UPDATE: 12/31/2009: The paper by Laderman and Reid of the San Francisco Federal Reserve Bank provides the crucial information on foreclosure rates in California, the heart of the mortgage meltdown:
We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers.
So, in the economists’ simple multiple regression model, after adjusting for income and FICO, minorities in California still had substantially higher foreclosure rates than whites:
- blacks 3.3X
- Latinos 2.5X
- Asians 1.6X
(These adjusted gaps are all statistically significant at the 0.01 level.)
Presumably, the raw differences in foreclosure rates are greater. Unfortunately, the actual raw numbers aren't listed in the report, and the authors refused my repeated email requests to release the unadjusted numbers by ethnicity.
The raw ratios are important for estimating the overall share of defaulted dollars by ethnicity in California. We know from the federal HMDA data that minorities accounted for 77% of subprime home purchase dollars borrowed in California in 2006 (the worst vintage for defaults) and 56% of all home purchase dollars. You can see the graphs here. (I'm excluding borrowers of unknown ethnicity and mixed ethnicity couples).
In other words, minorities accounted for the great majority of defaulted dollars in California. And, California accounted for a sizable majority of all the defaulted dollars that launched the mortgage meltdown that launched the Great Recession.
For the story of my request under the Freedom of Information Act to obtain a copy of the unadjusted ratios, see here.
UPDATED September 27, 2008: For a subsequent rebunking of the connections between the Bush Administration's ideology of "diversity" and the mortgage disaster, see my article on "The Man Who Has Escaped All Blame for the Mortgage Meltdown ... So Far."
Since writing that fairly comprehensive article on Saturday, I've also found some seemingly trustworthy statistics on recent subprime loans by ethnicity. (Unfortunately, nobody seems to have calculated defaults by ethnicity. Perhaps nobody wants to know?)
We do know that defaults are closely tied to subprime loans. The most toxic of all, adjustable rate mortgage (ARM) subprime loans, accounted in early 2008 for only six percent of all loans outstanding but 39 percent of foreclosures started. Fixed and adjustable subprimes account for only 12 percent of loans outstanding, but half of current foreclosures. The subprime share of new lending roughly doubled from 2003 to 2004 and increased again in 2005. A remarkable fraction of defaults appear to have come from mortgages originated in 2004 through early 2007, when median prices in California, Nevada, Arizona, and Florida were absurdly high relative to median incomes.
Compliance Tech, a firm that helps lenders "Manage Diverse Lending Markets," estimates that in 2004-2006, minorities accounted for 44 percent of all subprime loans, with Hispanics slightly outnumbering blacks.
Minorities probably have higher default rates than whites. For example, default rates on college loans are about five times higher for blacks, and more than two times higher for Hispanics, than they are for whites. (Asians are best of all at paying back college loans.) Normally, college loans are handed out more willy-nilly than mortgages, so the ethnic default rate gaps likely aren't as big in mortgages, but willy-nilly pretty much describes 2004-2006 mortgage lending in some markets.
On the other hand, they probably tend to have lower value mortgages. On the other other hand, many Hispanics are found in expensive states, especially California, epicenter of the crisis. The largest defaults in America as measured in dollar losses (number of defaults times size) appear to have come out of California's exurban fringe: the Inland Empire, Antelope Valley, and the Central Valley. All these areas tend to have mixed white and Hispanic populations.
Now, that earlier debunking.
A friend emails:
Quite a lot of mainstream conservatives---seemingly following Steve's lead---are starting to argue that racially oriented government housing policies played a very large role in the ongoing collapse of America's financial system, e.g.
The Diversity Recession:
http://www.vdare.com/sailer/080921_cornerstone.htm
and many, many, many other articles.
I just can't see how this makes any sense. Here are my back-of-the-envelope estimates:
(1) Blacks+Latinos together make up about 1/4 of America's adult population.
(2) A very disproportionate fraction of blacks+Latinos just aren't in the mortgage/homeowner demographic category. After all, a substantial fraction of adult blacks are either current convicts, drug addicts, or welfare recipients, and a substantial fraction of adult Latinos are either recently arrived or otherwise improverished illegal immigrants.
While some members of these sub-demographic categories do own homes and have mortgages, the rates are surely extremely low compared with the general population. For example, I really don't think too many of those Latino immigrant day-laborers at Home Depot own their own homes.
(3) Furthermore, even if we exclude those black+Latino subgroups, the remaining black and Latino population is considerably poorer than the
white+Asian population. Poorer people are much more likely to rent (or
live casually with friends and relatives) rather than own a home and have a mortgage.
(4) Therefore, I'd guess that that although black+Latinos are about 1/4 of the adult population, they'd probably have only about 10-15% of the home mortgages. Presumably, there must be some official statistics on this somewhere.
(5) Next, consider that blacks and Latinos tend to live in heavily black and Latino areas, where the housing prices are probably far below the national average. And since even homeowning blacks and Latinos are almost certainly poorer than homeowning whites+Asians, they're homes are cheaper. And probably very, very few blacks or Latinos can afford the upper-end $1M+ homes.
(6) Therefore, my rough guess is that while blacks+Latinos might hold 10-15% of the home mortgages, the total dollar amount of the mortgages held by those groups is much lower, perhaps just 5-8%. Admittedly, many Latinos live in ultra-expensive CA, but very few blacks do, and housing in heavily Latino TX is pretty cheap. A big fraction of the black population lives in the Deep South, where home prices are very low.
(7) Now suppose that 5-8% of the dollar value of American mortgages is held by blacks+Latinos. And let's suppose that the default rate among
blacks+Latinos is 3 times the white+Asian average, which is probably on
the very high side. If so, that still means that the impact of disproportionately high black+Latino default rates on the national dollar amount default rate would be pretty negligible, not remotely the sort of thing that would be causing all those banks (and maybe our entire financial system!) to collapse.
(8) Furthermore, the slice of the black+Latino population with supposedly the much higher default rates, e.g. the subprime borrowers, are also paying much higher interest rates and various extra fees and penalties, which would partially mitigate the impact of the higher default rate.
Anyway, that's my very crude analysis. I'd be very interested in knowing where my numbers might be off or what a better set of estimates might look like.
Any comments?
My published articles are archived at iSteve.com -- Steve Sailer
Posts
80 comments:
Your commenter is probably right that blacks and Latinos themselves probably had a small impact on the housing bubble, but attempts to weaken lending standards on their behalf probably had a much bigger impact, as marginal white borrowers took advantage of them too.
- Fred
"A very disproportionate fraction of blacks+Latinos just aren't in the mortgage/homeowner demographic category. After all, a substantial fraction of adult blacks are either current convicts, drug addicts, or welfare recipients..."
Here's a comment:
Who goes to jail? Black men.
Who buys houses? Black women.
advertising is targeted at minority groups....
Using data from the New York Federal Reserve, Carpe Diem has constructed an interesting chart on the distribution of various kinds of mortgages across the nation. It shows that only a tiny percentage of total mortgages are in the subprime category, a total of around 4% of the total housing stock, of which half a million units are in foreclosure.
Scroll down to the bottom of this link to see the chart:
http://mjperry.blogspot.com/search?q=subprime
Having looked into it a little, my guess is that it is not the subprime mortgages themselves which are the bottom of the panic, but rather the highly leveraged bets that certain banks, brokerage houses, and hedge funds made on these mortgages. Look up "credit default swaps" on Wikipedia to get an idea how this might explain it. The Long Term Capital fiasco also sheds light.
My theory is that Asians are overrepresented in terms of dollar losses through default.
The real question: Why don't banks lie and say that they do give loans to minorities? All it would take is some office worker changing "white" to "black" on the loan applications. That way, they wouldn't have to make bad loans.
Are we ever going to be given a simple explanation of how we got into this mess? Shouldn't we at least get that much from our government before they start buying up hundreds of billions in bad loans?
I have to think at least some of it has to do with reduced lending standards, else so many people wouldn't be walking away from their homes, leaving their equity and picking up a bad credit history along the way. Or have prices fallen so far in some places that even the 20% equity of traditional borrowers has been wiped out?
Steve, you are right, and your reader is just guessing.
In 2005-2006 49% of high cost housing loans were taken by african-Americans and hispanics.
http://www.federalreserve.gov/pubs/bulletin/2007/pdf/hmda06draft.pdf
Obviously this was not a general housing crisis spread evenly through all households. It was a crisis among new high risk loans marginal loans beyond historical levels.
The total US mortgage market is over 12 trillion dollars, only about 5% is in trouble. But of the loans in trouble 40-50% are subprime loans.
4-500 billion is not much of the mortgage market or even US economy (total household wealth is 56 trillion dollars), but even a few hundred billion in unexpected losses is enough to wipe out equity of leveraged banks.
Half the loans taken were by minorities. I don't know if the average size of the loss is the same for white/asian and non-white, but it's not unlikely that its higher for the later group, in which case more than half the losses were due to 1/4 of the population.
