September 17, 2008

Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities.

More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness.

The chickens have finally come home to roost.

About half of all mortgages for blacks and Hispanics are subprime, versus roughly one-sixth for whites. Not surprisingly, the biggest home price collapses have occurred in heavily Hispanic cities such as Las Vegas, Miami, Phoenix, and Los Angeles.

The mortgage bubble was essentially a bet on the purportedly increased creditworthiness of the bottom half of the American population. After three decades of the home ownership rate stalling at around 64 percent, a series of federal initiatives to increase minority and low-income ownership helped push the rate up to just below 70 percent.

As this graph from a 2006 article by three economists with the Federal Reserve Bank of St. Louis shows, the great bubble of the last dozen or so years was driven by bets on marginal households well below the median.

Economist William T. Gavin, a vice president at the St. Louis Fed wrote in 2006:

One of the stated goals of current and past administrations since the Great Depression has been to increase home ownership. After remaining relatively stable around 64 percent, the rate of home ownership has risen to 69 percent in the past decade. This uptrend has been driven by a sharp rise in the rate of home ownership among young, minority and low-income households.

In contrast, at least the previous bubble, the Internet stock boom of the 1990s, had a bit of prima facie credibility. It was a largely a wager on a three-phase business plan:

1. The smart fraction of American society would invent amazing new online services.
2. ?
3. Profit!

As it turned out, bright young people really did start up lots of websites that did things that almost nobody in 1994 had imagined. The problem turned out to be getting from Phase 1 to Phase 3. So many of them became competent at website creation that few (with the huge exception of Google) ended up with the kind of lucrative quasi-monopoly of which investors dreamt.

The housing bubble, on the other hand, never made much sense. The lower half of American society, where the new homeowners had to come from, isn’t getting better educated, is not settling down to more stable family structures, and is not developing a more rigorous code of honor about paying debts.

Nor was the government doing much of anything to help the bottom half earn more in order to afford home ownership. Indeed, by not enforcing the laws against illegal immigration, the Clinton and Bush Administrations were flooding the country with unskilled workers who competed down the wages of blue-collar Americans.

The home construction industry lured in Mexicans to build new exurban houses for Americans trying to get their children away from public schools overrun by the children of illegal immigrants”€”in effect, a Ponzi scheme that had to break down eventually.

It turned out, not surprisingly, that contrary to the assurances of the Great and the Good of both parties, many of these marginal homebuyers should have continued to rent.

Pushing black and Hispanics into buying was risky for all concerned. Economist Edward N. Wolff calculated that in 2004 the median net worth of black households was only $11,800, exactly one order of magnitude less than the median net worth of whites. (Hispanics were similar to blacks.)

Yet, pointing out that expanding credit to minorities was likely to lead to a debacle is not the kind of thing a prudent corporate manger would put in an email—too great a chance it would be discovered in a discrimination lawsuit.

For four decades, political leaders have viewed subsidizing minority home buying as insuring social peace. The Wall Street Journal reported on white flight from a Chicago neighborhood on March 2, 1977:

The whites in Marquette Park are particularly embittered over the Federal Housing Administration mortgage insurance program, which they claim is causing neighborhood deterioration by subsidizing home purchases by blacks too poor to maintain them. Long conservatively run and an engine of the post-World War II suburban housing boom, the FHA program was liberalized shortly after the 1968 urban riots to encourage lower-income black home ownership (‘if they own it they won’t burn it’ was the maxim of the time).

Whether home ownership actually precludes riots is uncertain. In the Florence-Normandie neighborhood in South Central Los Angeles, where the 1992 race riot broke out, five of every eight residences were owner-occupied.

Still, “if they own it, they won’t burn it” provides a hardheaded-sounding excuse for a complex web of policies that please real estate developers, who contribute so much to local campaigns. (For instance, Barack Obama has admitted to receiving a quarter of a million dollars from developer Tony Rezko, recently convicted on 16 counts).

Republicans theorized that raising the rate of home ownership would create more conservative voters, as Margaret Thatcher was said to have done in Britain by selling public housing flats to their tenants. Thus, George W. Bush campaigned in 2004 under the rubric “the ownership society.” As the President explained in his eye-glazing prose style:

…[I]f you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.

Thus, in a 2004 address to home builders, Bush called for the Federal Housing Administration to issue zero down payment mortgages in order to aid 150,000 first-time buyers per year, saying,

To build an ownership society, we’ll help even more Americans to buy homes. Some families are more than able to pay a mortgage but just don’t have the savings to put money down.

