April 5, 2008-- Rich Lowery, NYP editorial.
AT the center of the housing crisis, we're told, is some one called the "predatory lender."
He gulled poor people into taking mortgages "designed to fail," as Hillary Clinton has put it, and as the housing market collapsed, he enjoyed the resulting foreclosures. The predatory lender sucks the life out of the American dream, and only new regulations can stop him.
Such is the myth driving the housing debate in Washington, where both Democrats and Republicans are rushing toward a mortgage bailout. Of course there are unscrupulous mortgage brokers and bankers, just as there are unscrupulous politicians. They earned their fees by deceiving people into taking foolish subprime loans. Then, as "securitized" mortgages, the bad debt was unloaded onto investors.
But the real cause of the housing mess is a classic bubble in the housing market, the bursting of which has hammered lenders as well as borrowers. If the market had continued to rise, we never would have heard complaints about subprime loans. In fact, Washington had long encouraged these sorts of loans through the Community Reinvestment Act (CRA) as a way to make marginal - largely minority - borrowers into homeowners.
What's the difference between socially responsible loans extending the American dream to deserving people with poor credit histories and predatory lending? It's whether those loans work out or not. If they don't, lenders suddenly become "predatory."
Strangely, the more "predatory" they become, the more likely they are to go out of business under the weight of worthless mortgages.
Consider Countrywide Financial, a leading purveyor of subprime loans rocked by the housing downturn. A few years ago, everyone was covering Countrywide in laurels. In 2000, the Spanish-language newspaper La Opinion named Countrywide "Corporation of the Year" for "outstanding work in the Latino community in 2004, the National Housing Conference lauded Countrywide's CEO for his "longstanding commitment to reducing the barriers to homeownership in 2005, the Lending Industry Diversity Conference gave Countrywide its "Best in Minority Lending Award."
Though Countrywide wasn't technically covered by the CRA, it complied with the act. The CRA forced lenders to lower their standards to get mortgages to more minorities and permitted the "securitization" - the sale on secondary markets - of subprime loans. Hillary Clinton complains, "Subprime loans are five times more likely in predominantly black neighborhoods." As if that weren't the entire point.
As long as the market continued going up, subprime loans were good deals. People got an appreciating asset without spending much on it. If they got in trouble, they could sell or easily refinance.
A new study by the Federal Reserve Bank of Boston finds that housing prices are the key determinant of foreclosures in Massachusetts. An estimated 18 percent of people with subprime loans will experience foreclosure. Of households that bought homes with subprime mortgages in 1998, however, "less than 6 percent will ever experience foreclosure, because they benefited from the state's historic run-up in house prices between 1993 and 2005."
For a glorious few years, all the rules had been suspended. Wall Street gobbled up subprime loans on the secondary market because the old underwriting standards seemed to be for fuddy-duddies. It was a typical mania.
Washington can now make it into a morality play, but it partook of the delusion: Both political parties celebrated the increase in homeownership; the Federal Reserve expanded the bubble with historically low interest rates; and the CRA positively demanded improvident lending.
The best thing for the housing debate would be for everyone to absorb some hard truths:
1) Housing prices rose 50 percent between 2000 and 2006, and no one is going to start buying again - or know how much mortgage-backed securities are really worth - until the market hits bottom.
2) It has to be more difficult to buy a home.
3) Out of the 46 million mortgages in the country, 42 million are being paid on time by people called "taxpayers." What they should fear is not foreclosure so much as the taxpayer-funded bailout schemes of predatory politicians. comments.lowry@
