February 4, 2009


A standard response to the argument that the Community Reinvestment Act played a role in the (heavily minority) mortgage meltdown is to claim that most mortgages weren't covered under the CRA. (See, for instance, "11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis" by Sara Evans on AlterNet).

After all, look at giant mortgage-monger Countrywide Financial, which had been the biggest originator of mortgages in the country before it stumbled badly in 2007 and was bought by Bank of America in 2008.

Much of Countrywide wasn't officially regulated by the CRA. (Countrywide did operate a bank, Countrywide Bank, but it didn't make many acquisitions, so the CRA wasn't particularly relevant to Countrywide's bank.)

First, though, Countrywide was more the exception than the rule. Fortune wrote in 2003:

Countrywide, of Calabasas, Calif., near Los Angeles, is practically a pure play in mortgages. It's the only independent left in an industry now dominated by big, diversified banks, from Wells Fargo to Citigroup.

(Some big banks had mortgage subsidiaries that weren't technically covered by the CRA, but most acted as if they were under the CRA, which is a very loosely written statute intended more to put the fear of regulators and community organizers into banks rather than to spell out the banks' precise duties.)

Second, Countrywide's celebrated CEO Angelo Mozilo, who provided so many politicians in the Friends of Angelo club, such as Sen. Chris Dodd, with "superprime" low interest mortgages, announced in a fancy 2003 speech at Harvard that Countrywide was pledging $600 billion for "previously underserved Americans" over ten years -- exactly like so many CRA-covered banks did (e.g., Bank of America pledged $1500 billion and WaMu $375 billion).

Indeed, Mozilo was one of the loudest voices in favor of closing the racial gap in home ownership.

On the other hand, Countrywide appears to have pretty much known the score about the quality of the mortgages it was writing. It seldom hung on to mortgages it originated, instead bundling them up into mortgage-backed securities and dumping them on deluded buyers.

Countrywide chased hard after likely deadbeats, and piled on seemingly minor fees and conditions that added up to huge profits during the height of the housing bubble.

Why? Because borrowers who aren't good with money were easy to exploit upfront. (The problem turned out to be that just as these debtors weren't good at negotiating the terms of their mortgages, they also weren't good at earning enough to pay their mortgages, so defaults skyrocketed once housing prices in California, Countrywide's home base, stopped rising.)

How to explain Countrywide's behavior?

Generally, I find most people aren't cynical villains. They really come to believe as a general principle whatever they think is in their interest.

I'm not sure if that applies to Countrywide CEO Angelo Mozilo, however. Countrywide, it appears, was less a Kool-Aid drinker than a Kool-Aid peddler.

Perhaps one reason it was a big fan of the CRA was because Countrywide sold its junk mortgages to CRA-regulated banks who needed CRA credits for lending to minorities and low income folks. From Countrywide's old website (now scrubbed from the Internet after B of A's acquisition of Countrywide):
"The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit."
For sheer shameless promotion of the reigning conventional wisdom about the need to close racial gaps in home ownership rates, Mozilo's showcase Harvard speech in 2003 compares to George W. Bush's speeches of the same vintage:

The American Dream of Homeownership: From Cliché to Mission

Presentation by Angelo R. Mozilo Chairman

President and Chief Executive Officer, Countrywide Financial Corporation & Chairman, Countrywide Home Loans, Inc.

The Joint Center for Housing Studies of Harvard University

John T. Dunlop Lecture

Sponsored by The National Housing Endowment Washington, DC

February 4, 2003

It’s a personal honor because over 34 years ago my partner and I founded Countrywide with the objective to lower the barriers and open the doors to homeownership. We wanted to make the American Dream of Homeownership something tangible – something to which people could do much more than just aspire. We wanted to make it something they could access, afford and achieve. We wanted to prove that our company could and would succeed by offering home loans to hard-working families – of all races and of all ethnic backgrounds. In other words, it has always been our intention to be more than a corporation that makes mortgage loans; we wanted to be a force in making positive differences in people’s lives.

Whether you represent government agencies or GSEs, non-profits, faith-based groups or industry associations, communities or even Countrywide competitors, we together have secured the future for many families in this great Country. For the people in this room, the American Dream of Homeownership is not cliché. It’s our cause. It’s our mission. The past few years have been remarkable ones for our industry. Lower interest rates, the push for greater diversity in homeownership, and massive immigration into the U.S. have created both challenges and opportunities. However, despite the fact that approximately $2.5 trillion in mortgage loans were made in 2002, the gap between low income and minority homeownership, and what is classified as white homeownership, remains intolerably too wide. Therefore, expanding the American Dream of Homeownership must continue to be our mission, not solely for the purpose of benefiting corporate America, but more importantly, to make our Country a better place.