Go with your original instincts Steve, dig into this.
(someone here should also look at Socialist Obama seniors views about American ideals)
"My theory is that Asians are overrepresented in terms of dollar losses through default."
Evidence?
My comment is that if your correspondent is right, we'll find out eventually. If not, there's a good chance we'll never have confirmation.
Which is a roundabout way of saying we'll have a read between the lines kind of answer, eventually.
Your friend is missing an important dynamic: pricing-- of houses, of loans, of everything-- occurs at the margin. It doesn't matter what the majority of people can afford, only what the thin line of buyers at the advancing edge of the market will pay.
When government policy forced the price of loans down for preferred minorities, competitive pressure brought the price of loans down for everyone. After all, if someone with the right complexion and little or no income could get a 100+% LTV loan package, people who previously would have saved up 10-20% and qualified for a legitimate loan naturally demanded the same favorable terms as the (incipient) deadbeats were getting.
(Really. Someone would say to a mortgage broker "this janitor at my office borrowed $200,000 with no money down." No broker could reply "well, he's special-- you have to put up $40,000." If he did the prospect would just go down the street to another broker who would sign him up for the same mortgage as the janitor got.)
A big feedback loop made the whole thing burgeon for several years: preferred minorities were given undeserved loans. Salesmen, brokers, appraisers, insurers, lenders, lenders' executives, and CDO syndicators all earned fees. Using their loans the preferred minorities bid up the prices of homes. Ordinary folks saw prices rising and decided to move up. They asked for loans on easy terms too, which salesmen, brokers, etc. were pleased to give them since (most importantly) more fees were to be had, and (to make it all seem alright) rising prices were said to prove that homes were "good investments."
Fannie and Freddy bought tons of loans and syndicated them into bonds. Everyone did the same, and most of the bonds were "guaranteed" explicitly or implicitly, so they were popular with risk-averse(!) investors, lulled as much by the fantasy that "real estate never goes down" as by the AAA ratings on all that paper.
As prices steadily rose people began to speculate on houses and condos, buying them not for housing but with plans to resell them at a profit. Speculative interest boosted marginal prices quite a bit since it competed with actual housing demand for a limited supply of homes. Prices began to rise steeply, generating several effects: (1) some people (including of my own relatives, to tell the truth) panicked-- fearing they would be "priced out of the market forever" they rushed to buy beans and tortillas houses at champagne and caviar prices-- this put even more upward pressure on prices. (2) Lenders began to offer loans on ever less rational terms-- "no-doc,' 40-year terms, long deferred interest period, negative-amortization, obviously falsified appraisals-- to keep preferred minorities (and everyone else) in the bidding. (3) Salesmen, brokers, loan executives, builders... all made out like bandits on the ever-growing fees (often calculated as percentages of loan amounts), so they eagerly participated in fraudulent or imprudent (un-fiduciary) schemes, laying much of the risk off on bondholders. (4) Bondholders thought they were getting the perfect deal-- investments "over-secured" by ever more valuable real property.
At the same time as the government pressured lenders to finance preferred minorities (and for competitive reasons, everyone else) on uneconomic terms, the government made other regulatory changes which fostered the bubble: (1) The SEC authorized the big investment banks to increase their debt-to-equity ratios to unheard of heights. (2) The SEC eliminated all competition in the securities-rating industry, and permitted the few authorized bond-rating agencies, protected from competition, to extort fees to syndicators/issuers in return for favorable ratings-- of course this cut both ways, under the circumstances it was understood that all ratings would be favorable (certainly "due diligence" was repaced with "no diligence"). (3) All bank and financial regulatory agencies "forbore" to question circular "guarantees" which gave mortgage CDO's an illusory glamour of absolute safety.
In places like Los Angeles or San Diego, where the government had first limited the supply of houses (through zoning and "anti-sprawl" measures), then imported literally millions of poor aliens to compete for existing housing, then compelled lenders to finance those same poor aliens to bid more and more for said housing, the price of houses soon exceeded the ability of any working people to pay. Really, in early 2006 even a couple making a combined $200,000 yearly, five times or more the regional average household income, could not afford a to buy a modest single-family house in San Diego using a standard-type (30-year fixed, 10+% down) mortgage. Even before the peak, homes were sold only to people who already had houses to trade (selling one ridiculously overpriced home to buy another), or people willing to commit actual fraud ("no doc" or "liar" loans obtained by deliberate misrepresentation, which the mortgagees had no intention, or even hope, of ever paying down from income). Speculators continued to buy, but only because they believed the supply of greater fools had not yet been exhausted.
It wasn't just the "community reinvestment act" and Fannie/Freddy "affordable housing" pressure on lenders to give money to preferred minorities which made this the diversity bubble and recession. It was also, to a small degree, the government's pressure on lenders and everyone else to ignore the creditworthiness of illegal aliens. Lenders were threatened with punishment for "race" or "national origin" discrimination if they tried to check up on borrowers' immigration status or income. Of course those things were all relevant... an illegal alien is much more likely to default on a loan because he can escape all the usual consequences merely by returning to his country of origin (not to mention the risk that an illegal-alien borrower will default after he's caught and deported!).
Did you ever see the joke where the employee asks for a day off, and the boss starts by tallying up all the time he already gives a worker off? Through clever math he manages to convince the employee that he already works a single day a year, and he's not getting that day off.
That's kind of what your friend does with his math. First, instead of considering just recent borrowers, he considers all borrowers and gets the numbers down to "5-8%" of total dollar value.
1) I suspect we need to be looking at recent borrowers. Since whites were more likely to already own homes, they are a smaller share of recent borrowers. Minority home buyers were probably close to or even more than their share of the adult population for the last 6 years.
2) He assumes that the average minority is borrowing for a cheaper house than the average white. But the average new minority borrower, though buying cheaper houses in their area, is still buying in areas that are more expensive overall, like in Southern California.
The meltdown was minority-driven in other ways, if indirectly:
1) Skyrocketing home prices were probably justified by people who thought "good areas" (aka, white neighborhoods) were getting harder to come by thanks to immigration. Whites and asians overbought to escape the immigrant and black onslaught. People also probably felt that population growth due to mass immigration, was driving up the value of all land around cities.
2) And, since during the building boom the open borders folks argued we needed illegals to sustain that boom, you can't ignore the fact that the (over)building boom could not have at all been sustained without illegal immigrant labor.
The attitude was: "We need people to build homes for people who can't really afford them and, oh yeah, we need homes for the builders, who can't afford them either."
There are at least 3 or 4 ways race plays into this, minorities as total percent of defaults is only one.
Steve,
I am very impressed that you published this well thought out retort to your numerous diversity recession arguments.
Clearly, I agree with the commenter.
Ack ... surely it doesn't take a big portion of people with mortgages to go into default to make the whole system stop working. A few people take $100,000 of the bank's money and pay virtually nothing back ... it's going to take a whole lot of people paying whatever interest rate to make up for that. You lose a lot of cred if you have some people default, and banks live or die on cred.
I am Lugash.
Lugash thinks your friend is probably right. The guy making the "100% due to racial egalitarianism" is off base. Alt-A(i.e, middle class white people who did a stated income loan for an investment property) default rates have increased in sync with subprime rates, although they aren't as high. A lot of Alt-As were also refinanced in 2007, so the can will be kicked down the road a ways.
Once the social stigma of defaulting on a loan vanishes, and the Alt-A people run out of assets to cover their sinking equity levels, watch for Alt-A to get even worse.
Subprime loans were worse for *Wall Street* because that's where the early defaults are concentrated. The way most MBS are structured, and with Wall Street taking the shit lower tranches, is what got them in trouble. Alt-A will kill the "prudent" banks a year or two from now.
I am Lugash.
Fred's correct: Marginal white borrowers took advantage of the same lax standards.
I know this as I used to work as a mortgage loan officer.
Moreover, all standards became lax, including appraisal standards and inspection standards.
It was a perfect storm of systemic corruption.
What, a guy sends you a critique of your diversitt recession theory and you actually publish it without calling him names?
Should we be doing this? Shouldn't we just do what that leftists do and just point and sputter and call him names?
And let's suppose that the default rate among blacks+Latinos is 3 times the white+Asian average, which is probably on the very high side.
This might be the key assumption. How about 25 times? Say the typical white default rate is 2%, and the typical NAM default rate is 50%? How about 20% (or 10x)? It doesn't take a lot above the average to throw the whole system into convulsions.
Are there any official stats out there to give us a good idea what it really is?
I should practice giving short explanations before long ones.
Anyway, here is one: the government started a price spiral by compelling lenders to give money to people who couldn't pay it back, then kept it going by insisting that lenders give such people more and more money as prices rose in order to keep poor people in the home-buying game. It was nuts: easy credit pushed up prices, which threatened to price out poor people, so the government pushed for even easier credit to keep poor folks participating, which forced prices up again, and round-and-round.