Long before Bush came up with the phrase “ownership society,” Democrats had gleefully been using this justification to funnel vast sums of mortgage money to their base voters among minorities through the liberal-dominated quasi-state institutions Fannie Mae (once run by former Obama adviser Jim Johnson) and Freddie Mac and via leftwing NGOs such as ACORN (to which Obama had long and close ties). The government both devised de jure quotas and leaned on lenders with discrimination lawsuits to get them to impose their own de facto quotas.

The strong growth in the homeownership rate from the early Forties into the early Sixties was a symptom of an economically and socially healthy society in which good-paying jobs were widespread and human capital was rising. The high school dropout rate, for example, fell steadily from early in the century until the end of the Sixties.

In the mid-Sixties, however, the fraction of households owning their residence plateaued at around 64 percent, where it more or less remained into the mid-1990s, as the collateral damage of the Sixties cultural revolution hit the lower half of the population hard. The upper reaches of American society flourished under the new customs that emerged in the Sixties … but they already owned their own homes. To boost homeownership beyond 64 percent would require millions of people in the bottom half of society to convert from renting to owning.

In retrospect, this post-Sixties stagnation of the ownership rate stagnation was hardly surprising. American society began fragmenting in the Swinging Sixties, reducing the number of grown-ups per household. For example, the percentage of babies born to unmarried women has risen from six percent in 1963 to 39 percent in 2006. The 22 percent black illegitimacy rate that so alarmed LBJ’s advisor Daniel Patrick Moynihan in 1965 has grown to 71 percent. The percentage of babies born to unmarried white women hit 27 percent in 2006, and the illegitimacy rate of Latinas, a category that barely mattered in the 1960s but now accounts for a quarter of all babies, is now 50 percent.

After 1973, economic inequality grew steadily as well.

Moreover, the human capital of the bottom half of society stopped improving. According to a 2007 study by Nobel laureate economist James Heckman, the high school dropout rate has risen from around 20 percent in 1969 to about 25 percent in 2000.

Rather than make the fundamental reforms needed to help the bottom half actually become economically productive and domestically stable enough to afford to buy a home, the government tried to juice the home-ownership rate directly. Indeed, without ever-increasing government efforts, such as the 1977 anti-redlining Community Reinvestment Act (CRA), to artificially boost minority housing purchases, the rate would have naturally fallen due to the increasing number of single parent homes.

The CRA enables leftist lobbies like ACORN to shake down big financial firms whenever they tried to merge. Economist Thomas J. DiLorenzo observed that the Community Reinvestment Act:

compels banks to make loans to low-income borrowers and in what the supporters of the Act call “€˜communities of color”€™ that they might not otherwise make based on purely economic criteria. … These organizations claim that over $1 trillion in CRA loans have been made …The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “€˜protest”€™ is issued by a “€˜community group.”€™ … They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

To avoid the Community Reinvestment Act hassles, more than a few respectable institutions avoided doing business in minority communities. A lender could define its “community” as, say, stretching only five miles north and south from Mulholland Drive along the top of the Hollywood Hills.

Then, who’s more likely to offer mortgages to Compton and Pacoima? Why, high-pressure bucket shop operations that have no skin in the game”€”they”€™re just sales outfits that immediately repackage often fraudulently documented subprime mortgages and sell them to Wall Street.

Two events in 1992″€”a much-publicized study and a new piece of legislation”€”ratcheted up mortgage affirmative action.

U. of Dallas economist Stan Liebowitz recently pointed out:

Yet a ‘landmark’ 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed”€”a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

As Peter Brimelow noted in Forbes on January 4, 1993, blacks had the same default rates as whites, suggesting racial fairness. After all, if current financial institutions were really discriminating irrationally against minorities, it would be highly profitable for a non-discriminator to enter the market, just as the Brooklyn Dodgers won six National League pennants in the decade after they became the first team to sign black baseball players.

In reality, as Insight on the News reported in 1999:

A recent study by Freddie Mac, the federally chartered Federal Home Loan Mortgage Corp. that buys mortgages from banks to resell to investors, documents the shaky financial standing of minorities. The study found that nearly half of black borrowers and a third of Hispanics have “bad” credit records—that is, they have a record of delinquent loans or bankruptcy—compared with a quarter of whites. Moreover, income does not explain the disparity, according to the study. Among people with incomes of $65,000 to $75,000, 34 percent of blacks have bad credit, compared with 20 percent of whites.

Today, however, non-Asian minorities (NAMs) have much higher default rates, suggesting racial bias has entered the system of judging creditworthiness.