... The overall U.S. homeownership rate, which was at 44 percent in 1940, hit 68 percent by the end of the third quarter of 2002. Historically low interest rates along with new, creative and flexible underwriting techniques are continuing to fuel a record period of growth for our industry. ... And, increasingly, the sub-prime market is boosting that number and the industry as a whole. During the first nine months of 2002, sub-prime originations rose an estimated 26 percent over the same period in 2001 – outpacing the overall market. ...

It started with the New Deal, and now, we’re in a new century. But through it all, one thing has remained, more or less, constant. This constant is our challenge. And this challenge is to increase the access to affordable housing. And in order to do this, we must close the homeownership gap that still exists. ...

As President Bush said last October: “Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good of our Country, for the sake of a more hopeful future. We’ve got to work to knock down the barriers...”

While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 – an increase of 40 percent – the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse.

So tonight, I want to discuss why that gap persists and how Countrywide is trying to address it. ... If we don’t get a better handle on these issues, as I will discuss, I would argue that the homeownership gap will not only remain, but there is a good chance it will widen and the homeownership rates among low income and minority borrowers will continue to be depressed. ...

One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers. Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan. It is the willingness and the ability of a borrower to make monthly payments that are the determinants of loan quality. Over the past 50 years, I have personally interviewed thousands of potential homebuyers and in the vast majority of cases, the barrier standing in between them and the house of their dreams was the down payment. That barrier must be eliminated by offering customized programs to those borrowers who cannot meet the current down payment requirements.

Equally important, we must reduce the documentation required to make any and all loans; we should be able to approve loans in minutes, rather than days, and close loans in days, rather than weeks.

... Unfortunately, sometimes restrictive regulations, fees, and codes are even intentional – established by those who don’t want affordable housing, at least not in their neighborhoods. And that should remind us that affordable doesn’t necessarily mean accessible. Although it may not be the issue it once was, discrimination still exists. And make no mistake – it has an impact on the homeownership rate of minority families. Therefore, it is critical that our governments must work to solve the issues of restrictive regulations, fees, codes and land use. ...

Just over ten years ago, we launched our formal affordable lending program called House America. Our hope was that with flexible underwriting guidelines, we would enable more people to qualify for home loans, and by having fewer credit and employment constraints, more families would achieve their American Dream. Back in 1992, we started with a $1.25 billion commitment to House America. In 2001, as part of our House America campaign to provide residential financing in under-served communities, we increased our commitment to $100 billion with a goal of obtaining that objective by 2005. I’m proud to say that in just 22 months, and not five years as originally planned, we have reached that goal.

So I’d like to use this forum this evening to say that Countrywide is once again re-dedicating itself to expanding the dream of homeownership. Tonight, I am announcing the extension and expansion of our current 5-year, $100 billion challenge through the year 2010, with the commitment to fund a total of $600 billion in home loans for previously underserved Americans in this decade.

Countrywide is proud to make this commitment. We’re excited about our new goal. We’re eager to reach that goal. And, I can assure you that we will reach that goal. As we had envisioned in 1992, House America offers unique loan products that have been specifically designed to meet the needs of minority and low- to moderate- income borrowers. But it also does more. It has become not just a lending program, but a more comprehensive effort that devotes considerable intellectual and financial resources to increasing homeownership among minority and low- to moderate-income individuals and families. ...

It is an effort that, in addition to providing loan products with flexible underwriting criteria such as home rehab loans, also specializes in being able to layer financing programs through participation in hundreds of down payment and closing cost assistance programs. [The IRS finally declared these to be a tax evasion scam in 2006.] House America also offers other tools to ensure that we are doing everything in our power to expand the opportunities for home-ownership. It is an effort absolutely committed to education and outreach, both in English and Spanish, both online and in local communities, both at local home-buyer fairs and at lending workshops, and with our many partners, like Fannie Mae, Freddie Mac, FHA, the Congressional Black Caucus, the National Council of La Raza, AFL-CIO, and faith-based groups across the Country, just to name a few. I want to specifically and especially recognize Franklin Raines and his entire team at Fannie Mae for providing a great deal of the resources that have made it possible for us to achieve our House America objectives. [Raines called Countrywide a "paragon" of nondiscrimination, while Mozillo gave Raines the special "Friends of Angelo" rate on his mortgage.] In 1993, Countrywide opened four dedicated House America retail branches, and now we have 23 staffed with local and diverse professionals in major metropolitan areas all across the Country.