Two kinds of competition fueled the lending-terms spiral: retail competition forced lenders to extend the same easy credit to qualified borrowers as unqualified, putting more upward pressure on prices, and all borrowers competed for homes, forcing unqualified borrowers to ask for easier and easier terms.
If the government had relented after force-financing the first wave of otherwise unqualified buyers, the market would just have reached a new plateau.
However, and this is the key thing, the government continued to press lenders on minority borrowing. Every year the government demanded reports from lenders showing that they had financed a proportionate number of unqualifed buyers. As prices rose, lenders had to relax mortgage terms more and more to keep preferred minorities in the game. Competitive pressure ensured that everyone got the same easy terms.
Now, once the whole mess was launched a bunch of positive feedback loops, particularly the desire for everyone in the home-sales/loan-origination chain to keep earning big fees, helped keep it growing. But without the government constantly pushing lenders to give more and more money to unqualified borrowers as prices rose, the whole thing probably would never have gotten so big.
Steve the problem with your theory is that you keep concentrating on the subprime home loans. The media still refers to this as a subprime problem when it's only the canary in the coal mine. Here's a quote from a guy who correctly predicted every step that has happened so far.
Nouriel Roubini, Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business, is now being recognized by the financial media for having correctly predicted many of the afflictions which currently ails our economy. He believes that:
"This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk - and the collapse of many counterparties - will lead to a systemic collapse of this market."
The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.
...
"Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk."
Think about it Steve how many Mexicans are running investment banks, hedge funds, private equity firms. How many involved in commercial mortgages deals. This credit crisis was caused by mismanagement by the best and brightest those in the financial elite and in the federal reserve.
AS
Government mandated low standards in lending were enacted on the behalf of minorities. The economic leveraging that took place on that bad debt has exaggerated the effect beyond easy control. (thanks, whatever your name is rich genius bitch who helped make default swaps so fashionable)
Call it "affirmative action finance", a poison eco-pill. Now all we need to do is force responsible borrowers and lenders to pay for the mistakes of the irresponsible ones with this horrific bailout plan.
A hundred billion dollars to ACORN, the Democratic Party voter registration and money laundering gig? Bush's repution wasn't sunk by the Iraq war. This bailout will be the ultimate sinking of Bush.
Steve Hsu over at Information Processing:
"Earlier this year I wrote a post Fake alpha, compensation and tail risk in finance:
...current banking and money management compensation schemes create incentives for taking on tail risk... and disguising it as alpha. The proposed solution: holdbacks or clawbacks of bonus money... When will shareholders smarten up and enforce this kind of compensation scheme on management at public firms?
The classic example is writing naked (unhedged) insurance policies covering rare events and pocketing the fees as alpha. You trade tail risk for cash, and hope things don't blow up until you are out the door. It's agency risk on steroids."
He has been covering this issue for years. See also "Behind Insurer’s Crisis, a Blind Eye to a Web of Risk" By GRETCHEN MORGENSON in todays NYT. (Notice that Paulson was instrumental in setting up the new rules for "voluntary" self-regulation.)"
What we have here are irresponsible men making big bets with other people's money -- not unlike the buying on margin that triggered the Great Depression
Here's a list of top 500 foreclosure zipcodes from June 2007. Detroit appears there pretty often. I ran the top 5 zip codes on that list through a site called zipskinny.com. It simply shows census data for each zip code.
The top zip code for foreclosures, 44105, located in Cleveland, is 61.3% black. Number two on the foreclosure list is 30310 in Atlanta. According to zipskinny it's 92.1% black. The third highest foreclosure rate was in 80219 in Denver. It's 62.3% Hispanic. Number 4 is 48228 in Detroit. It's 69.4% black. Number 5 is 48205, again in Detroit. It's 84% black. I stopped at five.
Your commenter is probably right that blacks and Latinos themselves probably had a small impact on the housing bubble, but attempts to weaken lending standards on their behalf probably had a much bigger impact, as marginal white borrowers took advantage of them too.
There certainly might be some truth in this, but let's look at things another way.
Hank Paulson, former CEO of Goldman Sachs, personally made $700M from Goldman's booming profits generated by the "Lending Bubble."
Now I'm sure that Paulson's your typical "Wall Street social liberal", who wanted to do everything he could to help poor blacks, Latinos, and whites get mortgages and live the American Dream.
But even if he were a vile racist who hated minorities and poor people, the relaxation of credit standards did earn him $700M. So maybe he would have gritted his teeth and lobbied for them anyway.
And now he wants us to give him and all of his friends $700 BILLION...once again, to save all of America's poor blacks, Latinos, and whites from a terrible economic downturn...
I think the key is not the black and Hispanic losses, but how targeting black home ownership led to a degradation of standards for everyone. A main cause of mortgage innovation was because the old standards were 'outdated', meaning, they tended to reject more NAM. With house prices rising, no one notice the problems, but the seeds were sown in large part because the old, prudent standards had disproportionate impact on NAM application rejections (not defaults).
So, I think he's right that NAM housing losses are not the cause. But the NAM targeting was the main driver of mortgage innovations that led to the losses we observe across the board.
So - before the bubble, about 64% of Americans owned their own house. At the peak of the bubble (before the foreclosures started), maybe 69% did. However, in 5 years or so, there was more than 5% turnover - in fact, quite possibly 50% of all houses now standing were bought during the bubble years, depending when you define the start of it.
Lots of those buyers were moving up, but some were people who wouldn't have bought a house without the lowered credit standards, and some were people who bought their first house who would have anyway. But, due to the house price inflation, many of those who were otherwise creditworthy had to stretch to get the house they wanted, and of those, some will have stretched too much, or be snapped by external shocks (losing both jobs, divorce, etc.).
But the real culprit - the reason that Wall Street is in a lather - Born Again Democrat is right that it's that lots of paper was traded on Wall Street which was considered low-risk because the models didn't account for a housing price drop, and now there's hell to pay because they were wrong.
You don't hear much about "junk bonds" anymore, because they're reasonably well-priced. They're bonds issued by companies with a substantial possibility of default; and as such, they have high interest rates. People buy them knowing that there's a risk. People bought the new-fangled mortgage-backed paper thinking that it was much more secure than it really was.
There are a couple of reasons for the mortgage-backed paper being mis-priced (because the risk was miscalculated): first, the models used to calculate risk were inadequate, and didn't look at what would happen if there were a secular decline in house prices; second, borrowers, mortgage brokers, and to some extent banks, stretched the truth on many of the loan applications, making the input data for the risk calculation unreliable.
Even if the coming bailout doesn't actually restrict securitizing mortgages, this kind of crisis is unlikely, now that the quants on Wall Street have data about the effects of a housing price drop to plug into their models. Next time (and there *will* be a next time), it will be about something else.
The first comment has it right. The rules were relaxed to make it easier for minorities to borrow, but everyone was allowed to take advantage of the easier lending standards. Eventually there were no lending standards for anyone.
Here is a comment worth considering from the Dallas Fed:
Some 80 percent of outstanding U.S. mortgages are prime, while 14 percent are subprime and 6 percent fall into the near-prime category. These numbers, however, mask the explosive growth of nonprime mortgages. Subprime and near-prime loans shot up from 9 percent of newly originated securitized mortgages in 2001 to 40 percent in 2006.
Later mentioned:
This can be seen once we account for the fact that past-due rates—the percentage of mortgages delinquent or in some stage of foreclosure—typically run five times higher on subprime loans.
The entire piece is only eight pages and worth a read. I think you're on the right track, Steve.
Minorities hit hard by rising costs of subprime loans
By Sue Kirchhoff and Judy Keen, USA TODAY
"Across the nation, black and Hispanic borrowers helped fuel a multiyear housing boom, accounting for 49% of the increase in homeowners from 1995 to 2005, says Harvard's Joint Center for Housing Studies. But Hispanics and African-Americans were far more likely to leverage the American dream with subprime loans — higher-cost products for buyers with impaired credit — that are now going bad at an alarming rate.
About 46% of Hispanics and 55% of blacks who took out purchase mortgages in 2005 got higher-cost loans, compared with about 17% of whites and Asians, according to Federal Reserve data. The South Side of Chicago, with a large concentration of minority borrowers, has a high concentration of subprime loans and the state's highest foreclosure rate. In Boston, where defaults are rising — especially in minority areas — 73% of high-income black buyers (those making $92,000 to $152,000) and 70% of high-income Hispanics had subprime loans in 2005, compared with 17% of whites.
"Study: Wealthier minorities get high-cost loans
Lower-income buyers in Greater Boston affected at a significantly lower rate
By Kimberly Blanton, Globe Staff | January 25, 2007
A new study of high-cost, or sub prime, mortgages in Massachusetts unearthed a surprising fact: The loans are most prevalent among minorities with substantial incomes.
Around 70 percent of African-American and Latino borrowers in Greater Boston with incomes between $92,000 and $152,000 took out mortgages with high interest rates in 2005, according to the study released yesterday by Jim Campen, an economics professor at University of Massachusetts Boston and a long time analyst of mortgage lending to minorities.
