Warning

 

Close

Confirm Action

Are you sure you wish to do this?

Confirm Cancel
Member Login

Posted: 12/3/2007 6:01:08 PM EDT
Column: Government regulation brought us the housing disaster

Robert Kelly
Eagle-Tribune
http://www.eagletribune.com/puopinion/local_story_336093910?keyword=secondarystory
The housing market is slow. Just ask someone who is trying to sell a house, or any real estate agent.

And this is more than just an inconvenience that touches a few people. It has caused a flood of foreclosures that have had a powerful impact on giant financial institutions like Citicorp ($11 billion), Merrill Lynch & Co. ($8.4 billion) and Morgan Stanley ($2.5 billion), and it affects the way that people feel about buying and selling.

Bloomberg.com, a leading financial news resource, states the global problem succinctly: "The surge in foreclosures has ... led to more than $40 billion of write-downs for U.S. financial institutions."

Why all the foreclosures? Is it recession? A flawed lending system? Corruption?

* Recession? The current unemployment rate is 4.7 percent, the lowest since 2001 and reasonably reflective of that economic indicator for the last few years. Given the realities of the mortgage picture now and for months ahead, it is easy to predict a lower GDP growth rate for a time. But the U.S. is far from a recession in November, 2007.

* The lending system? The 2005 revision of the flawed bankruptcy law, which corrected the easy gateway to bankruptcy that permitted credit card holders to walk away from debt, also brought unintended consequences that contributed to the foreclosure problem. When the easy path to bankruptcy was closed, people living on the edge had to make a choice: pay the mortgage or pay down on credit card debt.

And choose they did. Richard Fairbank, CEO of Capital One Financial Corp., summed it up nicely: "What we conclude is that people are saying, 'Honey, let the house go, but keep the cards.' "

Bankruptcy law appears at the tail end of the lending system. As previously written, it invited irresponsible borrowing. Correcting this flaw indirectly caused an undefined number of foreclosures.

* Corruption? Subprime loans are at the bottom of the foreclosure problem - they do not qualify for the best interest rates because of the borrower's deficient credit history. In short, they are risky.

There are two elements to this corruption issue: Corruption, in the ethical/legal sense; and corruption in the business sense.

Appraisal values have risen sharply for the last two decades. Lenders are aware that these values, in many instances, are far greater than the amount of the unpaid balance of the mortgage. And to some, this represents a pot of gold waiting for the sticky finger.

The scam goes something like this: A homeowner, often a person with limited education and usually unsophisticated about such things, wants to make a home improvement. He can't get a loan from his bank, so a "friend" directs him to an unscrupulous subprime lender. A $100,000 loan is secured by the owner's property.

By this time, monthly payments exceed the owner's ability to pay. Foreclosure is the end of the story; if everything works as planned, the lender also owns the property, and the borrower is out in the cold.

Such predatory monsters are part of the foreclosure scene - a small part, one hopes.

Beyond these various contributors to the high rate of foreclosures is the sheer number of subprime loans, which by definition represent high risk. A generation ago, they would not have existed.

How do we know foreclosures are essentially related to subprime loans? An inspection of foreclosures listed on the Internet provides that answer.

In Essex County, for example, 510 foreclosures are listed. Not all carry sales values, but it's informative to study the 344 that do.

Geographically, 55 percent are located in Lynn and Lawrence; 18 percent in Haverhill and Salem; 8 percent in Methuen and Peabody; Amesbury, Beverly and Danvers account for 9 percent. All other communities in Essex County - the richest ones - account for just 10 percent of the total.

Those with limited income and a choppy credit background seek the subprime loan. So it is no surprise to find that the preponderance of foreclosures comes from the low-income communities.

In terms of size, 8 percent of foreclosures carry a sales value above $300,000; 52 percent were over $200,000; and 39 percent were valued at less than $200,000.

This data makes the point once again that subprime loans are the villains. These are loans that would never have been made as recently as a generation ago.

When and why did lending practices change? Who was behind it?

There may be several explanations, but in reviewing the data, one name keeps coming to the forefront: former Congressman Joseph P. Kennedy II of Massachusetts.

Writing in the July 14, 1989 National Review, Susan T. Mandel noted, "Sniffing out 'discriminatory' lending practices has been one of Kennedy's top legislative priorities since he came to Congress in 1987. ... Mr. Kennedy's voting record (is) one of the most liberal in the House."

Several 1989 studies suggested that bank lending practices were prejudiced against blacks.

There was no denying that minority applications for loans were turned down more frequently, but realists recognized that this was mostly due to disparity in income. Those seeking to play the ethnicity card, however, ever on the alert to find instances of discrimination, pounced on the statistics and charged banks with racism.

Joe Kennedy jumped into the middle of this morass and added his voice and power to the charges being leveled. And before he was through, an amendment was tacked onto a savings-and-loan bill that changed forever the way loans are made.

Prior to his amendment, lenders were required by the Home Mortgage Disclosure Act to report only the location of their loans; after his amendment, they had to report the number and location of applications, the race and income of applicants, and the disposition of the applications.

As a result of this change, the federal government and activists were now in a position to micromanage the decisions of loan officers and to yell foul whenever the racial balance seemed askew in their eyes.

When federal pressure was applied, banks became defensive. Traditional measurements of loan value were bound to get them into trouble with civil rights groups because they would, for example, keep loans out of high-crime neighborhoods and away from low-income applicants, who were risky customers at best.

So the subprime loan appeared as a way to provide home ownership to marginal owners. Higher interest rates are supposed to recompense lenders for loan losses.

In this environment, where fear of government accusations is as powerful as fear of loan losses, is it any wonder that lenders may have also become lax - approving even the most tenuous loans in the belief that real estate values would always ascend, and they could get out with their money intact?

