Friday, October 23, 2009

Financial crisis hitting poor and minorities hardest; indictment of liberal government policies and worldview.

The current recession brought on in part by the housing bubble has hit the poor and minorities much harder than the middle class and wealthy. That's the point made by Peter Schweizer author of the new book, "Architects of Ruin." He describes the thesis of his book for the Powerline blog.

For all the ink that has been spilled about the mortgage crisis in America, there remains a secret that almost all the major media has ignored: for all the talk of unsold condos in South Florida and McMansions sitting empty in California, the epicenter of this crisis is really in urban and minority neighborhoods....

Studies show that those hardest hit by the financial crisis are poor and minority neighborhoods. A massive study by the Boston Federal Reserve Bank looked and hundreds of thousands of mortgages and foreclosures and discovered that "in the current housing crisis foreclosures are highly concentrated in minority neighborhoods." The study notes that this is a unique phenomenon, "even relative to past foreclosure booms." The study found that those in poor and minority neighborhoods were seven times more likely to lose their homes to foreclosure that then general population.
What's the reason this housing crisis has hit minorities and poor the hardest?
This reality gives us evidence to find out who got us into this mess in the first place: housing activities and government officials who pushed for and got an aggressive affirmative-action lending program for home mortgages.

The idea sounds appealing enough: encourage homeownership in order to reduce crime, unemployment, and broken families. But activities pushed their agenda by demanding that lending institutions loosen their lending standards and look the other way when lending to people with bad credit. Activist groups such as ACORN, the Congressional Black Caucus, and the Service Employees International Union pushed banks to use "less traditional income sources such as food stamps, unemployment, part-time jobs, non-court ordered child support and foster care payments" while considering a mortgage application.

Liberal activists also pushed banks to agree "to lower down payment and closing costs" for lenders. What this meant is that the borrower would have little or no money in the game--no incentive to hang on if times got tough. The activists also pushed banks to allow people to take out larger loans on lower incomes, upending the traditional notion that people should only be allowed to have a mortgage payment account for, say, 28% of their income. Activists argued that this was all necessary in the name of social justice.

Subprime lenders such as Countrywide were all too happy to go along because it allowed them to sign even more loans that they could eventually sell to Fannie Mae and Freddie Mac. Countrywide provided, in their own words, "zero- and low-down payment loans and underwriting guidelines that recognize diversity and cultural differences in the way minorities and immigrants may view and conduct their personal financial situations." Defaults and credit histories were now "cultural differences."

Angelo Mozilo, the CEO of Countrywide, proposed "elimination of down payment requirements for low-income and minority borrowers" to close the gap in home ownership. He wanted to look at "alternative payment histories" on loans and "properly factor in cultural differences on credit, income and spending habits." From a business proposition this made perfect sense. Countrywide was selling most of its mortgages to Fannie Mae anyway, so they wouldn't have to remain on the books. In any given year 30% of the mortgages that Fannie Mae was buying were from Countrywide.

But now that the mortgage bubble has burst, who are the activists blaming? If they once accused banks of making too few loans to minorities, now they claim they are making too many. They claim the financial crisis is a result of unscrupulous lenders giving high-interest or adjustable rate mortgages to poor applicants who didn't know what they were signing. When the rates adjusted, bam, they lost their homes. But the problem is there is little evidence to prove this. Indeed, the problem seems particularly focused on the black community.

The Boston Federal Reserve found in a study of subprime lending that blacks suffered foreclosure rates three times those of whites and Hispanics, and Hispanics twice that of whites, even when they had the same kinds of loans. Blacks tended to put less money down, had lower incomes, and had taken on more debt. They were given the loans because of the flexible underwriting rules activities and their allies in Washington had been pushing for three decades.

The Boston Fed study also found that when it came to adjustable-rate mortgages, the majority of people who lost their homes were foreclosed on before the rate was even adjusted. So it wasn't bad loans. The problem was an affirmative action lending problem that encouraged people to take out loans that they should not have.

There is also no evidence of racism in lending. A study by the New York Federal Reserve Bank looked at more than 75,000 adjustable-rate mortgages and found that minorities did not pay higher interest rates than whites. Indeed, the study concluded that "minority borrowers appear to pay slightly lower rates, as do those borrowers in zip codes with a larger percentage of black or Hispanic residents."

The real culprits here are the social activists and their allies in Washington who pushed an activist agenda. They helped to propel us into the mortgage crisis we face today.

This is a good illustration of the abuse of government power and a faulty view of human nature held by liberal politicians and activists. They thought they could use the levers of government power to create a more equitable society by government fiat rather than recognizing the importance of character and responsible conduct, e.g. living within one's means, not buying what you can't afford and so forth. The result? The ones liberals intended to help were the ones actually hurt the most.

I fear they are attempting to apply the same mindset to the health care problem. Their good intentions are misguided and will actually harm, in the long run, those they intend to help.

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