"It's an astounding number," said Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which finances low-income home buyers. "I don't know anybody who can read that number and not be shocked."
Indeed, Campen determined that nearly half of all African-American and Latino borrowers in 2005 with incomes above $152,000 used a subprime loan to buy a home. Moreover, in Boston high-income minorities were six to seven times more likely to have an expensive mortgage than high-income whites, the study found."
Okay, I can't stop scratching this mosquito bite.
Look, normally as the price of something such as real estate goes up, bidders drop out. When prices are very high only rich people buy. In America few preferred minority people are rich (yeah, yeah, sports stars and entertainers... there aren't too many of those).
Indeed, the narrowing of demand at high prices tends to push prices down, until demand matches supply, of course.
But the government decided that a certain proportion of home buyers[1] had to be preferred minorities, even though on average they didn't have much money. The government actively punished lenders who didn't find ways, however imprudent or fraudulent, to keep minorities in the bidding for houses and condos as prices went up.
So when houses were affordable only to people with incomes far above the median and there should have been no low-income bidders-- therefore very few preferred minority bidders-- banks poured mortgage money into the pockets of poor minorities just so those banks could report that they had written the required percentage of loans to preferred minority buyers.
In a sense, the government itself kept bidding home prices higher by financing preferred minorities to bid against each other for marginal-priced homes.
As I pointed out before, the lowering of credit standards for preferred minorities inevitably forced the relaxation of standards for everyone else because of retail competition by lenders. The bonanza of fee income as easy money drove up prices gave everyone in the game an incentive to play it faster and faster. (The tsunami of borrowed money also provided funds to lobby (bribe) legislators and government officials to keep the fun going.)
Yes, looking at all loan is useless. You have to focus on subprime almost exclusively, as they represent the vast majority of the failing loans.
The next set of failing loans are the Alt-A loans, which are the 3/1, 5/1 etc. variable loans, but so far those failures dwarf the subprime failures. Some say they are the next train coming down the tunnel, however.
And yes, the leverage is the reason even this small number of loans overall (~2%) can cause such havoc. Think of it this way, how many 100,000 loans to you have to make at a 2.5% spread to cover the loss of a the half the principal of one of those loans, plus selling expenses etc. About 50-1 at least.
BTW, the Republicans are starting to make a decent case that it was the democrats that kept the fannie mae train going down the track at full speed with video clips such as this. I am acutally a little suspect about this, as I doubt they wanted true reform (they just wanted their peeps to get the action) but I could be persuaded otherwise.
What it comes to is a massive transfer of wealth to the underclass (sure, soon there was nothing left of it) and to the managers of the transfer operation like Goldman Sachs, Lehman, WaMu, etc. It will probably be paid through inflation, that is, by the fixed income & salaried class.
I wonder what will President Obama's program to improve home ownership among NAM ...
You have an amazing comprehension of the sociology of multiculturalism and I've been a fan of your sharp observation but now I see you're overzealous.
And, despite your effort at objective analysis, your bias is blinding. You aim to blame minorities. You want to build a grand theory rather than evaluate every topic. In doing so you advance this silly argument that minorities defaulting on mortgages greatly contributed to a financial catastrophe. "The week that changed American capitalism" is the culmination of layers of tangled wreckage, a collision created by the reckless behavior of elites mostly removed from selling home loans and mortgage policy.
Take a look at this article behind the fall of AIG: http://www.iht.com/articles/2008/09/27/business/28melt.php?page=1
"When Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.
Ten years ago, a "watershed" moment changed the profile of the derivatives that Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Cassano's unit, came calling with a novel idea.
Morgan proposed the following: AIG should try writing insurance on packages of debt known as "collateralized debt obligations." CDO's. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.
The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding CDO's and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.
Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid AIG to insure bonds that they held in their portfolios.
Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, AIG Financial Products was happy to book income in exchange for providing insurance. After all, Cassano and his colleagues apparently assumed, they would never have to pay any claims.
Since AIG itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.
These insurance products were known as "credit default swaps," or CDS's in Wall Street argot, and the London unit used them to turn itself into a cash register.
The unit's revenue rose to $3.26 billion in 2005 from $737 million in 1999.
...
Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.
So began AIG's downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.
Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped AIG Financial Products and its legendary, sprawling parent.
...
At the end of AIG's most recent quarter, the London unit's losses reached $25 billion."
Do you not see how clearly the mortgages are a minor crisis, yet, the uneven target of attention in a system that was widely shattered?
You are too tempted to illustrate in one simple example how minorities will single-handedly destroy the country.
You've cut through diversity shibboleth but don't be overcome by your own immutable narrative.
Diversity corrosion does not lurk as a major factor behind every social ill.
File this entry under: Political incorrectness can make YOU stupid.
Yee, I did not understand this as an an attempt to put the blame on "minorities". Rather as an explication that well-intended but irrealistic left-wing politics, aimed at favouring certain minorities, might be at the origin of this crisis. And that too is of course poliiticaly incorrect.
The best insider explanation of the meltdown in the derivatives markets yet (hat tip to Steve Hsu):
http://www.lrb.co.uk/v30/n09/mack01_.html
My assessment (ok guess) would be that he is underestimating the degree to which the seteld community has long since paid off their mortgages. If a house has been in the same hands for generations there is no mortgage, if for 15 years the exposure will be under 50% of the purchase price of 15 years ago ie not much.
Nonetheless even if that brings up the NAM bad debts from about 1.5% to max of 4% of the total market it remains a contributory factor to the fact that lenders were borrowing up to a theoretical 30/1 ratio of the money they actually had & lending onon the assumption that prices could never fall.
From wiki:
In the third quarter of 2007, subprime ARMs only represented 6.8% of the mortgages outstanding in the US, yet they represented 43.0% of the foreclosures started. Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.[4]
Thus, subprime is 55% of all foreclosures, and minorities represent at least 50% of subprime. If minorities just fail at the same rate as whites you have 2x the representation at a minimum. They probably fail at a higher rate, however boosting this ratio even higher.
Wiki Subprime
if you rely on a house of cards for your shelter, and a few mischievous ants knock it down, you can blame the ants. but i'd blame the engineer.
The commenters have debunked the debunker.
No one is blaming NAMs. The target of blame is the pandering to NAMs.
Now here's some philosophy.
To take a significant action, such as fleecing a nation, one must have both a "moral" and a "practical" backup. Greed ain't enough. One must have some rationale or excuse, however small and twisted, to shore up one's self-esteem and blind the victims before making the big kill.
Without the excuse of "universal homeownership" as an unquestionable ideal, the greed to do the swaps was held at bay. Only when "opposition is racist and criminal" got locked into place in every cerebrum throughout the system was there was no bar, no barrier to proceeding with perhaps the biggest goddamn rip-off in American history.
NAMs, and the undercollaterized whites bringing up the rear, merely rode the wave. Most are no worse than victims, unvirtuous but not culprits.
The culprits are the twin moral/practical: Diversity/greed. (By "Diversity," I mean the racial egalitarianism promoted in the West over the last 60+ years.) Both were necessary, neither was sufficient.
Greed is old as hell. Diversity, something new, was the catalyst.
In the body, plenty of diseases swarm. They are kept harmless by defense mechanisms, which are partly dependent on eating right, sleeping enough, and generally living healthy. But stop tending to health, start drinking a bottle of Egalitarian Rye every night, and the body weakens, becomes vunerable. It is the same with the body politic, to use another metaphor.
Now we're on our back in the hospital on life support, telling ourselves:
"It was the disease (greed), not the rye (racial egalitarianism)! Not the rye! Rye is good...sliding down my throat, making my belly warm...It's the fault of the disease I've got, not the fault of the innocent rye!"
Rational people, ecshewing egalitarianism as well as other nonsense, make for a society less vunerable to the evergreen urges of the Seven Deadly Sins. Is the stock of rational people swelling or shrinking? Are the crazies and the improvident about to be purged, or are they going to get another stab at it? We'll see.
My hypothesis is: This is one of those butterfly's wings situations.
I don't think that the push for minority (and immigrant) home ownership was all to blame, but I think your original commenter underestimates the effects that small differences can have in a highly leveraged situation.
Banks are leveraged. $1 in non-performing loans means, as I understand it, $7-10 that the bank can't loan out. Hence even small differences in foreclosure rates in a small percentage of the market can make a big difference.
Also, the drive to expand home loan credit to new populations fueled demand driven increases in housing prices. When these new home loan holders couldn't pay, prices started coming down, and banks who eventually did foreclose were holding real assets that had to be 'marked to market' at less than the outstanding debt.
yee,
I think you are making a common mistake. Steve isn't blaming minorities for the entire problem, just pointing out that pandering to them did contribute to the problem.
Its been pointed out numerous times that there is no reason Steve should cover AIG, derivatives, etc., because that is covered by extensively by the main stream press. Steve's niche is focusing on the one aspect of the story that the media always ignores.
