A few political thoughts

[nancylebov]

Addendum: This is plenty to show that there's nothing to Sailer's theory about the cause of the financial crisis.

*****

It seems to me that if the pressure to have politicians with extremely clean records continues, we're more likely to get younger politicians-- they haven't had as much time to do anything wrong. Good thing, bad thing, a thing, or wrong theory?

******

I've never seen orderly, prudent people-- those who "played by the rules"-- so angry, and justifiably so. Could they form a separate political force, and if so, what would it look like?

Is it a bad thing to teach people that playing by the rules is all they need? It seems to me that this can lead to ignoring context because just paying attention to the rules is supposed to be enough.

******

A more standard question: if the American system applies strong pressure to have two parties, and one of the parties is in as deep trouble as the Republicans, what do you think will happen?

******

A while ago, I heard about a theory that the housing mortgage crisis was the result of a requirement to make too many loans to poor and/or minority borrowers. This seemed so obviously wrong-headed-- a great many of the loans were made to people who were neither poor nor minority-- that I didn't need to bother to read any of the details.

A friend sent me this recently, and it doesn't seem impossible that a requirement was put through that any bank which wanted to acquire another bank had to meet standards for making loans to poor and/or minority borrowers, with side effects including that the growing banks were eventually making bad loans, and since the big banks were making bad loans, they made bad lending practices look respectable.

Unfortunately, my google fu doesn't seem to be up to finding the refutations to Sailer's theory that I glanced at when they first came out.

I don't know whether loans that met those requirements were so common as to actually make a big difference, nor does it explain why poor and/or minority borrowers were steered into unrepayable mortgages when in some cases, they qualified for better terms that they could have repaid. Perhaps the false ratings which simply made larger loans look better when they were resold are enough to explain that.

In any case, it looks to me as though there was prejudice involved in that no one-- not government or the press or the charities or the banks-- was keeping track of whether those loans made any sense. Or at least, there doesn't seem to have been even an effort to make it public, and I do keep an eye out for predictions that got ignored. It's possible that such predictions have been ignored so deeply that even now, they aren't getting publicity.

Here's a larger view from This American Life.

It argues that the money looking for places to be invested doubled in less than the past decade, and when Greenspan lowered the rates on Treasury bonds so much that they were no longer attractive, it occurred to someone that mortgages could be combined into investments. At first good mortgages were used, but there was so much demand that when all the potentially good mortgages were sold, worse and worse mortgages were created.

The adjustable rates for the loans seem like a way to con poor people into taking loans they couldn't afford, but that's consistent with the banks using loans to poor people as a way to make the banks look good. And, of course, no one was expecting housing prices to go down.

It's conceivable that both theories are true-- the loans to poor people led to bad banking practices, and that's why there was a home mortgage crisis rather than some other sort of bubble (though eventually there were CDOs) or general inflation.

Comments

[siderea]

The Sailer piece implies that WaMu failed and BoA is on the rocks because they made rotten mortgages. Is that in fact true? I thought their distress was the product of buying CDOs. You know, the "CDO crisis". I don't know if, in addition to buying bogus investment instruments constructed of bum mortgages made by fly-by-nights, they, themselves, made offered such mortgages. If so, that's new and interesting to me. Would you know?

Alternatively, is the article arguing that banks got CRA credit for merely owning shares in CDOs that lent to certain demographics? Because given the enormous difficulty in mapping mortgage holders to CDO owners, I don't see how that could work in practice.

[sethg]

The standing-on-one-foot explanation of why Sailer et al. are full of it: The CRA only applies to federally insured banks and (more loosely) to bank subsidiaries and affiliates. Lots of non-bank financial institutions issue mortgages. If the CRA actually was pushing banks into making unsound loans, then we would expect the banks to be disproportionately represented among the subprime mortgage holders. Actually the reverse is true.

[fidelioscabinet.livejournal.com]

Minority mortgage holders =/= poor people. One of the big complaints that led to lending equality stuff is that otherwise qualified (per income, employment, credit rating) borrowers could not get mortgages because they were minorities, and were often, in addition, attempting to get mortgages for properties in minority neighborhoods (the old-fashioned term was 'red-lining" for that). However, while there are quite a few people in trouble over their mortgages who are minorities of various kinds, the main problem is loans made without sensible relation to income level, especially adjustable-rate loans, as well as the immense inflation in housing prices. However, simply equating "minority homeowner" with "poor person who is a lousy credit risk" ignores basic demographics.


