A lot of subprime mortgage loans are defaulting. A big reason why is that, to avoid discrimination charges, lenders gutted their traditional lending standards in order to loan money to people with bad credit (bad credit is more common in some minority communities, so refusing to lend money to people with bad credit is alleged to have a racially “disparate impact”). The Community Reinvestment Act, which punishes banks that don’t make loans in high-risk areas, is also a key reason why (it was enacted and then made even more onerous by the very politicians who are now shrieking about the mortgage crisis they helped create).
Economics Professor Stan Leibovitz explains how this happened in The New York Post. John Derbyshire comments at National Review’s The Corner, noting that political correctness, not predatory lending, triggered the subprime mortgage crisis.
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I seem to have misspelled the economics professor’s name.
It’s Stan Leibowitz, not Stan Leibovitz. There’s no “v” in his name.
The good professor is obviously part of the lenders’ public relations campaign. It was caused by greed. No need for any study. Got that? Greed.
John Tancabel
Mr. Tancabel-
Could you please provide some data or other facts to substantiate your “greed” assertion? If, as you write, it is “obvious”, then providing this information should be relatively easy. In the long run, this will better serve your cause.
Most loan officers paid on a commission basis. During refi-mania, they pushed many borrowers who qualified for “A†loans into subprime loans. Why? They made $1,500 on an “A†loan and were paid $4,000 – 7,000 for a subprime loan. Many earned $200,000 to $400,000 for merely asking people their address, social security number, etc.
Merrill Lynch, Morgan Stanley, Lehman Bros., etc. were making lots of money packaging these mortgages into securities. They communicated to mortgage lenders, “we want more.†The lenders responded by saying, “only so many people qualify for loans.†Wall Street then said, “stop qualifying borrowers. Just ask them how much they earn.†We will buy every mortgage you make. The only requirement is that they must have a pulse. The mortgage lenders dutifully complied and lowered their underwriting standards so anyone with a pulse could get a loan. The lenders didn’t care as long as they could sell the loans to someone – and Wall Street was buying every loan that was closed.
Title companies were pocketing big dollars during these years. Only 15 % of a title insurance policy premium is used to pay claims. Recent lawsuits allege price-fixing among the insurers.
Appraisers totally left their integrity at home when they performed their appraisals. They valued homes at whatever value the loan officer wanted. An appraisal was a total waste of money.
Congress was told years ago by the FBI that there was rampant fraud in the mortgage business. Congress did nothing – because they liked the money Ameriquest and other lenders were contributing as campaign contribution. G. Bush appointed the head of Ameriquest as our Ambassador to the Netherlands, despite the fact that he would need mapquest to find the Netherlands. He basically purchased an ambassadorship. Now our Congressmen feign concern about the “subprime crisis.â€
The federal agencies, the OTS, OCC, FTC, who are supposed to be the policemen protecting the public from hyper-complex loans, permitted lenders they supervised to peddle these loans. They took no action against Ameriquest and it finally took the states attorneys’ general to get Ameriquest to obey the law. The agencies were neutered by political influence in Washington. We were paying for a Cadillac and we were getting a Yugo. The light bulb finally went on when the agencies saw many foreclosures looming on the horizon. To protect themselves, they issued “guidelines†to reign in some practices. Instead of acting as policemen, the agencies acted as undertakers, showing up when all the bodies were room temperature. Most employees were interested in becoming employed by the companies they were supposed to regulate – so no vigorous regulation occurred. I suspect they spent most of their time crowding around the copier making copies of their resume to send to lenders. The agencies took action against a few small companies, but nothing was done to curb the practices of Ameriquest, Countrywide, and other large lenders.
The Bush Administration somehow suppressed their impulse to be compassionate and supported the OCC in curbing any state consumer protection laws. The agencies dirty secret was that they abandoned their role as regulator and instead became an apologist for the excesses in the lending marketplace. The result is that these subprime loan foreclosures have reached into the minority community and stolen the wealth of equity built up over decades in a 1 hour closing. It shows the truth of the adage that you can steal more with a pen than with a gun.