FWIW, check out this post at Free Republic:
Bailout Falling Apart; House Repubs Not On Board
freerepublic.com
Sunday, September 28, 2008 2:46:16 PM
Post #187, Jolla: Being an insomniac - I play talk radio all night with a pillow speaker so as not to disturb Mrs La Jolla - on NPRs Latino show this morning a LatinAmerican economist with UCLA stated the numbers indicate Latinos have about 40% of the homes in foreclosures, AfricanAmericans about 50% - wonder why we have not heard that in the last two weeks?
I don't buy the diversity recession theory.
There are two types of mortgages made in the US - those guaranteed by Freddie/Fannie (with relatively strict underwriting standards) and always implicitly backed by the government, and other mortgages.
The pressure for minority homeownership was, in both cases, just the diversity racket operating as it always does, trying to maximize handouts to its constituents. Freddie/Fannie, as government-sponsored entities, were pressured by their regulators to make bad loans to minorities, and to some extent acceded to that pressure. However, those mortgages have always been understood to be government-backed, and defaults on the underlying homes are not affecting the broader financial system.
As to the mortgages not guaranteed by Freddie and Fannie, I don't think you can infer a causal relationship between the pressure to make loans to minorities and those loans being made. The banks making these loans knew perfectly well that the minorities to whom the loans were made were likely to default eventually, but they didn't care, not because they were pressured politically, but because they assumed housing prices would continue to increase indefinitely, meaning that the borrowers could just refinance when they could no longer afford payments. These loans were really derivatives on home price appreciation, cloaked as something safer (mortgages) so that banks could justify holding them to their regulators, and so the rating agencies could justify their high ratings. All the minority homeowners were essentially well-paid actors in this charade.
Okay, I found the MP3 for the interview that Freeper "Jolla" was talking about.
I'm pretty sure that he was listening to a KPBS San Diego rebroadcast of a show called Latino USA, out of KUT, 90.5 FM, Austin TX.
You can download a 2MB MP3 file of it here [at the University of Texas].
This is the summary:
DR. RAUL HINOJOSA-OJEDA
Latino USA's Maria Hinojosa speaks with Dr. Raul Hinojosa-Ojeda, executive director of the North American Integration and Development Center at UCLA, about how the financial crisis affects Latinos.
Money quote [shortly after the 1-minute mark]:
The data is quite staggering. 40% of the mortgages in the troubled subprime market that we are talking about were sold to Latinos. And, by the way - African Americans? - half of the homes that they bought and about half of the homes that Latinos bought in the last few years were in these particular types of very high cost mortgages.
[It's difficult to tell whether Hinojosa-Ojeda is smart enough to know the difference between P(A|B) -vs- P(B|A), so take his figures with a grain of salt.]
In the rest of the interview, they try to pin the blame on Ol' Whitey for enticing the poor NAMs into those foolish subprime mortgages.
Hinojosa-Ojeda has two home pages at UCLA's César Chávez Department of Chicana & Chicano Studies:
http://www.chavez.ucla.edu/raulhinjosaojeda.htm
http://www.chavez.ucla.edu/people/ojeda.htm
He also has a home page at something called "THE NORTH AMERICAN INTEGRATION & DEVELOPMENT CENTER":
http://naid.sppsr.ucla.edu/staff/staffraul.html
At that page, you can download a CV in PDF format [if you want to get really depressed, then glance at the section of the CV titled "GRANTSMANSHIP (Post 1993 Only)"].
He also displays a couple of email addresses if anyone wants to contact him [it looks like mediaone.net is now part of Road Runner, so maybe that address needs to be changed to something like "socal.rr.com"?].
It seems to me that this fiasco was made more likely by the severing of the connection between borrower and lender. When you got your mortgage from a local bank, the banker had a feel for who was a good risk, and he was familiar with the local real estate market as well. That set of circumstances probably hasn't been true any longer since the 80's or, perhaps even the 70's.
And with the CDOs, it's almost a matter of indifference to your mortgage lender whether you're a good risk or not, as they're going to sell your mortgage anyway.
A lot of the purchasers of these CDOs are foreign - both private investors and sovereign wealth funds. It is perhaps no accident - these investors have little or no familiarity with American real estate markets, and with the social realities that underpin them (for example many foreigners think that blacks constitute a huge fraction of the U.S. population - even as high as 40%, based on their overrepresentation in the media).
Perhaps even American bankers have been hoodwinked by the false picture painted by the media that they thought these subprime loans were a good risk. After all, they watch the same TV and movies that the rest of us do. All the minorities they see on TV are responsible, well-adjusted, law-abiding folks.
I'd be interested in hearing what financially savvy readers think about Roubini's analyses which are highly critical of the bailout plan
http://www.rgemonitor.com/roubini-monitor
There were real estate bubbles all around the world, not just in the US. In the UK, Bradford & Bingley (mortgage lender) and Fortis (Belgium's biggest bank) just failed. Earlier this year, Spain had its own real-estate crisis, and it looks like there are bubbles in Australia, Ireland, Eastern Europe, etc. I can't see how you can blame that on NAMs in the USA. Nor can you blame the explosion in credit default swaps that brought down AIG on NAMs.
Forgive my ignorance, what's NAM?
NAM = non-asian minority
tc: There were real estate bubbles all around the world, not just in the US. In the UK, Bradford & Bingley (mortgage lender) and Fortis (Belgium's biggest bank) just failed. Earlier this year, Spain had its own real-estate crisis, and it looks like there are bubbles in Australia, Ireland, Eastern Europe, etc. I can't see how you can blame that on NAMs in the USA. Nor can you blame the explosion in credit default swaps that brought down AIG on NAMs.
You ought to read Spengler, over at the Asia Times [Collingwood, in the Spengler forum, has also been all over this]: With just a handful of exceptions [Israel, Iceland, parts of Red State America], no one in the civilized world is making babies anymore.
In fact, we are about to witness the greatest collapse in the world's civilized population since the fall of Rome, circa 450AD.
No babies = no home buyers.
Well, at least no home buyers about 35 years later, and we're now about 40 years removed from when civilized fertility rates first began to plunge below replacement levels in the mid- to late-1960's.
The good news for the survivors is that home prices will continue to fall around the world, hence homes will become "affordable" once again; the bad news is that the NAMs [in Europe, NAMs are what we call "Muslims"] will move in to fill the void left by the departure of the civilized peoples on their journey to nihilism's inevitable conclusion [which is Death].
Oh, in case you think the Feds were responsible for forcing easy credit to preferred minorities (and creating more such minorities by tolerating illegal peasant immigration) but innocent of restricting the supply of housing (a parallel policy which helped fuel the bubble), think again. While the Feds did not directly impose, say, zoning restrictions, the Feds did directly fund, from Federal tax dollars, the entire housing-restriction political movement. That's right: the whole "anti-sprawl" "popular front" was financed by the US Federal government.
Yee,
Yes, CDOs and other financial instruments of mass destruction contributed to the debacle. But to get those dominoes falling first what had to happen was much higher rates of mortgage default.
Did the CDO market cause the high rates of mortgage default? Why did banks lower their lending standards?
NAM = Non-Asian Minority
Found this on Youtube.....
http://www.youtube.com/watch?v=H5tZc8oH--o
Not a big fan of John McCain but interesting historical perspective.....
Here's a list of top 500 foreclosure zipcodes from June 2007.
Very useful list. Just look at Tennessee. Most people unfamiliar don't realize that, except for one small corner in the Mississippi Delta region, Tennessee is not very black. The eastern half is overwhlemingly Republican and actually saw a lot of its "Volunteers" volunteering for the Union during the Civil War. Memphis has not even 1 in 9 of the state's population, and yet every single one of the 13 zip codes in Tennessee among the top 500 defaults is in Memphis. One is called Cordova, but that's adjacent to Memphis or may now actually be inside of it.
Pennsylvania defaults? All 5 are in black Philly; none in white Pittsburgh.
North Carolina? All 4 in Charlotte; none in the Research Triangle.
A look at the Rust Belt/Sunbelt coincidence of defaults and foreclosures brings up a point I've seen made before, probably on VDare: a normal, healthy economy often sees jobs created in one area and lost in another. Businesses in the booming region need workers, and they (used to) draw off people from the moribund region.
In a healthy (and law-abiding) economy, the businesses in the Sun Belt would've been attracting, and perhaps even actively recruiting, workers from the Rust Belt. Instead they saw a cheaper and easier way to fill their labor needs: recruit from Latin America. Cheap pliant labor, unlikely to unionize. So in our unhealthy economy, the folks in the Rust Belt got stuck, because they couldn't get jobs in the Sun Belt, or couldn't afford the homes there, or wouldn't live in Aztlan; and the USA got stuck with more VibrantPeople from points south.
Result: increasing defaults by Americans stuck in the Rust Belt, and increasing defaults by non-Americans who moved into the Sun Belt.
In 2005-2006 49% of high cost housing loans were taken by african-Americans and hispanics.