There's an old rule of thumb for what percentage of your monthly income the mortgage should be--I forget whether it was a third or a fourth, but I know there was one. This old rule was completely ignored. People were also encouraged to take out second mortgages and to refinance their existing mortgages, again for a lot more money than they could afford; the value of their equity was often over-estimated, on the principle that real estate prices would never, ever drop. People, including those with what we would ordinarily consider "good" incomes, were buying houses at extremely inflated values--there was a Particle at Making Light some time back about housing collapses in the Phoenix AZ area, where things had been ovebuilt, and could not be resold because demand was behind supply.

Then there were the notorious "liar's loans" which was a trick employed by mortgage-offering businesses to issue a mortgage they could then turn around and sell--the recipient was told to state a figure for their income, which would never be checked--in fact, there was often no check made to even verify employment. Since the loan was going to be sold ASAP, it was not a problem for the issuing business if the loan was bad.

One of the factors that led to housing price inflation was Greenspan's insistence on exceedingly low interest rates--he was trying, he claimed, to prevent inflation and keep the economy expanding at a stable rate. He managed to create a housing bubble instead. Another issue affecting this has been the bankruptcy-reform legislation, which has made it very difficult for judges to make adjustments in mortgages, so that homeowners could deal with lower payments. There was also the tendency to push as many people as possible into home ownership--there are a lot of advantages to home ownership, but it's not a practical choice for everyone.

Loans to poor people did not automatically lead to bad banking practices--the avid desire to keep stock prices high by meeting Wall Street analysts' exaggerated earnings estimates did that. Banks, as well as plenty of other businesses, took bigger and bigger chances to meet and exceed these expectations. (It's one of the things that started Enron down the road to obliteration--they had a really great year, thanks to being in a position to take advantage of a great piece of luck--and then were under pressure to do this every single year, which is not possible--in any business there are good years, bad years, and fantastic once-in-a-lifetime breaks (good or bad). Legislation in the 1980s put businesses in the position of having to maximize short-term gains for investors, rather than being able to manage with a longer view in mind.

It always seems to be that there are those who are most comfortable blaming poor people*--but there were plenty of other bad, short-sighted choices operating to produce this problem, and simply pinning this all on the poor fails to address the fundamental flaws that have been installed in the system, and we have to fix those in order to improve the general economy in the long-term.

*It beats saying "there are things in the world-view I have been using that turn out to be flawed operating principles that must be adjusted or corrected." After all, who wants to have to admit they were wrong about something?

[dsgood.livejournal.com]

If the Republican Party is able to retain major party status in all states, it will revive.

In Minneapolis, the second party on the City Council is the Green Party rather than the Republicans. If the GOP falls far enough, then opposition to the Democrats will be a patchwork of independents and minor-party officials. Once there's Congressional caucuses with respectable strength, a new party will begin to form. It would have different names in different states.

In either case: the Republicans or the new party might be left of the Democrats rather than right of them. Or it may be liberal in some areas, conservative in others, with some local parties being radical left and others radical right.

[nancylebov.livejournal.com]

So the bottom line is that the law exists, but was misrepresented and had little or no effect on the crisis.

[nancylebov.livejournal.com]

Well, there've always been a lot of people (or is it just a matter of where I hang out?) who want individual liberty combined with a good social safety net. I wonder if they'll get something started.

[nancylebov.livejournal.com]

Minority mortgage holders =/= poor people. I hope you're arguing against Sailer here-- I was careful to say "poor and/or minority".

I've been reading about red-lining-- banks just turning down borrowers from certain neighborhoods, which meant that some people who were neither poor nor minority could get loans.

It's a practice that banks seem very attached to, and I'm forced to conclude that making money is actually not a very strong motivation, even for banks. Enforcement of status and/or not thinking harder than necessary seem to be stronger motivations.

I used to hear that you shouldn't be spending more than a quarter of your income on housing. I'm not sure if that was supposed to include repairs and maintenance as well as the mortgage, but I don't think it did.

If you haven't read or listened to the This American Life piece, I recommend it highly. It wasn't just that bad mortgages were being offered (bad terms for people who, in some cases, couldn't afford even reasonable mortgages), but that there was a huge amount of pressure to write more and more of worse and worse mortgages.

Do you have any reason to think Greenspan was lying when he said he thought he was doing what was good for the economy?

Could you give some more details about the legislation from the 80s that led to businesses operating more in the short term?

[malkingrey.livejournal.com]

Two things I'm currently very grateful for:

One, that when Himself and I bought this house, way back in 1989, we perforce (because it was a VA loan†) got a standard-issue 30-year fixed-rate mortgage instead of one of the newly-fashionable adjustable-rate or balloon mortagages.

