Here’s the part that confuses me: to get the majority of people of color into mid class neighborhoods, didn’t they by definition, have to ignore their true ability to afford these homes, given the lower incomeb and wealth levels them?
Yes and not just China. The world was awash with capital looking for safe investments so there was pressure on investment funds to get that money lent out. Mortgage securities have traditionally been the safest and most boring choice (along with Treasury bonds) for cautious savers.
The logic is that everyone has to live somewhere so a home owner will do their utmost to pay the mortgage.
The jokey image at the time was about funds pouring in from Japanese housewives and Belgian dentists - which gives you an idea of why this became a global crisis.
Anyway here is a cartoon video which cleverly explains the sub-prime fiasco. No sound just like a proper comic strip.
I live in Melb.Aus. I assume that any political argument I read in the USA will be distorted and misleading. I assume that the timeline you’ve quoted is at best misleading, and at worst sheer fantasy. Having got that out of the way…
Here in AUS we deregulated before you. And we had governments of the left that effectively encouraged, by whatever means, low-start (balloon) loans to low-income people, in the belief that getting them into owning a home was a good thing, and that in the future, they were going to be able to make those home loan repayments.
Fortunately, our deregulation, which came with the same shonkey deregulated salesmen, and our low-start (balloon) loans, came at different times.
So our bust with the banks selling low-documentation loans, and false-documentation loans, happened at a different time than the victimisation of poor people trapped in legitimate loans with rising interest rates that they were never going to be able to pay off.
And both busts were much smaller, because the shady bank loans busted very quickly, because the repayments started immediately,
and the low-start loans to low-income people were only sold with legitimate full documentation to a relatively small number of people, to comply with the pressure being exerted by the government of the left.
The thing that amazed me about the USA bust was that you already had the example of Australia: you could see what was going to happen when you deregulated housing loans. And you could see what had happened to those people who, with the best of intentions, had been sold low-start loans to get them into home ownership.
And you still did it anyway. Both mistakes. At the same time.
I’m not aware of any legislation or regulation in Aus that made the banks offer low-start loans to poor people. The governments of the day told them that it was a good idea with a strong moral basis, and that they should avoid regulation and public hate by getting behind the idea. I think that was all that was required in Aus.
Your dad sounds much smarter than my dad. My husband and I are in the process of buying a house (we close on Sept 23!) and a couple of months into the house hunting process I bemoaned to my dad the fact that most of the houses in our area seem to be priced exactly the same, no matter how nice or how shitty. Beautiful 2000 sq ft farmhouse with a pool? Same cost as the 960 sq ft house 13 blocks over that caught fire last year. Seriously we saw a wide range of houses that were all essentially the same price and were all about 15-20k more than we wanted to pay. My father’s response? “$20,000 is only about 100-150 bucks a month more on your mortgage. The government made Fannie Mae give out those substandard loans to other people who were lowlifes with no job. You and Mr pbbth both work, you wouldn’t have any problems!” I am surprised I didn’t need surgery to reattach my retinas after how hard my eyes rolled back into my head. We worked with our realtor and found a much more affordable house that is in perfect condition in a good school district so we are thrilled, but there is definitely a subset of people out there who figure only welfare queens with their 7 kids in the back of their caddy that were given loans by the bank because the government made them were being forclosed on.
I believe that was Professor Watkins’ core argument.
To get any people of lower-than-mid-class income (regardless of national origin, etcetera) into the mid-class neighborhoods, the industry would have had to willfully ignore the applicants’ ability to afford those homes. That, from what I’ve read repeatedly, is the crux of the crisis. and the government’s accusation against the industry bigwigs who supported the practice.
What confused me (and spurred my OP) was that Watkins seemed to be saying the industry had to willfully ignore the applicants’ ability to afford those homes in order to comply with (Democrat) Government requests to prove they weren’t RedLining. My argument against Dr. Watkins* published perspective is that the industry didn’t have to ignore the applicants’ ability to afford those homes but nevertheless did so willingly. What they were asked to do was prove they were compliant with anti-RedLining laws – and the political affiliation of the requestor is irrelevant since those laws had been around through several administrations. Blaming the less-wealthy (particularly if they’re people of color) or anti-discrimination efforts is a red herring because all they were asked to do was prove they were compliant, and either they had been compliant or they hadn’t. Even if, as Watkins claimed, the industry started ignoring applicants ability to afford homes “in response to” the request to prove it wasn’t RedLining, the activity was a distraction (compounded by complicity and concerted effort) to take attention away from the industry’s proof – or lack thereof – and could do nothing to change the past.