The notion of "minorities" causing the "mortgage mess" is dubious BS. Notice that the claim above lumps together credit worthy "minorities" with those who lack credit or are failing to make payments. The fallacy is obvious. The correct procedure is identifying what "minorities" are covering their financian obligations and those who arent then calculating their relevant weight on the mortgage products in question. Not surprisingly, those who advance the "minorities caused this" thesis have not done this, and have shown little hard evidence to back up their dubious cliams.
Using this broad brush approach, since 51% of said loans were taken by white people, then "obviously" as a result, that bigger percentage means white people caused the mortgage mess. Also note that "minorities" in federal reports also include Asians, who are in significant percentages in certain states or local regions, and who on average, post higher family incomes than whites. Furthermore the claimant doesnt define "high cost" housing loans. What the heck does that mean? A house costing $350,000? $100,000? An interest rate of 5%? 9%?
In addition the so called "government report" given at the referenced website does not confirm the so-called 49% minority figure. In fact federal reserve reports note that "minorities" are actually underpresented in loans given. The notion is a convenient one- advanced by Ann Coulter among others, with "minorities" serving as convenient whipping boys ofr "our current mess". But it is bogus.
seecof said:
When government policy forced the price of loans down for preferred minorities, competitive pressure brought the price of loans down for everyone. After all, if someone with the right complexion and little or no income could get a 100+% LTV loan package, people who previously would have saved up 10-20% and qualified for a legitimate loan naturally demanded the same favorable terms as the (incipient) deadbeats..
You haven't yet established that this army of "preferred" minorities were raking in all this cash. What credible source can you provide that shows this? A similar claimant above, could provide little data to back up similar claims. The federal reserve reports cited actually show minorities being "underrepresented" in loans. So how are they the cause of this "meltdown"? Captain Jack's and Lugash's explanations makes more sense.
I would agree with you to the extent that government pressures brought down loan requirements for everyone, and that is the point, everyone, not "preferred minorities". Under both Clinton and Bush there was pressure to expand mortgage opportunities for everyone ACROSS THE BOARD, not simply "minorities." It is this general loosening of credit requirments, together with the activity of speculators that is more relevant that "preferred minorities". By the way, in various government reports, women are treated as "minorities", hence broad brush claims relating to minorities may well include white women as well.
Here's a list of top 500 foreclosure zipcodes from June 2007. Detroit appears there pretty often. I ran the top 5 zip codes on that list through a site called zipskinny.com. It simply shows census data for each zip code.
The top zip code for foreclosures, 44105, located in Cleveland, is 61.3% black. Number two on the foreclosure list is 30310 in Atlanta. According to zipskinny it's 92.1% black. The third highest foreclosure rate was in 80219 in Denver. It's 62.3% Hispanic. Number 4 is 48228 in Detroit. It's 69.4% black. Number 5 is 48205, again in Detroit. It's 84% black. I stopped at five.
You might as well stop at 5 because your argument makes little sense. For starts, urban areas will always have more mortgage activity than rural areas because (a) more people live in urban areas and (b) that's where most of the housing stock is.
Second you make little definition of "urban" areas. City zip codes areas often include mostly wite suburbs.
Third, in your haste to pinpoint the so called "black" areas, you conveniently forget to mention that #3 on the list is Denver, which is almost 70% white. Funny how you missed that...
Fourth, minority areas are usually "UNDERREPRESENTED" in loans given. Gubment reports that debunk the all-purpose explanationo f "racism" confirm this, noting that there are good economic reasons such communities are underrepresented. In "black" Atlanta or Detroit for example, minorities still receive loans at a lesser rate that whites close by or elsewhere. The notion of an army of unqualified minorities raking in tons of federal mortgage loan money, and thus causing our "current mess" is not based on reality, but the extreme fantasies of some conservatives. See for example:
http://goliath.ecnext.com/coms2/summary_0199-5753584_ITM
However, and this is the key thing, the government continued to press lenders on minority borrowing. Every year the government demanded reports from lenders showing that they had financed a proportionate number of unqualifed buyers. As prices rose, lenders had to relax mortgage terms more and more to keep preferred minorities in the game.
Shaky reasoning. In fact the pressure was put on ACROSS THE BOARD to show government was helping the common volk attain their housing dreams. Singling out minorities as the trigger is dubious. Various financial institutions may have talked up their "minority outreach" spiel as cover to justify what they were doing- namely aiding mostly real estate white speculators, and lower income whites.
If so, that would be nothing new. Alleged "concern" for minorities is a standard cover for those with other agendas. The financial institutions got a two-fer by using minorities as cover- they appear more "sensitive", and they make more money. It is very unclear as to whether this alleged boatload of cash actually reached said "minorities."
tootalljones,
1. Blacks are 12% of US population; Hispanics a little more. How come a quarter of the population has 49% of the subprime mortgage loans? ("High cost" is another term for subprime.)
2. Read all the links here. If you don't have time, read this one. It wasn't written by Ann Coulter.
3. It isn't the NAMs' fault. It's the pandering to NAMs that gets the ball rolling on collapsing standards.
4. Read a little more before commenting. Not knowing the meaning of "high cost" is a significant error, and not your only one.
Looking at the top 500 foreclosure zips, I was expecting a damning list of barrios and hoods across the nation. Instead there isn't a single zip code in New Mexico, no Santa Ana, no San Antonio, no Houston. Murrieta, CA (not too many blacks or mexicans there apparently) did make the list and so did a Texas Zip code with a median income at least 2x the state average. I also found an overwhelmingly white (by California standards) zip on the list, but at least 5500 of its foreign-born residents are from another disliked isteve immigrant demographic E. Europe and Central Asia.
I don't doubt that minorities have a higher foreclosure rate than average, the problem is your analysis seems to ignore the speculators who obviously played with larger dollar amounts than the minority borrowers.
Univ of Chicago Economics prof confidently describes the roots of the crisis:
http://caster.wgnradio.com/podcasts/x720full-048-080922.mp3
The whole notion that this crisis is about government "forcing" banks to make cheap loans for minorities and the poor shows a real lack of understanding of financial market developments over the last decade.
New financial structures created a profit incentive for making bad loans, which were actually preferred in certain ways to traditional good ones, since it's easier and faster to make a loan without checking the borrower. Substandard loans could be packaged and sold easily and for high profits (because they could be separated into AAA low-yield and less highly rated high-yield instruments). You could quickly package your loan into a security, sell it, and collect your profits before any foreclosures happened. The system needed loans as an input, and profit-motivated lenders went out and eagerly (no government pressure needed!) made them.
The Community Reinvestment Act was passed in 1978, this mess takes off in 2000.
David sez:
David said...
1. Blacks are 12% of US population; Hispanics a little more. How come a quarter of the population has 49% of the subprime mortgage loans? ("High cost" is another term for subprime.)
2. Read all the links here. If you don't have time, read this one. It wasn't written by Ann Coulter.
3. It isn't the NAMs' fault. It's the pandering to NAMs that gets the ball rolling on collapsing standards.
4. Read a little more before commenting. Not knowing the meaning of "high cost" is a significant error, and not your only one.
Perhaps you ought to read a bit more before commenting, and you need to define your terms better up front. No one disputes that minorities have a higher percentage of the sub-primes. What is at issue is whether that has played a "big role" in the crisis. You have produced little evidence that this so. None of the links you post back up your claim. All they show is that yes, minorities have a greater percentage of subprimes. We all knew that. You still have not produced the beef showing how significant that fact is to the subprime crisis. What is the percentage weight of the evil "minority" loans versus those taken out by good white people in relation to the meltdown?
And how is this percentage significant? The vaunted "49 percent to minorities" if indeed this is the case, is less impressive than it seems. If 200,000 loans were taken out, what's the breakdown? If 70% of these loans went to minorities but only covered 20% of the total dollar pot, that leaves 80% of the pot subject to the defaults of white people, even though they may have taken out a lesser percentage of loans. But you haven't even begun to present credible evidence along these lines. The key point question is how significant to the overall crisis situation are those minority loans? You havent begun to answer this. There is also the questuion of predatory lenders.
The following link about how minorities are being scapegoated, puts a final nail in the argument that anti-redlining regs "caused" the crisis.
http://www.baltimoresun.com/news/opinion/oped/bal-op.viewpoint28sep28,0,6004405.story
What is says is instructive. The COmmunity Reinvestment Act or CRA has been a favorite whipping by of conservatives for "causing" the crisis. But the CRA covers banks and thrifts, and these only floated about 25% of mortgage loans. The other 75% were made by unregulated mortgage financing institutions that DID not fall under the CRA. The notion floated by some conservatives that financiers were somehow "forced" into giving out all these shaky "affirmative action" loans is dubious. As noted above, only 25% of these type loans are covered by the CRA. And sure those poor credit tisks who borrowed deserve their lumps, but what about the mostly white lenders, real estate speculators etc who pocketed a good profit by pushing such loans? In their haste to blame minorities, some conservatives seem to conveniently forget this OTHER side of the coin.
