Mortgage Bailout

Unbelievable Gall from the New York Times

by Hans Bader on December 9, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Nanny State, Precaution & Risk, Regulation

As economists and the Wall Street Journal have noted, the Community Reinvestment Act was an important ingredient of the financial crisis, by pressuring banks to make risky loans to people in low-income, predominantly-minority neighborhoods, even if such loans were unlikely to be repaid. Now those loans, which were economically unjustifiable, are defaulting, resulting in pain for both banks and borrowers alike.

So what does the New York Times recommend as a solution? To “strengthen” and expand the Community Reinvestment Act’s provisions “requiring banks to lend, invest and open branches in low- and moderate-income areas,” by making it even more onerous and inflicting it on even more lenders! As if we don’t already have enough risky subprime mortgage loans fueling the mortgage crisis. The mindset of a Manhattan liberal is truly beyond belief. If the definition of insanity is doing the same thing over and over again (even after it has proved unsuccessful), and expecting a different result, then the editors of the New York Times must be insane.

The New York Times is getting criticism for its role 75 years ago in concealing Stalin’s “terror famine,” in which the Soviet dictator deliberately starved to death six to ten million Ukrainians, in an artificially-engineered famine that the New York Times denied was occurring, even as its Russia correspondent, Walter Duranty, was writing glowing reports about Russian harvests, and receiving expensive gifts from the Soviet government. (The Times has refused to return the Pulitzer prize that Duranty and it received for their misleading coverage of life in the Soviet Union).

Banks Sued No Matter What They Do

by Hans Bader on November 30, 2008 · 4 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk

Banks get sued for discrimination no matter what they do.  If they don’t make enough loans in low-income, predominantly minority neighborhoods, they get accused of “redlining,” and are subject to sanctions under politically-correct laws like the Community Reinvestment Act, which contributed to the financial crisis by pressuring lenders to make risky mortgage loans. 

But if they do make such loans, they get accused of “reverse redlining,” and get sued by the liberal special-interest groups and municipalities that encouraged them to make such loans during the mortgage bubble.  Baltimore and various borrowers have also brought “reverse redlining” lawsuits against banks.

The Washington Post reported yesterday that bond-rating agencies like Moody’s and Fitch are now getting sued, too, for “reverse redlining,” under the theory that they encouraged risky loans to low-income minorities (who subsequently regretted taking out those loans) by giving respectable ratings to the mortgage-backed securities produced by packaging those mortgage loans.  The plaintiffs include the National Community Reinvestment Coalition, which has been pressuring lenders to make risky loans to low-income minorities for years.  They blame the ratings-agencies for allowing lenders to make loans to minorities with “insufficient borrower income levels.”

I’ve been a big critic of the ratings agencies in the past, even before the current financial crisis, for their lousy record of rating many kinds of securities, but this suit is meritless, and ignores legal limits such as proximate causation to boot.

We wrote earlier about how federal affordable housing mandates and diversity pressures contributed to the financial crisis.  Those federal mandates, which helped bring about the collapse of the government-backed mortgage giants Fannie Mae and Freddie Mac, remain in force even after the nationalization of Fannie Mae and Freddie Mac, which continue to buy up risky loans at taxpayer expense.

Don’t Scapegoat Free Markets

by Hans Bader on October 22, 2008 · 1 comment

in Bailout Watch, Economy, Legal

Even the liberal Washington Post (which has endorsed the more liberal candidate in every presidential election since 1952) points out that the “free market” is not to blame for the recent financial meltdown – a point also made in the conservative Washington Examiner and the liberal Village Voice.

“The market that failed was not exactly free,” notes its editorial:

The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government’s failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Bailout Bill Is A Threat to Democracy

by Hans Bader on October 2, 2008 · 4 comments

in Bailout Watch, Economy, Legal, Precaution & Risk

At least in its original form, the $700 billion bailout bill was unconstitutional because it gave the Treasury Secretary boundless discretion to buy, or not buy, bad loans at whatever suited his whims, without providing for judicial review.  More recent versions of the financial-system bailout bill may have added a little bit of judicial oversight (rendered almost meaningless by virtue of the minimal, vague, and conflicting statutory criteria they provide), but they have not changed the fact that the bill remains politically dangerous.

If the bailout bill passes (as seems likely), businesses seeking to sell their bad loans will have a powerful incentive to ingratiate themselves with whoever is president, and whoever is the Treasury Secretary, by making political donations and engaging in influence-peddling.  Expect vast political donations to the President and his party from banks and lenders if the bailout bill passes, effectively drowning out the voices of the American people. 