It is an effort that has enabled Countrywide to become the number one lender to Hispanics for the last 6 years and the number one lender to African Americans for the past 3 years. ...

Fortunately Countrywide isn’t alone – there are other mortgage lenders and financial institutions that are all making positive contributions. And the lesson we can take away from this is the following: for a long time, when it came to increasing low-income and minority homeownership, the message has always been “we should,” or “we must.” But the fact is, “we can,” and “we are.” Now, we must take the energy and expertise and the ideas and the innovation that we’ve brought to increasing the overall homeownership rate, and apply them to creating reasonable parity among homeowners. It is time, once and for all, to narrow and ultimately eliminate the homeownership gap. I believe we can eliminate the gap and it is, in large part, why I got into this business.

But to do so will require us to resolve three structural obstacles: ...

“THE UNDERWRITING PROCESS” As many of you know, after the loan application is taken, the data is input into an automated underwriting system to support the lender in accurately assessing the risk. These systems look at a multitude of factors in making this assessment including credit history or scoring, collateral, and the ability to pay.

I have two issues with our industry’s current underwriting methodology. The first is that the automated underwriting systems kick far too many applicants down to the manual underwriting process, thereby implying these borrowers are not creditworthy; and the second issue is that once arriving in the hands of a manual underwriter, the applicant is subject to basic human judgment that can be influenced by the level of a borrower’s credit score. ...

However, far too many borrowers are being referred to an arduous manual and cumbersome underwriting process. To me, that is clear proof that the level deemed to be an acceptable risk by our automated underwriting systems is much too high. While many of these borrowers may ultimately be approved, it is because the manual process, or human underwriter, has analyzed non-traditional factors such as the borrower’s rent and utility payment history, which should be embedded in the automated underwriting process.

Now, let me address my second issue, and that is the manual underwriting process itself. While Countrywide’s own internal evidence supports the notion that manual underwriters are approving a good majority of the loan applications that get referred, the fact of the matter remains that a human is involved in this step of the process thereby creating the possibility that a decision is made based upon the level of the borrower’s FICO score.

We cannot deny that human beings aren’t influenced by FICO scores. If we can be influenced by a high credit score, then it is only logical to assume that we are equally influenced by a low one. Therefore, the underwriter – either because he or she views the current system as relatively inflexible or because he or she chooses to err on the side of safety – may decide not to override a system that has been deemed to be an accurate forecast of risk. Thus, the current protocol intentionally creates an environment where borrowers with lower FICO scores are subject to being disproportionately affected by the manual underwriting process. I say we need to amend these systems to do more than just approve the “cream of the crop,” by creating a system that says “no” only to those deemed unwilling to make their mortgage payments. We must understand that the credit scoring system we have built is still imperfect, and that if we are to have any chance at closing the homeownership gap, we must make a serious investment in improving its capacity and capabilities. We must do this through improved automated underwriting models that take into account more variables, and measure true indicators of risk and willingness to pay. We need an ongoing educational process, not only at the primary market level, but also in the secondary markets and with mortgage insurers to help lead this effort to recalibrate the scoring system. And finally, it must be recognized that borrowers with credit scores below what is currently defined as “creditworthy” levels can still be acceptable credit risks. Thus, the credit score bar dividing creditworthy from high-risk borrowers, must be substantially lowered by the GSEs [Government-Sponsored Enterprises: i.e., Fannie Mae and Freddie Mac], the secondary market in general, and with bank regulators. The GSEs have made good progress over the last few years in expanding their credit criteria, but I encourage them to become much more aggressive in this regard.

From the NYT in October 2008:

Shortly after he became chief executive [of Fannie Mae in 2004], Mr. [Daniel] Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.

But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.

Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

Then Mr. Mozilo offered everyone a breath mint.

Let's let Mr. Mozillo have the final words:

... And according to the White House, meeting their goal of 5.5 million new minority home-buyers within the decade will add $256 billion to the housing sector. [A connection between Bush and Mozilo is one that historians should explore -- their speeches sound like they may have been talking to each other. Mozilo wanted to get richer and Bush wanted Hispanics to get mortgages so they'd become Republicans.]