QUOTE:
"The heart of the crisis was caused by unregulated and lightly regulated mortgage brokers and independent mortgage bankers and affiliates that are not subject to the CRA. It would be quite odd if an act ... caused institutions not subject to its purview to do things that were inappropriate," said University of Michigan law professor Michael Barr, who has studied this legislation.
So much for the CRA as the "cause" of our problems.
As for the notion implied by some commenters of undeserving minorities raking in this boatload of cash, it is bogus. QUOTE:
The Center for Responsible Lending, a nonprofit research group, examined 50,000 subprime loans nationwide and found that blacks and Hispanics were 30 percent more likely than whites to be charged higher interest rates, even among borrowers with similar credit ratings.
Again, lenders didn't push those loans to comply with any "affirmative action in lending" programs. They did it to make money. That's the same reason Wall Street's masters of the universe created all those exotic investment vehicles - instruments they didn't understand any better than some homebuyers understood their adjustable rates.
If Wall Street was motivated by greed, President Bush was motivated by his belief in an "ownership society." In 2003, about the time that conventional lending standards evaporated, he said, "We want more people owning their own home. It is in our national interest that more people own their home."
In other words those minorities weren't receiving any windfall favors. They had to pay higher interest rates and fees for the shaky loans (as they should) - hardly the picture painted by some conservatives of blacks and Hispanics trundling cartloads of easy cash home. And the crisis was caused by lessening of prudent credit restraints ACROSS THE BOARD, including policies pushed by Bush, not whether you were a minority or not. "..lenders didn't push those loans to comply with any "affirmative action in lending" programs. They did it to make money.."
http://www.baltimoresun.com/news/opinion/oped/bal-op.viewpoint28sep28,0,6004405.story
Looking at the top 500 foreclosure zips, I was expecting a damning list of barrios and hoods across the nation. Instead there isn't a single zip code in New Mexico, no Santa Ana, no San Antonio, no Houston. Murrieta, CA (not too many blacks or mexicans there apparently) did make the list and so did a Texas Zip code with a median income at least 2x the state average. I also found an overwhelmingly white (by California standards) zip on the list, but at least 5500 of its foreign-born residents are from another disliked isteve immigrant demographic E. Europe and Central Asia.
I don't doubt that minorities have a higher foreclosure rate than average, the problem is your analysis seems to ignore the speculators who obviously played with larger dollar amounts than the minority borrowers..
Exactly. Denver, at almost 70% white is number 3 on the list of bad zip codes, and as yous ay above, where are those massively Hispanic zip codes showing how minorities "caused" the crisis?
Even if minorities defaulted at a higher rate, those pushing the "big role" theory have yet to produce credible evidence that shows how significant the minority loans are in terms of the OVERALL crisis situation. If 80% of the loans went to minorities some might be tempted to say aha! But if said minority loans only covered 30% of the pot, that still leaves 70% of the total dollars available for non-minority people to play with. As you also say, what about the big sums speculators were moving around? Many are quick to finger point at "blacks and other minorities", while conveniently leaving these key players out of their zone of condemnation.
Steve,
Here's an article from the NY Times about a mostly-minority housing development where "fewer than 10 of the 3,900 households have defaulted on mortgages" over the last 27 years, "In a Sea of Foreclosures, an Island of Calm". The key difference?:
“We demanded down payments,” Mr. Gecan said, “and we resisted government attempts to have us waive down payments. Over the last six or eight years people kept suggesting various programs with zero down. We kept saying, ‘That’s ridiculous — that’s how you get into mass foreclosures.’ ”
- Fred
Upon reflection I think the theory that the root cause of the current crisis is imprudent lending to NAMs is a little too convenient. It appears to me that this imprudent lending is more a symptom of a general loss of sanity among lenders than its cause. This general loss of sanity seems typical of bubble markets. For example Japan in the 1980s. Going forward I think we need regulations to protect lenders from themselves. Like the rule that you can't buy stock on more than 50% margin. Perhaps a rule that you have to put 20% down on real estate.
Cap'n Jack: "1) Skyrocketing home prices were probably justified by people who thought "good areas" (aka, white neighborhoods) were getting harder to come by thanks to immigration. Whites and asians overbought to escape the immigrant and black onslaught."
Which is one of the big points that Prof. Elizabeth Warren at Harvard Law School made in her 2003 book about mortages, family debt and what Steve calls "affordable family formation" ... although she pulls her punches and talks euphemistically about "good schools".
See the following interview, particularly starting at the second page where she hits on the "good school" connection.
http://dir.salon.com/story/tech/feature/2003/10/13/bankrupt_parents/index1.html
You'd like Liz, Steve. She thinks the way you do ... although she still cannot see the elephant.
It is not the underlying defaults that have made this a "crisis". If that were the case, the relevant institutions could simply take a hit and move on. Rather, what has caused this problem is the lack of honesty by the banks. Either they do not truly know the true measure of their exposure due to the complexity of the financial products or chose to hide them, the credit markets have seized up because of a lack of trust among financial institutions. That is, one year ago, these banks started raising capital but understated their needs (deliberately or not). They burned the sovereign wealth funds, private equity, and other major investors in the last year. While many of these sources have plenty of funds to lend or invest, they won't go near the banks. So, the banks trying to get it from the government instead.
tootaljoness,
Denver isn't 70% white. It's 50% non-Hispanic white, 34.8% Hispanic. http://quickfacts.census.gov/qfd/states/08/08031.html.
Fair enough and accurate, but those figures are for Denver COUNTY. When you look at the CITY of Denver, white people are 65.3% of the total.
http://quickfacts.census.gov/qfd/states/08/0820000.html
Financial Affirmative Action
By Matthew Vadum
Published 9/29/2008 12:08:01 AM
spectator.org
When the history of the Great Economic Meltdown of 2008 is written, in-your-face shakedown groups like the Greenlining Institute will be held to account.
Greenlining, headquartered in Berkeley, California (where else?), is a left-wing pressure group that threatens nasty public relations campaigns against lenders that refuse to kneel before its radical economic agenda. Its principal goal is to push politicians and the business community to facilitate "community reinvestment" in low-income and minority neighborhoods.
The Greenlining name is a play on the unlawful practice of "redlining." That's when financial institutions designate areas, typically those with a high concentration of racial minorities, as bad risks for home and commercial loans. The Institute wants banks to give a green light to loans in these areas instead.
Recently profiled by John Gizzi, Greenlining uses carrot-and-stick tactics to blackmail public agencies, banks, and philanthropists to achieve its objectives. The Institute brags it has threatened banks into making more than $2.4 trillion in loans in low-income communities.
Was this a good idea?
Not according to University of Texas economist Stanley Liebowitz. He wrote that the current mortgage market debacle is "a direct result of an intentional loosening of underwriting standards -- done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults"...
THE REAL SCANDAL - HOW FEDS INVITED THE MORTGAGE MESS
By STAN LIEBOWITZ
February 5, 2008
nypost.com
...In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.
In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances.
Yet a "landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.
That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination...
Cap'n Jack: "1) Skyrocketing home prices were probably justified by people who thought "good areas" (aka, white neighborhoods) were getting harder to come by thanks to immigration. Whites and asians overbought to escape the immigrant and black onslaught."
A bit over-stretched here. Home prices are influenced by many forces. Macro forces include mortgage interest rates, economic strength (the business cycle), and federal taxes. Micro forces include local economic strength, state and municipal zoning, neighborhood features (such as quality of schools), and the condition of the property itself. The notion that trembling white people were stampeding hither and yon and paying overheated prices just to escape "blacks and immigrants" is a bit over-done here. Demographics is a factor without a doubt, but only one factor in the mix. In any event, you have some heavy lifting to do to prove that whites and Asians "overbought" themselvesinto bankruptcy because they feared them there minororeetees...
Big bill sez:
Which is one of the big points that Prof. Elizabeth Warren at Harvard Law School made in her 2003 book about mortages, family debt and what Steve calls "affordable family formation" ... although she pulls her punches and talks euphemistically about "good schools". See the following interview, particularly starting at the second page where she hits on the "good school" connection.
http://dir.salon.com/story/tech/feature/2003/10/13/bankrupt_parents/index1.html
Your reference to Warren's book still fails to prove that white people "overbought" to "escape" blacks and Mexicans. "White flight" has been ongoing since the mid 1970s, but there was no orgy of "overbuying" until the loosened credit markets of the 1990s and beyond, among other economic factors. The key thrust of Warren's book is the vast expansion of women into the workplace, and certain weaknesses this has caused in family finances and safety nets. It is the central theme of her book, not merely "good schools". In your haste to beat the "those evil minorities" drum you are distorting what Warren is saying.
