Once again, Race

Expert: Boston study at root of housing crisis
Battle over blame

Angry taxpayers and politicians looking for someone to blame for the current economic crisis may have no further to look than the Boston Federal Reserve Bank, according to a top academic.

The stunning rise in U.S. home foreclosures, which is a root cause of what has become the greatest economic crisis since the Great Depression, was made possible by flexible mortgage-lending standards championed by the Boston Fed in the mid-1990s, according to Stan Liebowitz, an economics professor at the University of Texas at Dallas.

In 1992, four Boston Fed researchers argued in a landmark study of Home Mortgage Disclosure Act data that there were “substantially higher denial rates for black and Hispanic (mortgage) applicants than for white applicants.”
The Fed study concluded that “a black or Hispanic applicant in the Boston area is roughly 60 percent more likely to be denied a mortgage loan than a similarly situated white applicant. . . .

“In short, the results indicate that a serious problem exists in the market for mortgage loans, and lenders, community groups and regulators must work together to ensure that minorities are treated fairly.”

Lynn Browne, who co-authored the 1992 study, was the Boston Fed’s deputy director of research at the time and now serves as its executive vice president in charge of communication. She said co-author Alicia Munnell approached her to do the study because “community activists were complaining that mortgage loans were not being made in minority communities.

“It did not seem satisfying to have to keep responding, ‘We need more data,’ ” Browne said.

Liebowitz, a longtime critic of the study, says it was rife with data errors.

In fact, there were enough critics of the study - and the issue had become so politicized - that, in 1995, Browne and another one of her co-authors published a 26-page article rebutting critics’ arguments.

“My guess is that they were interested in finding a particular result,” Liebowitz said. “Richard Syron was head of the Boston Fed at the time. He went on to be the head of Freddie Mac. They were looking for mortgage discrimination and they found it.”

The Boston Fed study got a lot of attention. It put banks on the defensive against charges of racism and gave community activists and minority groups ammunition in what became a very ideologically driven push to expand homeownership in America.

Once again, the Boston Fed led the way and the Fed’s next step is what, according to Liebowitz, “really opened up Pandora’s box.”

The Fed published a guide in 1993 for banks on equal opportunity lending, with a foreword written by Syron. The guide recommended changes to mortgage underwriting standards and practices that, according to Liebowitz, is where we find the seeds of today’s mortgage meltdown.

The guide says “management should be directed to review existing underwriting standards and practices to ensure that they are valid predictors of risk. Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.”

Among the recommendations in the Boston Fed’s 1993 “Closing the Gap: A Guide to Equal Opportunity Lending”:
Special consideration could be given to applicants with relatively high obligation ratios who have demonstrated an ability to cover high housing expenses in the past. Many lower-income households are accustomed to allocating a large percentage of their income toward rent.

Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations or municipal agencies to cover part of these costs.

Lack of credit history should not be seen as a negative factor. Certain cultures encourage people to pay as you go and avoid debt.

Lenders should focus on the applicant’s ability to maintain or increase his or her income level, and not solely on the length of stay in a particular job.

In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part-time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments and unemployment benefits.

Liebowitz argues that these recommendations - which began as well-intentioned efforts to prevent racial and cultural discrimination in mortgage lending - overreached.

He also says the widely disseminated guidelines were misused or exploited by lenders, some well-meaning and some predatory, and laid the groundwork for abusive practices - such as no-money-down, option adjustable-rate-mortgage and liar loans - that have spiraled into the mortgage meltdown the country is faced with today.

Hat tip: Dave Amos

“What was the impact of this attack on traditional underwriting standards? As you might guess, when government regulators bark, banks jump. Banks began to loosen lending standards. And loosen and loosen and loosen, to the cheers of the politicians, regulators and GSEs (government-sponsored enterprises),” Liebowitz writes in “Anatomy of a Trainwreck: Causes of the Mortgage Meltdown,” a chapter for an upcoming book, which he provided to the Herald.

As for Browne and the Boston Fed, they don’t see how their well-intentioned effort to fight discriminatory lending could have gotten the country into this mortgage mess.

“I think it’s a real stretch,” said Browne last week. “I don’t see much of a connection other than the initial efforts of banks to respond (to the guide) showed that there was a market there. That may have piqued some interest (from predatory lenders).”

Browne said the housing bubble can be blamed more on a big expansion of the broker community, rising house prices and increased demand.

Regulatory changes and lax enforcement also helped accelerate the crisis by allowing Wall Street firms and others to buy more and more of the securities backed by these risky mortgages, experts argue.

“I disagree very strongly with the idea that this (guide) set us on a slippery slope,” Browne said.

Syron left the Boston Fed in 1994 and wound up as CEO and chairman of the Federal Home Loan Corp., or Freddie Mac, in 2003. As head of Freddie Mac, Syron has said he faced increasing pressure to buy up more and more risky mortgages, some of which the Boston Fed’s guide had, in effect, served to legitimize.

When too many of the mortgages went bad, the federal government stepped in last month to take over Freddie Mac and another government-supported enterprise, the Federal National Mortgage Association, or Fannie Mae. Syron and Fannie Mae chief Daniel Mudd were ousted.

Liebowitz says Syron deserves a fair share of the blame for what has happened.

“Richard Syron was most recently head of Freddie Mac where, his total compensation in 2007 was $18.3 million. Nice reward for presiding over unprofessional research behavior, bankrupting Freddie Mac and crippling our financial system, all in the name of politically correct lending,” Liebowitz quipped.

Syron could not be reached for comment.

In defending the Boston Fed’s position, spokesman Joel Werkema said: “The (1993) manual was trying to be helpful. There was a moral imperative and a market that our study found hadn’t been served so well in the past. The message to banks was, think flexibly. Back then, you’ve got to remember, it was pretty hard to get a mortgage.”

By Frank Quaratiello
October 6, 2008

http://www.bostonherald.com | Business & Markets
Article URL: http://www.bostonherald.com/business/general/view.bg?articleid=1123690

Hat tip: Bob Cusack

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).
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Response by: Red State Patriot

" Back then, you’ve got to remember, it was pretty hard to get a mortgage.” Apparently for a reason!

If this is what liberalism and an attempt at socialized housing will do to the markets, imagine what someday will become of socialized medicine and socialized education. Forget that thought - it's already happened.

I hesitate to ask, what's next? Having already read, 'We The Living' by Ayn Rand, I know.

Just yesterday, Bank of America — one of this country’s “strongest” banks — revealed that its earnings plunged 68% in the third quarter. Why? Because the toxic loans in its portfolio made under pressure of political correctness, made to irresponsible demographics, are now imploding. Bank of America is having to pay more than $8 billion to modify (rather than let default) 400,000 troubled mortgages it bought in its acquisition of Countrywide. And because its own credit card customers, a large number of whom are illegal alliens, defaulted on a staggering $1.24 billion in credit card debt in July, August and September alone! If you were wondering, it has only just begun. Can you say Dow Jones Industrials - 6500 or lower?

Posted October 7, 2008 08:33 PM
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