Lending laws with no teeth permitted yield spread premiums, no consequences for not providing a good faith estimate or an accurate good faith estimate, allowed a lender to promise certain lending terms and then to surprise borrowers at the closing with different terms, did not require lenders to inform borrowers in writing that their ARM loan was a discounted ARM loan, permitted lenders to provide a modest loan program disclosure to consumers intended to enable them to weigh the risk of accepting an ARM loan, when Merrill, Morgan Stanley, CitiGroup, and others could not themselves assess the risk with the best financial minds that money could buy and as a result incurred billions of dollars of losses. These Wall Street Companies sold the packages of loans as above-market yields, while knowing that they were really a train wreck waiting to happen. That fact will become clear as pension funds and others due these Wall Street Companies.
No rational loan underwriting, inflated appraisals, inadequate regulation, and unfettered greed. It all resulted in the biggest fraud perpetrated on the American consumer. Thousands have been harmed. It is all quite shameful.
In the wake of the foreclosures, I have clients who have killed themselves, divorced their spouses, were prescribed anti-depressants, and abandoned their family in shame. I have met kids who cut themselves and shoplifted because they did not want to lose their home.
Despite this, the Mortgage Bankers contend the solution is not tighter regulation. What planet are they living on?
The subprime crisis has led to good times at the FBI, where things are booming. Investigators and the US attorney are convicting brokers, loan officers, appraisers, realtors, etc of a variety of crimes. This wave of crime will take years to sort out.
The subprime mortgage crisis came about for a multitude of reasons — not just because of “greed” or “fraud.”
The intrusive push by politicians to make homeownership more attainable for those who did not qualify for traditional prime loans (ex. The Community Reinvestment Act), along with the Federal Reserve’s policies of keeping rates too low for too long played a major role in creating the subprime “crisis.”
The low interest rate environment coupled with a rapidly appreciating real estate market led to lax underwriting standards by lenders, and exacerbated an already inflated housing bubble. When the Federal Reserve started to aggressively increase rates over an 18 month period of time, the housing bubble began to deflate. Lenders that once originated subprime loans by speculating on rising home prices, and the irresponsible homeowners that treated their homes as piggy banks went bust… and Wall Street is left with a slew of worthless paper.
Good points although I disagree on a few. I do respect your opinion however. Read more on the following topics Mortgage watchdog, mortgage advice, mortgage tips, review, low interest rate, fha help, avoid fraud, first time home buyer, cheap mortgage on http://www.brokerpolice.com
Good write-up!
So, I take it that you think think the Community Reinvestment Act and those who created/supported it are all TOTALLY BLAMELESS in this “cluster.”
Vice Presidential candidate and Alaska Governor Sarah Palin has been getting more negative attention than positive attention from the media. For example, last Saturday Palin made her late-night entertainment debut on Saturday Night Live. Instead of commending Palin for playing along or mentioning that her appearance gave SNL its highest ratings in 14 years, the press criticized her for her appearance. Palin has been under constant attack; the media has bashed Palin for her performance as Governor of Alaska, the pregnancy of her unmarried 17-year-old daughter, and even her character. The media has stooped to new lows by implying that the United States would self-destruct should Palin have to replace McCain as president. As is typical with unbalanced news-reporting, these attacks are misconstrued half-truths. In fact, Sarah Palin has a large number of admirers who commend her for her persistent effort to improve the state of Alaska. Other admirers point to her unwavering support of the disabled population and her push for the interests of special-needs individuals, like those with autism and Down syndrome. Many more followers put their trust in Sarah Palin because she advocates for personal responsibility and financial freedom. Palin opposes the elimination of cash advances, a legitimate and invaluable resource because people have the right to financial freedoms and the right to choose to get a payday loan.
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