She stresses the fragile nature of the two-income family, based on dependence on female earnings. This contradicts the claim that a frantic desire to "escape" minorities is driving this crisis. To the contrary, the "crisis" revolves around heavy female labor force participation, and subsequent over-extension of family finances. Its not those evil minorities that are at fault, it's your regular white moms in the workforce it could be well argued using Warren's reasoning. As one review puts it:
Warren and Tyagi consider factors that can be supported by empirical observation. They offer a well-researched, three-part explanation for the growing financial troubles of the middle-class family: the rising cost of being middle-class, the increased risk faced by families without a stay-at-home parent, and the emergence of a deregulated credit industry have combined to dramatically increase the financial danger faced by the American family.
A number of factors explain the problem of rising costs, including a bidding war in the housing market, a marked rise in the cost of education, and the additional burden of providing a second vehicle for the working mother. With more money earmarked for the necessities of middle-class existence—house and car payments, insurance costs, educational expenses—there is less flexibility and freedom and a greater chance that expenses will outstrip resources and compel bankruptcy if disaster strikes. “And so the Two-Income Trap has been neatly sprung. Mothers now work two jobs, at home and at the office. And yet they have less cash on hand. Mom’s paycheck has been pumped directly into the basic costs of keeping the children in the middle class.”
http://www.law.harvard.edu/students/orgs/jlg/vol27/sullivan.php
Notice the variety of factors at play here that drive up costs and cause financial crisis, including the deregulated credit card industry. It is much more than the simplistic "fear of minorities" that is at the heart of the crisis. White people aren't driving themselves into bankruptcy because they fear a black guy moving in next door, as some would simplisticly have it. Warren mentions good schools, but schools are only one of many factors in the mix as noted above. Other important factors include mortgage interest rates, economic strength (the business cycle), taxes, earnings, local economic strength, state and municipal zoning, and the condition of the property itself.
Before trotting out the tired "fear of minorities" nag, look at the actual data. The central claim you support is that white people (with asians thrown in) "overbought" or ran into financial crisis, cuz they were "fleeing" blacks and Hispanics. In "fleeing" them there minororotees, they overstretched themselves financially. However, your own reference undermines this claim. Warren shows that the "overbuying" or "overstretch" is caused by factors much closer to home, convenient as it may be to make "blacks and other minorities" the scapegoats.
lucius sez:
Recently profiled by John Gizzi, Greenlining uses carrot-and-stick tactics to blackmail public agencies, banks, and philanthropists to achieve its objectives. The Institute brags it has threatened banks into making more than $2.4 trillion in loans in low-income communities.
Of course. This is standard leftwing pressure tactics, but it still doesn't prove the central claim advanced by assorted posters, that loans to minorities played a "big role" in causing the mortgage meltdown. Exactly how "big" a role have they played? 20%? 60%? 70%? of the action?
Also note that the CRA regulations against "redlining" only cover banks and thrifts which account for only 25% of the action.
http://www.baltimoresun.com/news/opinion/oped/bal-op.viewpoint28sep28,0,6004405.story
The other 70% was by forces and agents not falling under CTA jurisdiction. But even if it was all CRA, no one has yet presented any credible proof to substantiate the claim that them there minororeetees had a "big role" in the meltdown..
As always, Americans confuse class with race.
I think looking at default rates of minorities is a limited view. Akin to Fred "attempts to weaken lending standards on their behalf ...", it could be the policy directive to increase loans to lower-income groups had unintended consequences.
Fred states "as marginal white borrowers too advantage of them too". Not only them, but other speculative, middle-America buyers started to take advantage of subprime loans to buy and flip property, assuming an ever-increasing housing market. This speculative buying is probably unprecedented in the history of our housing market.
kevin said,
I think looking at default rates of minorities is a limited view.[...]it could be the policy directive to increase loans to lower-income groups had unintended consequences. (emphasis added)
That's what Steve is saying - except he shows that it was less "lower-income groups" than specifically named and singled out racial minorities.
Read and read the references.
"As always, Americans confuse class with race."
Including American leftists, who howl "racism" when talking about blacks disproportionately making up the lower-class.
Non-whites are not non-whites but merely "low-income people" in "low-income areas"...until it's time for the left to bash Whitey again, in which case it's "racist America keeping minorities poor."
too tall is at it again!
Warren shows that the "overbuying" or "overstretch" is caused by factors much closer to home, convenient as it may be to make "blacks and other minorities" the scapegoats.
Well, here are some of Warren/Tyagi's "factors closer to home" as quoted by tootall himself:
A number of factors explain the problem of rising costs, including a bidding war in the housing market, a marked rise in the cost of education, and the additional burden of providing a second vehicle for the working mother.
A marked rise in the cost of education -
For whom? For the taxpayer, who is supporting public school? No. More people electing to pay tuition to private schools (on top of paying taxes) are the subjects of "a marked rise in the cost of education." Why do more people send their children to private school? As Steve has pointed out many times, what makes a good school (output) is good students (input), not the other way around.
The additional burden of providing a second vehicle for the working mother -
Why are working women (and second vehicles) treated as some kind of new phenomenon here? Read between the lines. Why is she working NOW? To defray "the rising cost of being middle-class," such as "educational expenses." To help pay the mortgage on a new house in a good exurban (white) neighborhood. And to run that new-fangled second car, of course! Why is a second car (a staple of the middle-class for decades) mentioned as significant NOW? Long/longer commutes. Why live in suburbia cum exurbia, far/farther/farthest from where you work? Why not just stay in the 'hood?
A bidding war in the housing market -
I.e., more expensive houses are being built, bought, and sold.
Now, putting aside "duh" explanations like "greed," why is getting a new house important? Middle-class people aren't creating any baby boom, so they don't need a McMansion to raise a Walton-size family (or in many cases even a My-Three-Sons-size one). To flip? Sure - but what in the first place created a bubble in housing specifically as opposed to a bubble in, say, tulips?
Wherefore did houses become a craze, a national obsession, with HGTV and Home Depot and their like becoming bulwarks of the culture and economy for a time (until the recent and ongoing downturn)?
Because a big new house is a mark of middle-class status. That is what gives it its value. But what's the value of middle-class status? The most significant benefit of being middle-class is precisely that you get away from lower-class people: that is the central attraction and value of being middle-class. Sure, the stuff is nice, but status is more satisfying. Higher prices keep out the riff-raff. When people talk about a more "comfortable" life-style, the largest part of that is the ability to avoid consorting with the rabble.
It's circular. It's also true.
Statistical proof of this? You got statistics about bears and woods?
[more] important factors [than white flight] include mortgage interest rates, economic strength (the business cycle), taxes, earnings, local economic strength, state and municipal zoning, and the condition of the property itself.
What a list! And has each one of these nothing important to do with white flight, in causing or in being affected? Look here. Of course they all do.
My wife and I got a starter home precisely to get away from "low-income" people in apartments - some white, most black. We soon had to move out of the starter home (in 2003) when the starter neighborhood apparently reached the 25% or 30% tipping point: new "dark surlies" made it inhospitable in dramatically quick fashion. We moved, far out of the city (40 mile one-way commute to work), into a "historical home" with an ARM tied to the Libor rate. Thank God we sold out of that before the mortgage mess hit the fan. Subsequent moves have been to whiter areas of the country.
I *am* white flight. And I'm not the only one.
Now we did "flip" the first home - in it 4 years, sold 50% above purchase. And we paid off many debts from the profitable sale of the historical home. In the end we came out about even financially. The key motivation was to provide a safer happier environment for ourselves...even if we had to drive 80 miles a day.
Now ask your white friends if something is "ghetto" (not black, but specifically "ghetto" - use that word). They have comprehensive opinions about what is and isn't "ghetto"...but might not speak completely freely about it unless you're an OLD friend. Uh, and white.
No one wants to live ghetto, just as no one really wants to live in downtown Detroit.
Now ask yourself why liberal types in local politics perpetually decry "sprawl" and agitate for governmental downtown renewal. Why is it such an elusive problem getting people to move "back downtown" into "high-density multi-use" blah blah blah that will turn a profit for these do-gooders and supposedly for everyone else involved, too? Why do the homosexuals who gentrify an "urban" war-zone describe it as "vibrant" and (approvingly, because it points up their bravery and daring) "a bit dangerous"? Downtown is only a geographical area, only a bunch of buildings, so why the fuss? Why didn't I have to specify which downtown?
The extent to which white people will go to stay away from blacks is staggering and even dismaying, and should not be casually underestimated with dismissive talk about "oversimplification" (wherein your repetitions seem to protest too much, too tall). Remember that white mom isn't keeping all that statistical data and complex factoring in her head; the average person isn't a wonk. She says, "Honey, we ought to move" (and Honey agrees, if he does) with one impulse: to secure a hospitable environment for them and theirs. All the math, the affording, and the rationales fall into place later on.
That's just the way it is, moral indignation be damned.
Well wait
If so many of these foreclosures are minority loans and
we're gonna spend all this money to keep these people in their homes even though they can't afford them then
isn't this in effect just a MASSIVE redistribution of wealth from whites to minorities???
Post a Comment