Liebowitz went on:

Yet the political agenda triumphed”€”with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: “€˜discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.’

Liebowitz asked:

Some of these ‘outdated’ criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant’s ability to manage debt.

This is just standard operating procedure when the government wants private firms to impose racial quotas on themselves. The same procedure is used in hiring. Objective measurements that have ‘disparate impact’ on legally protected groups have been subjected to severe judicial and legislative review for decades, with the burden of proof severely resting on the firm.

Liebowitz goes on:

Sound crazy? You bet. Those ‘outdated’ standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Also in 1992, Congress passed the Government Sponsored Enterprises bill, which set “targets” (i.e., quotas) for Fannie Mae and Freddie Mac, which are quasi-governmental publicly-traded for-profit thing-a-ma-bobs, to encourage “affordable” and “underserved” (more or less minority) home loans.

Both the Clinton and Bush departments of Housing and Urban Development raised the quotas repeatedly. For example, initially, the Clinton Administration required 21% of these quasi-governmental mortgages must go to “underserved areas” (which are officially defined as “low-income census tracts or in low- or middle-income census tracts with high minority populations”), but the quota for 2008 established by the Bush Administration is 39 percent.

Reuters reported October 13, 1999:

The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups. ‘We need to push into these underserved markets as much as we can,’ said David Glenn, president and chief operating officer of Freddie Mac. …

In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.

The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.

Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets.

Now, even the head of Freddie Mac has protested that the quotas have become “perverse.” On March 12, 2008, Bloomberg News reported:

Freddie Mac Chief Executive Officer Richard Syron said he’s urging changes in federal rules that enabled too many low- and moderate-income Americans to buy houses they can’t afford. It’s ‘perverse’ that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged ‘to put people into homes that they end up losing,’ Syron said at a meeting with analysts and investors in New York.

Ironically, Syron helped get us into this mess when he was head of the Boston Fed. His Freddie Mac biography boasts, “Syron also was sponsor of a landmark study on racial discrimination in mortgage lending …”

Similarly, the Clinton Administration used the Community Reinvestment Act and Fair Housing Act to set, in effect, racial quotas for private lenders. Cynthia Latta, an economist with DRI/McGraw-Hill, commented in 1999:

We have created a tremendous amount of risk…Banks are under a great deal of pressure to lend in these communities. It is very political

The Fed pumped so much money into the system after 9/11 that, with stocks in disfavor after the Internet bubble burst, the liquidity flooded into the home market, postponing the day of reckoning in housing until now.

Straightforward tax-and-spend programs were out of favor in the 1990s, but lean-on-lenders for the benefit of your political constituents is always in season.

For instance, an article entitled “Fannie Mae Bending Financial System to Create Homeowners, Says Raines” reported in 2000:

Yet home ownership is unevenly distributed in society, [Fannie Mae head Franklin] Raines said. He quoted the famous pronouncement by W.E.B. Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th century is the problem of the color line. Du Bois also observed that the size and arrangement of people’s homes is an index of their condition…

In the early days of the movement, he said, there was a significant commitment of government funds. … Now, said Raines, more money is being invested in community development through private mechanisms, including Fannie Mae, which works through mainstream lenders to reach out to underserved communities.

During the 1990s, Fannie Mae pledged $1 trillion in capital over seven years to boost home ownership among underserved populations. Last spring, said Raines, the commitment was completed ahead of schedule, and Fannie Mae pledged a further $2 trillion to assist 18 million families during the next decade.

George W. Bush got in on the game too. The Bush Administration announced on June 17, 2002:

Today, President Bush announced a new goal to help increase the number of minority homeowners by at least 5.5 million before the end of the decade… The President also issued ‘America’s Homeownership Challenge’ to the real estate and mortgage finance industries to join in his effort to increase the number of minority homeowners by taking concrete steps to tear down the barriers to homeownership that face minority families.

Bush called for, “Creating new mortgage products to meet the unique needs of recent immigrants.”

The President bragged:

Many organizations have already responded to the President’s challenge by committing to substantially increase by at least $440 billion, the financial commitment made by the government sponsored enterprises involved in the secondary mortgage market, specifically targeted toward the minority market.

$440 billion here, $440 billion there, pretty soon you are talking about real money.

In 2004, President Bush promoted his Zero Down Payment Program for FHA insured loans, thus giving Presidential respectability to the ruinous trend toward no money down deals. MSNBC reported in a March 27, 2004, article subtitled “President wants to add new minority home owners:”

He also proposes to make zero down-payment loans available to first-time buyers whose mortgages are guaranteed by the Federal Housing Administration.

