pursuit of credit cards.

Brt said...

The "back of the bus" story has to be bogus. He has straight hair, and no one could confuse him for an African. Also, whence the assumption he's Italian? The names of his parents and wife are not available on the net.

Eric said...

Steve,

I give itulip.com my highest possible recommendation as the best original source of economic analysis. Their ten-year forecasting record has been dead-on; they were the first (in 2006) to call for a Q4 2007 recession. You'll find their commentary to be far more sophisticated and accurate than the simplistic corporate greed/gov intervention explanations.

itulip:economics/investment what isteve:psychology/politics

AmericanGoy said...

"Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates."

Wow, like the two are not inherently the same.

The people from the private branch get top jobs in the government organs regulating their industries, then go back to the private branch again, and back again to government...

It is an incestuous relationship.

Alfred Aiken said...

My brain is having trouble with this damned nuance you're trying to introduce.

simon said...

That bit about 15-35% downpayments sounds significant, though. It does seem to me like the GW Bush drive to end dowpayments explains a lot of why the bubble and collapse occurred when it did, peaking ca 2005-7, rather than decades earlier when the CRA first came into force.

There seems something particularly toxic about Liberal ideology in the hands of "conservatives" like GW. Liberals like Bill Clinton seem to be able to mitigate some of the worst effects of their ideology, knowing where to (quietly) draw the line; whereas liberal-conservatives carry Liberalism's implications through to the bitter end.

Killing-for-peace is another example - Clinton's 'humanitarian' Serb-killing was cautious and circumspect compared to GW's disastrous Iraq attaq.

Anonymous said...

Article is just more proof that the modern multi-racial society is inherently dysfunctional.

China laughs while the western nations are atomized and weakened by divide & conquer immigration policies.

By the way: let's get that La Raza woman on the Supreme Court already.

Rohan Swee said...

“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx[...]

...When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”


I don't have access to the New Yorker article, but I glean from wikipedia that Mozilo's "Countrywide" dates from 1978. If anybody was asking anybody to sit in the back of the bus c.1978 or later in Florida I'm the Queen of Sheba. Am I confused about the timeline here or is this whole backgrounder manufactured out of whole cloth? (Though the back-of-the-bus claim would be slightly less implausible than Mozilo using Orlando public transportation in the first place.)

OT - Time writer comprehensively explains California's woes for you.

Anonymous said...

I think the problem is that both libertarians and liberals have unrealistic views of the way government and business interact with each other. They don't realize that often enough the guys in government and business comes from the same schools and have similar goals and worldviews.

I'm urging my brother Tim to write a follow-up to his book The Big Ripoff, which did a great job explaining how business and government work together.

--John Carney, Clusterstock.com

anony-mouse said...

Ritholz repeatedly states his opinion that the CRA had nothing to do with the mortgage meltdown since it didn't cover mortgage brokers or the securitizers of MBS's.

He tends to blame the end of Glass-Steagal, bond rating agencies and lax enforcement.

John Anello said...

Government regulation was ultimately the culprit in this. I agree that execs like Mozilo and those at Washington Mutual had taken a bite of the “diversity” apple, but had the government not venerated them as role models for home loan lending the recession would not have been as widespread and as severe.
The market is a much better tool for determining who should receive home loans and who should not, in great part because it is color blind. In a true free market system, if it is determined that a person has good credit and stable income then they would receive a mortgage regardless of socio-racial issues. If the majority of these people happen to be of a particular race, well then that’s just too bad for the diversity crowd.
Without government intervention, zealous diversity worshipping companies like Washington Mutual and Countrywide, that continuously made bad loans to unqualified minorities, would never have grown so large; in fact they would soon have found themselves out of business.

Ritholtz said...

Ha! You clearly are not familiar with my work if you think I am a liberal. (See this for example http://www.salon.com/news/feature/2009/04/16/cassandras/index.html)

My book Bailout Nation has pissed off people on the left and the right (One chapter is titled "The Virtue of Foreclosure").

I believe in free markets, and that somehow annoys the far left. But I am reality-based, and that seems to confuse and disorient the hard right.

My politics is pragmatic realism and my agenda is identifying what is broken so it can be fixed.

That seems to contradict much of the nonsense spewed by both political extremes. Read the blog and/or the book before name calling

headache said...

Ritholtz:
I take the liberty of repeating what American Goy (AG) said about your text:


Ritholtz: "Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates."


AG: Wow, like the two are not inherently the same.


Id' say AG calls it right.

Steve Sailer said...

Barry Ritholtz comments:

"Ha! You clearly are not familiar with my work if you think I am a liberal."

Okay, but can you see how your protest shows that you are still missing the point of my post?

Anonymous said...

Speaking of China, re Anonymous' comment about it laughing at us (which it does): just how long would it have taken their justice dept. to turn Matches into a kidney donor?

Anonymous said...

"Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates."

Wow, like the two are not inherently the same.

Indeed.

If you can make a quick buck while doing politically correct things, you are golden. At least until the bottom drops out. Then you may be indicted....

Dutch reader said...

I don't have access to the New Yorker article, but I glean from wikipedia that Mozilo's "Countrywide" dates from 1978. If anybody was asking anybody to sit in the back of the bus c.1978 or later in Florida I'm the Queen of Sheba.

Yeah, in 1978, when John Travolta (Saturday Night Fever 1977, Grease 1978) and Al Pacino (The Godfather 1974/1978) were big stars, nobody wanted to accept an Italian in American society.

Eric said...

Finally, even if government and business had been sensible, the brute fact of population change in California, replacing middle class people with peasant class people, would have caused massive problems in generating enough productivity to repay debts.

But it wouldn't have mattered, since no bank in its right collective mind would have given money to those people in the first place.

silly girl said...

Ritholtz.


"I believe in free markets, and that somehow annoys the far left. But I am reality-based, and that seems to confuse and disorient the hard right. "


Will you support getting rid of Fannie Mae and Freddie Mac by declaring them bankrupt (because they are) and liquidating their assets?

Would you further assert that banks be allowed to only make loans that they believe are profitable?

Show us the pragmatism that says no bank has to make loans to any unqualified applicants even if that means that only a fraction of minorities can afford to buy homes.

Show us the pragmatism!

Patel Motel said...

I think the problem is that both libertarians and liberals have unrealistic views of the way government and business interact with each other. They don't realize that often enough the guys in government and business comes from the same schools and have similar goals and worldviews.

Google "public choice economics".