As an analogy:
When I worked in the dorms, there was a student living there who hadn’t paid for her room in six months. She had gotten three warning letters and the third threatened eviction. The next week she filed a police report and called the local news and said, “Hey! I was raped by a janitor in my dorm!” Ultimately, she was expelled for fabricating a rape story to get around the eviction issue and she was facing criminal charges by the time I left that university. Had she just falsely accused the employee of rape, she would probably have just been expelled (though the janitor might have files a personal lawsuit). Since she did it to cover up something else, it was more of a criminal matter. If the housing industry had just said, “Well, we’ve still been redlining” they would probably have gotten fined and some bad press. Instead, (if that part of Watkins’ claim is true) they tried to divert attention from their past misdeeds by willfully ignoring applicants’ ability to afford loans. And the criminal charges will go on for years to come.
–G!
*I did not state it in the OP because I wanted to open a discussion, not just express my discontent and state my position.
If the industry was purposely excluding minorities from home loans, it doesn’t necessarily follow that these excluded minorities were subprime.
Ah, so it was the fault of all those colored folks and their quote-on-quote community groups. Good to know. Maybe the Republicans will come along and save us from these unsavories so we white folk won’t fall victim to the community organizers and their uppity communist philosophies!
It’s not so simple as that.
It’s common for accusations of various forms of discrimination to center on statistical analyses that compare rates of whatever for Group A versus Group B. If the ostensible victim group is getting whatever benefit at a lower level, then it creates a sort of presumption that there is discrimination going on. At that point the accused has a heavy burden to disprove the assumption, and even if they’re successful they are in for a lot of bad publicity.
It’s not impossible for this backdrop to influence business actions, especially if - as was the case here - conditions are otherwise ripe for it anyway.
That said, this is the first time I’m hearing the suggestion that the subprime mortgage crisis was linked to red-lining specifically. Generally the suggestion is that it was presure to increase home-ownership by lower income people (of all races).
The extent to which that contributed to the sub-prime mortgage crisis is a matter of considerable dispute. See here for some discussion.
Here is the Wikipedia definition of redlining
[QUOTE=wiki]
Redlining is the practice of denying, or charging more for, services such as banking, insurance,[2] access to health care,[3] or even supermarkets,[4] or denying jobs to residents in particular, often racially determined,[5] areas. The term “redlining” was coined in the late 1960s by John McKnight, a sociologist and community activist.[6] It refers to the practice of marking a red line on a map to delineate the area where banks would not invest; later the term was applied to discrimination against a particular group of people (usually by race or sex) irrespective of geography.
[/QUOTE]
Redlining has nothing to do with housing discrimination - which is another problem - but has to do with treatment of people living in a certain area. I’ve seen a Times report that in New York during the problem if you match neighborhoods by average income those in minority neighborhoods would be far more likely to be sold subprime loans than majority neighborhoods - same income levels, remember.
I’ve seen some disputes about whether redlining actually happens. But no matter - any bank that could prove they treated everyone equally would be off the hook.
Now, some of the biggest culprits like Countrywide were not even banks, and so not covered. And the loan writers financial incentives strongly encouraged writing subprime loans. And no one ever told banks to hide true income levels in writing loans, which they did.
We have plenty of documentation that banks and mortgage companies knew they were writing crap and selling it as gold. I’d like to see some documentation from banks saying they didn’t want to write subprime loans but had to. BoA is settling for $16 billion - (not exactly for writing the loans, more for selling them) - you’d think they could get this cut if there was any argument at all that the devil, I mean the government, made them do it. It appears they know better.
ISTM that this addresses a strawman. No one is saying that the government literally forced the banks to do this. The allegation (FWIW) is that it was very difficult to comply with government policies unless they did this.
That speaks to moral culpability and to policy recomendations for the future. It’s not a legal defense in court
During the Clinton administration, there were indeed changes to the Community Reinvestment Act, which I think is what you’re talking about. The intent was to strengthen the CRA and reduce redlining by lenders.
However, it is generally agreed that CRA loans were not the problem that caused the crisis of 2008.
From Wikipedia:
I remember reading in Joe Nocera’s All the Devils Are Here: The Hidden History of the Financial Crisis that a significant number, perhaps even a majority (can’t remember at the moment), of subprime loans were second and even third mortgages, and had absolutely nothing to do with the CRA, and that CRA loans generally outperformed subprimes.
