White House Philosophy Stoked Mortgage Bonfire
By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

… “The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

… “We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

As I explained in detail back in October in “Karl Rove — Architect of the Minority Mortgage Meltdown.”

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

http://www.whitehouse.gov/news/releases/2002/06/20020617-2.html

For example, in Bush’s July 17, 2002 address to the African Methodist Episcopalian church in Atlanta to promote Bush’s October 15, 2002 White House Conference on Minority Homeownership, the President said:

“Now, we’ve got a problem here in America that we have to address. Too many American families, too many minorities do not own a home. There is a home ownership gap in America. The difference between Anglo America and African American and Hispanic home ownership is too big. (Applause.) And we’ve got to focus the attention on this nation to address this.

“And it starts with setting a goal. And so by the year 2010, we must increase minority home owners by at least 5.5 million. In order to close the homeownership gap, we’ve got to set a big goal for America, and focus our attention and resources on that goal. (Applause.) …

“And so here are some of the ways to address the issue. First, the single greatest barrier to first time homeownership is a high downpayment. It is really hard for many, many, low income families to make the high downpayment. And so that’s why I propose and urge Congress to fully fund the American Dream Downpayment Fund. This will use money, taxpayers’ money to help a qualified, low income buyer make a downpayment. And that’s important.

“One of the barriers to homeownership is the inability to make a downpayment. And if one of the goals is to increase homeownership, it makes sense to help people pay that downpayment. We believe that the amount of money in our budget, fully approved by Congress, will help 40,000 families every year realize the dream of owning a home. (Applause.) Part of the success of Park Place is that the city of Atlanta already does this. And we want to make the plan more robust. We want to make it more full all across America.”

Mortgage dollars for home purchases flowing to Hispanics increased 691% from 1999 to 2006 versus about 100% for whites.

A lot of people can’t imagine that minorities can make much of an impact but when you look at data from the Federal Home Disclosure Act database, you’re eyes should be opened.

By 2004-2007, minorities accounted for half of all subprime dollars, purchase and refinance. In 2006, minorities accounted for 34% of all kinds of mortgage dollars, subprime and prime. In 2006, the average mortgage of any kind taken out by a Hispanic was a few thousand dollars larger than the white average — that’s because Hispanics are so concentrated in Housing Bubble states, especially California.

Contrary to what the host says, foreclosures tend to be concentrated in working class districts, typically heavily minority. For example, in Los Angeles County, the nation’s largest, foreclosures have, so far, been minimal in wealthy white and Asian places like Santa Monica. They’ve been quite high in Non-Asian minority districts like Compton (which is now majority Hispanic), and overwhelmingly high in mixed ethnicity blue collar exurbs like forlorn Lake Los Angeles in the distant high desert.

Until I heard partisans impugning the Community Reinvestment Act. Suddenly it became clear. The CRA was the product of successful local community organizing to reform lending practices (behavior) and to ensure greater transparency concerning lending to allow for public scrutiny (regulation of a kind). Also at the local level, activists were able to convince community-based lenders to focus their practices on social improvement, and research shows that where activists were successful in organizing to apply pressure, both the character of lending – and the local government’s own housing activities – produced gains in affordable housing (for example).

Thus the hostility to CRA and to community organizers more generally. Thanks, Barry, for bringing this to our attention. I too choked on the op-ed piece. With the recent campaign to put it into context, now I understand better why it’s the bogeyman – and why progressive reforms in urban policy (duh – WHAT urban policy?) and housing in particular will be hard-won victories.

I saw Lonesome Dove on last week. Couldn’t help but watch, even tho I have the DVD collection.
Those were the days. Love that one on a shutin winter day.
“they say your a Man of Vision … ya … hell of a vision”

To add the obvious: in a world dominated by the politics of the “Washington Consensus” and globalized financial markets these factors are of course global (if free credit is available in the USA and in Japan, it does not stay confined to the USA and Japan) and would affect most countries at the same time.

Except of course those like Germany whose political and business elites do not subscribe entirely the the Washington Consensus and “beggar thy worker” policies.

The ultimate root cause is political, the rise to power of the financial rentier class, that has happened thanks to the anti-labor, anti-business political movements of Reagan, Thatcher etc. This happened in a lot of countries and even got a name, the “Washington Consensus”. This resulted in a huge transfer of resources and power from primary, secondary and tertiary industry to financial speculation, who bought politicians.

The economic ultimate causes are two: the essential abolition of the fractional reserve requirement, and the 0% yen carry trade, both of which started in 1995-1996. This created a colossal amount of essentially free money, which was used by financial speculators as zero-cost input in lending at a high price to the rest of the economy. A third political cause was the integration of the ex-second world (ex-communist) economies in the rest of the world economy, which greatly reduce the global bargaining power of the workers in first-world economies.

Everything else is a consequence, and a pretty immediate one too. Only fools would not borrow at 0% or not create credit if there is zero reserve requirement, and use that to buy assets.

1) yes, our morgages were securitised in the same way via CDOs. In some cases it was the same banks doing the lending in both US and UK: e.g HSBC, who for some reason were known as a cautious lender in the UK but my understanding is that they were a big part of the sunprime action in the US. Santander did alot of morgages in the UK via Abbey National, and of course did the same in Spain.

2) As mannwich pointed out, the cultural/media pressure was immense. Nightly property development shows, pressure to get on the ladder before it got too late, watching the Jones-next-door net worth rocket via their buy to let portfolio. Buy-to-let was the main driver in the UK, much of which I think was financed just by short term wholesale borrowing without even much securitsation (e.g. northernrock, bradford&bingley), with plenty of normal middle class families owning 3-4 proprties. In factthe people with several investment properties were seen as the sensible ones. The real ‘idiots’ just withdrew equity from their only property and spent it on pure consumption.

3) Same regulatory failure as in the US. Its embarassing how our administration just took their lead from the US, no questions asked, whether it was iraq, finance or mortgage lending. And it is true to say that this started with Blair, who in turn took his lead from Clinton initally, before W.

Cause and effect, my ass.

Actually, colion, I don’t think the IBD goes far enough. Rather than blame Clinton and the CRA, I think we need to pin the blame where it truly belongs: with Abraham Lincoln and the 13th Amendment.

If we never had Lincoln, if we never saw the passage of the 13th Amendment, blacks would still be slaves and we wouldn’t have so many minorities getting mortgages.

Ultimately the CRA is a civil rights bill, so it’s just a continuation of the process that began with the 13th Amendment and continued through the Civil Rights Act and the Voting Rights Act to the present, or at least until 2000.