... For our industry and, more importantly, for our Country, together, we can make this the beginning of a great day. Because increasing homeownership among lowincome and minority populations remains a great challenge – but it is one that has been entrusted to our collective hands. And the wonderful families I’ve talked about are proof that we can do the job. Our experiment is working. Success can be within everyone’s grasp.

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


Anonymous said...

From Mozilo's speech:

We need an ongoing educational process...


Anonymous said...

Great digging Steve. Should make that AlterNet chick Evans go purple in the face. But of course liberals will just cram all this down the memory hole and throw a few more stolen trillions after it in order to make sure the hole is closed. Or so they think...

Anonymous said...

Is it coincidence you chose to post this on the day when AOL's top news story was "The Biggest Snake Ever Discovered?" (2,500 pounds, as big as a school bus)

I love Mozillo's argument that down payments have nothing to do with risks on housing loans. Those hard-hearted New Dealers must have just made this one up. Down payments have nothing to do with: 1) the borrower's habit of self-discipline and limiting consumption spending for a medium-term purpose; and 2) the lender's cushion against loss if the borrower defaulted.

If down payments were the big housing hurdle for poor people, it would mean they would, on average, only have been able to buy houses three to five years later, and they would have had more manageable mortgage payments when they did buy.

Red-lining is the other bogeyman of the CRA. Isn't it just short for, "we are a little more careful in lending money backed by assets in a block were we would never dream of opening a branch?"

Is it a coincidence that the biggest purely financial crisis in 75 years, which has cratered the world economy, is occurring because of massive losses in the one financing sector that is most heavily and obviously influenced by government pressure? The investment banks could have used their sophisticated models to underestimate the risks of all sorts of assets, but apparently these models only blew up when used on mortgage-backed securities.

The "CRA deniers" have yet to explain why, so far at least, the only massive losses on underlying assets have occurred in housing, with only a barely avoided default by the auto companies controlled by the UAW.

Unknown said...

Steve needs to write another book with lots of Appendices. And someone needs to subsidize mailing copies to every bank, newspaper and politician!

Anonymous said...

I thought Countrywide was on my side.

Anonymous said...

"It started with the New Deal" - and ended with the New Depression.

I remember seeing Countrywide's $600 billion commitment back when it was announced and wondering how the hell they got the money to make all those loans. I didn't realize they weren't lending against their own assets, and were pawning the loans of on naive investors.

most acted as if they were under the CRA, which is a very loosely written statute intended more to put the fear of regulators and community organizers into banks rather than to spell out the banks' precise duties.

Which is a nice way of saying that it's the perfect law for tyrants - nothing spelled out; all at the whim of regulators. "I didn't know I was speeding, officer. The sign says 65 and that's what I was doing." "Well today I decided the limit is 25, so I'm get to...er, have to write you a ticket."

The past few years have been remarkable ones for our industry. Lower interest rates, the push for greater diversity in homeownership, and massive immigration into the U.S....

I'm shocked. Shocked! I never suspected that the homebuilding/-lending industry wanted more immigrationas a way to boost business.

Anonymous said...

Second, Countrywide's celebrated CEO Angelo Mozilo, who provided so many politicians in the Friends of Angelo club, such as Sen. Chris Dodd, with "superprime" low interest mortgages, announced in a fancy 2003 speech at Harvard that Countrywide was pledging $600 billion for "previously underserved Americans" over ten years -- exactly like so many CRA-covered banks did (e.g., Bank of America pledged $1500 billion and WaMu $375 billion).

This actually makes WaMu look somewhat rational.

Anonymous said...

11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis

Holy Cow, check out the comments. Those people have rocks in their heads. Seriously! And people call Stormfronters stupid... (okay, most of that is fanatical, willful ignorance, but still)

I need to go wash my eyeballs after that.

Anonymous said...

The unfortunate thing is everybody is only going to get serious when the money is gone. And that includes potential taxpayer money. Maybe then some investors are going to ask some hard questions they should have been asking since the Civil Rights days. But then again. maybe we are just resetting to a lower level of civilization, like Ballmer wants us to. As long as the elites stay in place on the ride down, what to they care?

Modern mom said...

As a victim of Countrywide's race to the billions, we are horrified to learn just how unsavory the lending business really is. We'd like to point out that our property always magically met the mark and we got our money. Isn't that amazing? We finally discovered the ugly truth when everything crashed and we were left unable to move to a senior living community. We will be here until the rafters tumble down. At least we'll save money on a burial lot. We're living on it now.