The Washington Post reported on June 10, 2008, in “How HUD Mortgage Policy Fed the Crisis:”

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending. Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more “€˜affordable”€™ loans made to these borrowers. … Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

None of this was controversial at the time, in part because being oblivious to the obvious about minorities is the hallmark of authority these days.

Thus, the home ownership increased over the 1994-2004 period by 8.6% for non-Hispanic whites, but by 16.1% for blacks and 16.7% for Latinos. I calculate that ethnic share changes alone between 1994-2004 would have driven down home ownership rates by 1 to 2 points. Instead, they went up 4 points.

Similarly, from 1994-2004, the ownership rate for married couples went up 7.8%”€”but by 15.2% for female-headed families.

One mystery remains: Why was Wall Street was so credulous about all these dubious mortgages?

Obviously, greed and fear are always at war on Wall Street. Perhaps, though, one reason greed outgunned fear while phony subprime mortgages were running amok in recent years was that so many were going to non-Asian minorities and that Wall Streeters assumed that the federal government would bail them out rather than see so many NAMs turned out on the street.

Further, lots of immigrants actually do have more income than they report to the IRS”€”illegal immigrants often get paid in cash under the table. As USA Today reported in 2007:

Hispanic families are more apt to have undocumented income, leading them to lenders who make loans without income verification, according to the National Council of La Raza.

Quite a few of the legal immigrants in Southern California are from mercantile minorities in West Asia who consider paying taxes something that only chumps do. The presence of all these immigrants who work in a grey market cash economy gives a mortgage company like Countrywide a rationalization for believing loan applicants when they put down an income figure that’s far above what they can document from their 1040: Who knows? Maybe Uncle Adnan’s import-export business really does generate enough cash to cover the loan. Who can tell for sure?

As Fred Dickey showed in his 2003 Los Angeles Times Magazine article “€œUndermining American Workers,”€ immigration has driven a large fraction of California’s economy underground. Not only can”€™t it be taxed, but it can”€™t be documented either.

And the problem is not just that “€œundocumented workers”€ get “€œundocumented mortgages.”€ It’s also that so many others get drawn into the “€œundocumented income”€ racket. For example, many of the highest rates of foreclosure are in fast-growing boomtowns like Las Vegas and exurbs like Palmdale, CA, where so many people are in the contracting business building and upgrading housing.

When some of these contractors get a mortgage for their own homes and the bank asks them to document their income, they wink and imply: “€My employees don”€™t want me to keep a lot of documents on them, so I pass my savings on to my customers who don”€™t want me to keep a lot of documents on them either. Just trust me.”€

And many contractors were getting rich in the housing boom, so they were safe bets as long as the boom went on even if they wouldn”€™t document their income. But a lot of the people applying for mortgages by claiming to be successful cash-only businessmen weren”€™t successful, and were just staying afloat by refinancing their mortgages as interest rates dropped and home prices went up. Ultimately, even the ones who were raking in the cash during the Bubble got hammered when the housing construction boom ended.

Finally, a compounding factor in the subprime debacle was that these complicated exploding adjustable rate subprime mortgages were disproportionately handed out to people who aren’t very good with numbers. For example, the Washington Post profiled the fraudulent straw-man mortgage received by a Honduran immigrant cook named Glenda Ortiz, who paid “€œtriple what the house had sold for the year before, and $5,000 more than the asking price…”€:

She agreed to a high-interest loan that would cost her more than $3,000 a month, more than 70 percent of the $4,200 that she and her husband brought home monthly. She signed papers in English that she didn’t understand. One said she was married to a man she didn’t know. She placed her financial future in the hands of a woman she barely knew who sold cosmetics and jewelry door to door. She sought no one else’s advice.

In contrast, a list of the ten places with the lowest ratio of subprime to normal mortgages consists of sophisticated San Francisco and nine classic college towns, such as Ithaca, NY.

In summary, while blame for this economic fiasco is deservedly widespread, multiculturalism bears a much larger share of the shame than it’s gotten so far.

As Brimelow wrote in National Review in 1993:

Classical socialism called for direct state ownership of the means of production, distribution, and exchange. Neosocialism just aims at political control. Socialism claimed to be more efficient. Neosocialism claims to be more equitable. Above all, neosocialism professes to combat “€˜racism,”€™ since this magic word cows all opposition.

Steve Sailer is a columnist for and the founder of the Human Biodiversity Institute.  He also blogs a lot.

This article was originally published on June 22, 2008.


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