Don’t blame minorities for the financial crisis, blame the banks

There is a really rancid and intellectually dishonest narrative developing again on the right on financial reform.

Instead of regulating the banks, they are trying once again to blame the financial crisis, the global recession that followed and subsequent Wall Street bailouts on Fannie Mae and Freddie Mac — which is code for minority homeowners, many of whom lost their homes during the fallout of this debacle.

With all the obvious excesses and abuses within the financial market, it would seem ridiculous. But they have managed to peddle even more ridiculous narratives in the past — like death panels.

Here’s their basic premise:

Back during the Carter Administration, the country passed the Community Reinvestment Act to encourage homeownership among minorities. The CRA, of course, came directly upon the hills of redlining — essentially the way the banks did business up until the CRA, which was effectively refusing to lend to minorities.

To fully understand this intellectualized racebaiting, you really need to read the words of The Wall Street Journal’s Charles Krauthammer.

“Much of the crisis was brought upon us by the good intentions of good people.” He continues: “For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.”

So, the banks failed because the government forced them to lend to minorities. It wasn’t the banks. It wasn’t the ridiculous mortgages. It wasn’t the flipping and packaging of those mortgages, removing any incentive the banks had to ensure the lenders could pay. It wasn’t a lack of oversight. It wasn’t the blatant targeting of the poor and elderly to refinance their homes. It was “liberals” who pushed for the CRA and those damn minorities and people with bad credit for not paying their mortgages.

And here’s why it’s a load of B.S.

First off, the CRA, applies only to depository banks. The banks that spurred the growth in the subprime market weren’t regulated banks. It was firms like Argent, American Home Mortgage, Countrywide. An analysis of Home Mortgage Disclosure Act (HMDA) data in the country’s 15 biggest metropolitan areas found that 84.3 percent of the high-cost loans made in 2006 were originated by non-CRA lenders—including 83 percent of high-cost loans to low- and moderate-income individuals. According to the Federal Reserve, non-CRA lenders were twice as likely as CRA lenders to issue subprime loands to vulnerable owners. The Federal Reserve also reported that responsible mortgages made by CRA lenders have about the same low rate of foreclosure as other traditional mortgages

The CRA never told the banks to make loans with no-money down. It didn’t tell the banks to throw their underwriting stnadards out of the window. And it certainly didn’t tell the credit-rating agencies to to give high-grade ratings on subprime debt. This market was created by the banks because they knew there was a hunger among investors for high-yield premiums, a quicker and bigger return on their investment.

Also, Fannie Mae Freddie Mac did not invent the subprime loan. The subprime loan is a symptom of the problem not the cause.  It would be more logical, though also wrong, to blame global investors who were greedy for the high-yield premiums that these subprime loans offered. They were the ones gobbling up the packages indiscriminately. It would be more logical to blame the regulators for giving these subprime loan packages Grade A credit ratings when they were clearly riskier bets — which is why the payoff was greater. They were a gamble and should have been graded that way, but weren’t.

The most logical, of course, would be blaming the banks. The banks were double dipping twice over. They would make money off the front end due to the higher interest rate. Then, they bundled these packages and then dumped them on investors, so they never had to expose themselves to the added risk — for which they charged the higher interest. Then, the banks put those packages into the derivative market, where they double dipped again — betting on their failure.

The second reason it’s a bunch of B.S. is that, though the subprime crisis has caused the most massive destruction of wealth in Black and Latino communities, that’s not what killed the economy and forced us into a real estate crisis. The real estate bubble is largely due to speculation and flipping on a much larger scale than families of color not being able to make monthly their house payments. Speculators were buying up multiple residences with little or no money down using exotic adjustable rate mortgages that required balloon payments, which is not even a subprime loan. It’s a loan that is literally designed for speculation. The logic here is that the investor, the speculator, would sell the home by the time the balloon payment came due. And many did, but when the bubble burst, those homes were foreclosed on. That happened on a massive scale in many boom markets like Florida.  Think about WCI Communities in Miami. When it went bankrupt, one company, one group of investors, tens of thousands of condominiums were left hovering on the market.

But the biggest reason this whole blame-the-minority line does not hold is water is that it has been proven time and time again through smaller lending programs that there is nothing inherently risky about lending in working-class or minority communities.

What really happened

It was a combination of excessively low interest rates, the hunger for high yields (risky and increasingly exotic lending instruments) and either a genuine lack of understanding in terms of how much risk was involved or a crafty process of shifting that risk and fraud. And this was all caused by a lack on transparency — which is at the heart of the crisis —  the whittling away of underwriting standards and a lack of regulation.

See the story.