The incoming administration may be able to use it as a form of political patronage, effectively operating as a political slush fund for favored lenders.  During the New Deal, the government used welfare programs to essentially buy votes in swing states.  As a result, even though the U.S. economy recovered more slowly from the Great Depression than from prior sharp recessions, and even though it recovered more slowly than the economies of other Western countries which rejected big-government responses to the Depression (like Great Britain, where public employee salaries were cut), the incumbent administration was reelected an unprecedented four times.  

The same danger of vote-buying and veiled political extortion is present is an acute form in the financial system bailout bill that is likely to be enacted by Congress in some form.

Bailout Bills, Illegal Aliens, and Weird Lending Practices

by Hans Bader on September 24, 2008 · 1,268 comments

in Bailout Watch, Economy, Legal, Politics as Usual

The proposed $700 billion bailout is “dangerous, inflationary, unnecessary, and unconstitutional,” funds left-wing special-interest groups, ignores less costly ways of propping up financial markets, and fails to consider regulatory reforms that might reduce the need for a bailout.  It’s not clear why we should trust federal officials with $700 billion to buy up bad loans, without any clear standards or judicial oversight, given that governmental incompetence and government regulations (such as affordable housing mandates) helped spawn the mortgage crisis.  Many economists oppose the proposed bailout.

But some lending practices are hard to explain.  Why did so many lenders make loans to illegal aliens without steady jobs, who are now defaulting by the thousands, as Michelle Malkin notes?  Is it because of the societal (and governmental) obsession with diversity?

When I and my wife, a legal alien, bought our house, the mortgage company told me that if my wife were an illegal alien, rather than legal, we would have qualified for certain loan programs with big banks.  But because she was a legal alien waiting for her green-card (which she had recently applied for), we didn’t qualify.

Mark Krikorian, an activist against illegal immigration, argues that “we’re in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the “Diversity Recession” (if this doesn’t work, make that the Diversity Depression). In other words, if poor people in general, or blacks or Hispanics in particular, were less likely to be approved for a mortgage, the only possible reason was racism or classism or whatever. Thus ‘creditworthiness’ was an illegitimate, dead-white-male concept, like middleclassness. Because, after all, isn’t everyone entitled to credit?”

Another strange lending practice also popped up when I purchased a home.  I ultimately left my wife off the mortgage entirely, because I was told that since she had no credit history (despite being thrifty and having savings and no debts), putting her on the mortgage would actually get us a worse, higher interest rate than if I alone applied (I received a rate of 5%, a low rate by historical standards).

Why on Earth were we treated as worse off if my wife co-signed the loan, which makes no sense economically?  It’s not like having her on the loan would have made me any poorer or less able to pay.

People I’ve talked to have theorized that it is a byproduct of two things: (a) discrimination lawsuits, and (b) courts’ indulgence towards junk science.

If the bank gave loans to white people like my wife with no credit, or bad credit, the bank would later look bad if was sued for discrimination, even if it was innocent.  If a “fair-housing” group later sued the bank accusing it of discrimination, supported by a misleading “regression analysis” of the bank’s lending decisions, the bank could end up having to explain, at great expense, why it loaned money to my wife, but not to many minority borrowers who also had no credit or bad credit (never mind that my wife would have had a co-signor with good credit — me).

Why should such misleading regression analysis matter?  The Supreme Court may have opened the door to such junk science in its Bazemore decision, which allows plaintiffs to bring discrimination lawsuits based on obviously flawed statistics, such as regression analyses, as long as the plaintiff claims that the analysis includes all “major” variables, even if “minor” variables that also matter are deliberately left out, unless the defendant can prove that even major variables have been omitted.

Bailout Threatens Economy, Shreds Constitution, Rips Off Taxpayers

by Hans Bader on September 22, 2008 · 11 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Sanctimony

The stock market sank as the Bush Administration capitulated to liberal demands that its proposed $700 billion bailout of the financial system be expanded to add more costly give-aways, like “systematic” limits on foreclosure, that would allow irresponsible borrowers to remain in their homes at taxpayer expense.   The bailout is so extreme that it is unconstitutional.

Because of rigid federal accounting regulations that require Enron-style “mark-to-market accounting,” the bailout could actually deepen the financial crisis.  The bailout will reduce economic growth over the long run, and is logically inconsistent.

The bailout rips off people who lived within their means to pay their debts.  I can pay my mortgage, because I was frugal, and bought a little two-bedroom house on a fixed rate mortgage.  But reckless people in my region can’t pay their mortgage, because they bought big houses on adjustable interest-rate loans with low teaser rates.  Now that their introductory low rates have expired,  they can’t afford their payments.  The government is going to bail them out, at our expense.  While many defaulting borrowers have been living it up, buying fancy Lexus cars and eating expensive restaurant meals, I’ve been going through recycling bins on weekends searching for coupons.  (I found over $100 in baby food coupons that way).

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