And two, that very the first thing we did with our share of the proceeds of the sale of Himself's childhood home in Westchester County, NY, after hs mother's death, was to pay off that same mortgage.

†As Himself said, "Uncle Sam tried his level best to shoot me, drown me, and give me weird tropical diseases, and he failed. So now Uncle owes me a house."

[inquisitiveravn.livejournal.com]

I think the old rule was one quarter of your monthly income on the mortgage, one third on total debt, including the mortgage. That could explain your confusion on the proportions. When I was working at a mortgage company in the late 80s, it was 28% on the mortgage, 36% total debt, aka the 28/36 rule.

[avram]

Gee, Steve Sailer misrepresenting facts to make black people look bad? Who'd a thunk it?

Seriously, "mau-mauing the bank's CRA flak-catchers"? He's not even trying to fly under the radar.

[holzman.livejournal.com]

The last time I looked at the Wikipedia entry on the Community Reinvestment Act, it did a pretty thorough debunking of the idea that it had anything to do with the mortgage crisis.

The issue isn't that people sold mortgages to poor people. The issue is that people sold mortgages that customers couldn't afford. You can be Bill Gates and Ross Perot combined, and there's a mortgage that you can't afford, math just works that way. Poor people, middle class people, rich people, all of them got convinced to buy more house than they could afford because the regulations that prohibited banks from doing that were repealed. CRA had nothing to do with it. Indeed, I seem to recall that the Wikipedia entry includes links that document that CRA loans are less likely to be defaulted on.

[heron61.livejournal.com]

It argues that the money looking for places to be invested doubled in less than the past decade, and when Greenspan lowered the rates on Treasury bonds so much that they were no longer attractive, it occurred to someone that mortgages could be combined into investments. At first good mortgages were used, but there was so much demand that when all the potentially good mortgages were sold, worse and worse mortgages were created.

From everything I've read, this is the explanation. I've read a number of excellent articles on how the fact that using high-risk mortages as investments looked like a wonderfully easy way to make lots of money if housing prices kept going up, and no one [1] considered what would happen if prices fell.

[1] A few economists did, and have been writing about this for the past couple of years - I'll see if I can find the references.

[heron61.livejournal.com]

If the Republican Party is able to retain major party status in all states, it will revive.

Fortunately (from my PoV at least) instead of attempting to moderate their views, the Republican Party's reaction to losing big seems to be to get even more extreme, which is a lovely way to turn it into a purely regional party with limited national influence. In betting that this state will continue for a decade or so. After that point, either (most likely) someone will revive the party and come up with a significantly new direction for it (effectively remaking the party into something different) or (far less likely) someone will create a new party to replace them. I think the odds of the later happening are no better than 5%.

[heron61.livejournal.com]

*blinks* How is the current Democratic Party remotely against individual liberty?

In my ideal world, the Republican party would crumble, to be replaced by a revitalized Green Party that looked to the EU for it's ideas - effectively making the Democrats the conservative party, a role they seem admirably suited for.

[fidelioscabinet.livejournal.com]

I'm taking aimm a tSailer there, because the existence of midle-class minorities appears to a thing he cannot acknowledge existence of, no matter how long or hard this is shoved into his face.

I would say that banks are fond of making money, but are as vulnerable to memes as any other people or groups of people, and the memes minority member = poor risk, and largely-minority/minority neighborhood = bad neighborhood have been very powerful and hard to shake off--not that some even tried to do so.

There was a great deal of pressure to write mortgages, which is why some started falling back on the 'liar's mortgage'--if you couldn't produce legitimate customers, then dig up whatever customers you can find, because they won't be your problem for very long.

I don't think Greenspan was lying--I think he was an idiot who was so bound to his Randian notions that he ran head-first into a brick wall at a high rate of speed, and took the economy with him--not once, but twice, or perhaps three time--besides the mortgage & real estate bubble, there are the dot-coms, and, perhaps, also the Bush I recession--Reagan brought him in to replace Paul Volcker who was too cautious for the taste of the Reaganites.

I don't have the names/numbers of the specific bills from the Reagan era right now--I don't follow a lot of this closely enough to be on top of this, but you want to look for keywords like maximized profit, rational choice, and so on. I'm sure that some of the legislation was put through on into 1990s as well. One name to look for as a continual commentor on these things is Nouriel Roubini, who observations hav eproved to be highly on point and whose predictions have all too often been borne out.

[fidelioscabinet.livejournal.com]

That sounds about right--and it does explain why I was having trouble recalling the figures.

