[ExI] AIG Bail out

Lee Corbin lcorbin at rawbw.com
Tue Sep 23 22:54:43 UTC 2008


Well, I believe that at least *part* of the problem
lies in the way described below, taken from

http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0

-------------------------------------------------------------

THE REAL SCANDAL HOW FEDS INVITED THE MORTGAGE MESS
By STAN LIEBOWITZ
 
Did what gov't asked: Countrywide CEO Angelo Mozilo.February 5, 2008

PERHAPS the greatest scandal of the mortgage crisis is that it is a
direct result of an intentional loosening of underwriting standards -
done in the name of ending discrimination, despite warnings that it
could lead to wide-scale defaults.

At the crisis' core are loans that were made with virtually
nonexistent underwriting standards - no verification of income or
assets; little consideration of the applicant's ability to make
payments; no down payment.

Most people instinctively understand that such loans are likely to be
unsound. But how did the heavily-regulated banking industry end up
able to engage in such foolishness?

>From the current hand-wringing, you'd think that the banks came up
with the idea of looser underwriting standards on their own, with
regulators just asleep on the job. In fact, it was the regulators who
relaxed these standards - at the behest of community groups and
"progressive" political forces.

In the 1980s, groups such as the activists at ACORN began pushing
charges of "redlining" - claims that banks discriminated against
minorities in mortgage lending. In 1989, sympathetic members of
Congress got the Home Mortgage Disclosure Act amended to force banks
to collect racial data on mortgage applicants; this allowed various
studies to be ginned up that seemed to validate the original
accusation.

In fact, minority mortgage applications were rejected more frequently
than other applications - but the overwhelming reason wasn't racial
discrimination, but simply that minorities tend to have weaker
finances.

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.

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."

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.

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.

Flexible lending programs expanded even though they had higher
default rates than loans with traditional standards. On the Web, you
can still find CRA loans available via ACORN with "100 percent
financing . . . no credit scores . . . undocumented income . . . even
if you don't report it on your tax returns." Credit counseling is
required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out
one paragon of nondiscriminatory lending, which worked with community
activists and followed "the most flexible underwriting criteria
permitted." That lender's $1 billion commitment to low-income loans
in 1992 had grown to $80 billion by 1999 and $600 billion by early
2003.

Who was that virtuous lender? Why - Countrywide, the nation's largest
mortgage lender, recently in the headlines as it hurtled toward
bankruptcy.

In an earlier newspaper story extolling the virtues of relaxed
underwriting standards, Countrywide's chief executive bragged that,
to approve minority applications that would otherwise be rejected
"lenders have had to stretch the rules a bit." He's not bragging now.

For years, rising house prices hid the default problems since quick
refinances were possible. But now that house prices have stopped
rising, we can clearly see the damage caused by relaxed lending
standards.

This damage was quite predictable: "After the warm and fuzzy glow of
'flexible underwriting standards' has worn off, we may discover that
they are nothing more than standards that lead to bad loans . . .
these policies will have done a disservice to their putative
beneficiaries if . . . they are dispossessed from their homes." I
wrote that, with Ted Day, in a 1998 academic article.

Sadly, we were spitting into the wind.

These days, everyone claims to favor strong lending standards. What
about all those self-righteous newspapers, politicians and regulators
who were intent on loosening lending standards?

As you might expect, they are now self-righteously blaming those,
such as Countrywide, who did what they were told.

Stan Liebowitz is the Ashbel Smith professor of Economics in the
Business School at the University of Texas at Dallas.




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