The settlement is not a court settlement, it is a negotiated settlement. You’d think they could do better if they had the argument that they were pressured by the government, and had no alternative. We’ll see if Angelo uses this when they come after him - not that Countrywide was even subject to these pressures, not being a bank.
Still, do you dispute that they made a lot of money selling crap loans in the short term? Do you dispute that they actively solicited them? There were examples of old people whose homes were paid off already being convinced to take out a subprime loan - and then losing the house. Did the government pressure them to do that?
You settle based on what’s likely to happen if you go to court.
One doesn’t cancel out the other.
To the extent that government policies had a hand in encouraging the policies that led to the crisis (if they in fact did), that is not ameliorated by the fact that you can point to other villians.
They were fools. I am not especially sympathetic to these people, for the most part. No one forced them to take these loans, not the government and not the banks.
I’m woefully uneducated about the housing industry (which is another reason why I started this thread). Does ‘second and even third mortgages’ mean they were refinancing existing loans, or starting loans on second and third houses?
The bleeding-heart leftie in me has no sympathy at all for people (like my coworker) who had to foreclose because he couldn’t afford the loans on both his residence and the property he was renting out. Why did he take out the loans? To buy a 58’ fishing boat. :dubious:
–G?
*I’m envisioning little green plastic tokens at the tops of my Monopoly board spaces…
A second mortgage is a loan secured by the equity in your house. So, if you’ve paid off half of your first mortgage, you can get another, secured by the equity you now have in your house.
So it’s neither refinancing an existing mortgage – if you did that, you’d still only have one mortgage – nor a mortgage on a second property. That would still be a first mortgage (on that piece of property).
The settlement amount depends in no small measure on the probability of success in court - at least for cases where the settlement is >> the legal fees. I’d think that a strong case that the government pushed them to do it would have improved their chances and thus reduced the settlement.
But clearly the banks did not do the minimum to make the government happy. And Countrywide was not even covered by CRA. Why did they do it?
Well the government sure didn’t. No one forces anyone to fall for any scam - does that mean that the scammers who target the gullible are not culpable? That the victims deserve all the blame?
Still, the point is that if the problem was due to the government pressuring the banks, that does not explain the banks and others going after people whose mortgages would not count to them looking better. Doesn’t make the mortgage companies look very good, does it?
A loan on a rental property is not necessarily stupid. (And as mentioned, it is not a second mortgage.) If the payments and upkeep are covered by the rent, and if you have a better investment for the money, it might make sense.
For a boat, maybe not. The urge for consumption, coupled with a lack of growth in salaries was one reason for the run up of debt. The ads all described this as free money, and never mentioned cashflow at all of course.
One can have no sympathy for people who made unwise financial decisions, or who thought they were getting “free” money.
I have a bit more sympathy for those who were conned into thinking that housing prices would continue to rise forever, at a rapid rate, so they could always sell for more than they paid. Not all of us are especially financially sophisticated. I know I’m not.
But at the bottom of all this, lenders (banks and non-bank entities like Countrywide) were making loans that they knew were crap. And mortgage brokers were out there hustling these loans. Everyone knew the whole thing would fall apart sooner or later. It used to be that the risk a lender took was that the loan wouldn’t be repaid, but in this new environment, the risk they were taking was that they’d be the one left holding worthless paper, which they tried to avoid by endlessly slicing up and securitizing the debt and selling it to the next entity down the line. The one left holding the bag would be the sucker. It was a huge game of musical chairs.
And insurers didn’t help – the role of credit default swaps in all this was huge. They were selling air – there was no way they could cover all the debt that was inevitably going to go bad.
Not to mention the ratings agencies, who would rubber-stamp just about anything.
The strawman is that the CRA, and CRA loans, had anything to do with the crisis of 2008. They didn’t. CRA loans were generally made with reasonable care, following reasonable guidelines. They weren’t the “liar loans” and junk lending that spun out of control.
No, it wouldn’t. Because it’s not a legal defense, as above.
As I said above, this was not the only factor.
I don’t see any scam here.
If banks pretended that loans were 30 year fixed when they were really introductory low fixed periods - or something of that sort - then the people were scammed. If the lenders just aggresively sold their most profitable items and people failed to appreciate what was in their own interests, they were not scammed.
If a car salesman convinces you to buy a sports-car when you really needed a minivan, you were not scammed.
I’m not trying to make the mortgage companies look good.
Not so simple. Read the Wiki link in my post above.