[bruceb.livejournal.com]

Nancy, Steve Sailer is an extreme white supremacist and a willing thorough liar. His stuff is disassembled from time to time at crookedtimber.org, and sometimes at Matt Yglesias' current place, the URL for which I'm not remembering. He will oppose anything he thinks is likely to benefit minorities at any cost to his beloved white race, and convinced that all problems afflicting whites come ultimately because of minorities and their corrupting influence.

I'm not exaggerating. It's just that he puts on a veneer of rationality so that it can take a while to realize how vile he is.

[captain-button.livejournal.com]

Brad DeLong has been denouncing this claim quite a bit. Some links to his blog:

(This may get me moderated for excessive links, ah well.)

http://delong.typepad.com/sdj/2009/01/supply-curves-slope-up-demand-curves-slope-down.html
http://delong.typepad.com/sdj/2009/01/june-22-2005-fannie-mae-decides-not-to-compete-with-the-private-sector-in-making-stupid-housing-loans.html
http://delong.typepad.com/sdj/2009/01/fannie-mae-and-freddie-mac.html
http://delong.typepad.com/sdj/2008/12/the-wsj-news-pages-weigh-in-dont-blame-cra-the-sequel.html
http://delong.typepad.com/sdj/2008/12/james-kwak-is-a.html

[nancylebov.livejournal.com]

Could you tell me more about the regulations which forbade selling mortgages that people couldn't afford?

[nancylebov.livejournal.com]

I know what Sailer's reputation is, but since I believe that finance, government, religion, and education have all contributed to this mess, I thought I'd check on whether well-meaning regulations to help poor people might have a piece of it, too.

Religion: apparently, the prosperity gospel (God will give you good things if you pray enough and give money to the right church) did its bit to convince people not to look at whether their mortgage made sense.

Education: I believe that conventional education is a long training in taking orders, ignoring whether what you're doing makes sense, and believing that the rewards you get for following the rules are all that you need to pay attention to or that the rules are just arbitrary restraints to keep you from getting what you want.

There are plenty of people who, whether by their own good sense or because their parents taught them well, still pay attention to more than what they're being told, but there were too many people (many of them with very expensive educations) who weren't at all reality-based.

[nancylebov.livejournal.com]

Gun ownership. And the Democratic Party has supported the war on drugs.

[tashadandelion.livejournal.com]

It's 41% of your gross income monthly that is now being considered "OK" to spend on total debt a month. I talked to a loan officer at a major mortgage company in the last month; that's how I got the figure.

[nancylebov.livejournal.com]

Thanks very much. That should be enough to put a stake through its heart.

[(Anonymous)]

Yeah, one thing that's irritating about this whole topic is that a lot of the folks who argue that CRA-related decreases in lending standards are to blame for the housing crisis (like Steve Sailer) have a relatively small set of proposed culprits for all social ills--(illegal immigrants, black criminals, white liberals).

Now, that doesn't mean that it's not true, though I think Avram's comment makes a pretty good surface-level argument against it being a major cause. One thing that is clear is that there was massive political support for:

a. Getting more and more people into houses, especially poor and minority people. (Steve Sailer documents this pretty well, though it's not like this is hard to find with a bit of Googling.)

b. Keeping house prices (and the whole massive sector of the economy based on them) rising forever. Surrounding this was the pretty-much-universal notion that buying a house was a wonderful, almost can't-lose, investment, a ticket to an upper-middle-class retirement.

These two were just flat incompatible--if you're poor enough to just barely be able to get into a house, then having house prices rise moves home ownership entirely out of reach.

My relatively uninformed intuition here is that the causality in this crisis probably went the other way. A big industry of mortgage brokers, investors, real-estate agents, developers, contractors, banks, and various related interested parties (like current homeowners and local governments dependent on property taxes) *needed* to keep being able to sell houses/sell mortgages. They managed to get the common practices changed in ways that clearly exposed investors to a huge amount of risk, partly using the poor and minorities as reasons. And this just coincidentally made them huge piles of money.

[nancylebov.livejournal.com]

Plausible, except that everything I've heard about mortgage crisis added up to it being driven by the finance industry. It's not crazy to think that the house-builders and sellers had a piece of what's going on, but I haven't heard of any evidence.

I agree that the ideas that everyone should own a house and that house is an absolutely wise investment were part of the problem.

Who are you? Your style sounds familiar, but I can't place it. If you prefer to be anonymous, please at least use a pseudonym-- I like to be able to tell one anonymous person from another.