Ted Kennedy gave us the immigration mess; Joe Kennedy may have done the same for mortgage loans.

Robert Kelly
Eagle-Tribune


(page 4 of 4)
View as a single page

The housing market is slow. Just ask someone who is trying to sell a house, or any real estate agent.

And this is more than just an inconvenience that touches a few people. It has caused a flood of foreclosures that have had a powerful impact on giant financial institutions like Citicorp ($11 billion), Merrill Lynch & Co. ($8.4 billion) and Morgan Stanley ($2.5 billion), and it affects the way that people feel about buying and selling.

Bloomberg.com, a leading financial news resource, states the global problem succinctly: "The surge in foreclosures has ... led to more than $40 billion of write-downs for U.S. financial institutions."

Why all the foreclosures? Is it recession? A flawed lending system? Corruption?

* Recession? The current unemployment rate is 4.7 percent, the lowest since 2001 and reasonably reflective of that economic indicator for the last few years. Given the realities of the mortgage picture now and for months ahead, it is easy to predict a lower GDP growth rate for a time. But the U.S. is far from a recession in November, 2007.

* The lending system? The 2005 revision of the flawed bankruptcy law, which corrected the easy gateway to bankruptcy that permitted credit card holders to walk away from debt, also brought unintended consequences that contributed to the foreclosure problem. When the easy path to bankruptcy was closed, people living on the edge had to make a choice: pay the mortgage or pay down on credit card debt.

And choose they did. Richard Fairbank, CEO of Capital One Financial Corp., summed it up nicely: "What we conclude is that people are saying, 'Honey, let the house go, but keep the cards.' "

Bankruptcy law appears at the tail end of the lending system. As previously written, it invited irresponsible borrowing. Correcting this flaw indirectly caused an undefined number of foreclosures.

* Corruption? Subprime loans are at the bottom of the foreclosure problem - they do not qualify for the best interest rates because of the borrower's deficient credit history. In short, they are risky.

There are two elements to this corruption issue: Corruption, in the ethical/legal sense; and corruption in the business sense.

Appraisal values have risen sharply for the last two decades. Lenders are aware that these values, in many instances, are far greater than the amount of the unpaid balance of the mortgage. And to some, this represents a pot of gold waiting for the sticky finger.

The scam goes something like this: A homeowner, often a person with limited education and usually unsophisticated about such things, wants to make a home improvement. He can't get a loan from his bank, so a "friend" directs him to an unscrupulous subprime lender. A $100,000 loan is secured by the owner's property.

By this time, monthly payments exceed the owner's ability to pay. Foreclosure is the end of the story; if everything works as planned, the lender also owns the property, and the borrower is out in the cold.

Such predatory monsters are part of the foreclosure scene - a small part, one hopes.

Beyond these various contributors to the high rate of foreclosures is the sheer number of subprime loans, which by definition represent high risk. A generation ago, they would not have existed.

How do we know foreclosures are essentially related to subprime loans? An inspection of foreclosures listed on the Internet provides that answer.

In Essex County, for example, 510 foreclosures are listed. Not all carry sales values, but it's informative to study the 344 that do.

Geographically, 55 percent are located in Lynn and Lawrence; 18 percent in Haverhill and Salem; 8 percent in Methuen and Peabody; Amesbury, Beverly and Danvers account for 9 percent. All other communities in Essex County - the richest ones - account for just 10 percent of the total.

Those with limited income and a choppy credit background seek the subprime loan. So it is no surprise to find that the preponderance of foreclosures comes from the low-income communities.

In terms of size, 8 percent of foreclosures carry a sales value above $300,000; 52 percent were over $200,000; and 39 percent were valued at less than $200,000.

This data makes the point once again that subprime loans are the villains. These are loans that would never have been made as recently as a generation ago.

When and why did lending practices change? Who was behind it?

There may be several explanations, but in reviewing the data, one name keeps coming to the forefront: former Congressman Joseph P. Kennedy II of Massachusetts.

Writing in the July 14, 1989 National Review, Susan T. Mandel noted, "Sniffing out 'discriminatory' lending practices has been one of Kennedy's top legislative priorities since he came to Congress in 1987. ... Mr. Kennedy's voting record (is) one of the most liberal in the House."

Several 1989 studies suggested that bank lending practices were prejudiced against blacks.

There was no denying that minority applications for loans were turned down more frequently, but realists recognized that this was mostly due to disparity in income. Those seeking to play the ethnicity card, however, ever on the alert to find instances of discrimination, pounced on the statistics and charged banks with racism.

Joe Kennedy jumped into the middle of this morass and added his voice and power to the charges being leveled. And before he was through, an amendment was tacked onto a savings-and-loan bill that changed forever the way loans are made.

Prior to his amendment, lenders were required by the Home Mortgage Disclosure Act to report only the location of their loans; after his amendment, they had to report the number and location of applications, the race and income of applicants, and the disposition of the applications.

As a result of this change, the federal government and activists were now in a position to micromanage the decisions of loan officers and to yell foul whenever the racial balance seemed askew in their eyes.

When federal pressure was applied, banks became defensive. Traditional measurements of loan value were bound to get them into trouble with civil rights groups because they would, for example, keep loans out of high-crime neighborhoods and away from low-income applicants, who were risky customers at best.

So the subprime loan appeared as a way to provide home ownership to marginal owners. Higher interest rates are supposed to recompense lenders for loan losses.

In this environment, where fear of government accusations is as powerful as fear of loan losses, is it any wonder that lenders may have also become lax - approving even the most tenuous loans in the belief that real estate values would always ascend, and they could get out with their money intact?

Ted Kennedy gave us the immigration mess; Joe Kennedy may have done the same for mortgage loans.

Robert Kelly of Peabody is a regular contributor.
Top Top