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With the federal government working up a new housing ploy, I figured it’s timely to dredge up the 2008 short story I published in The American Conservative:

 

Unreal Estate

Memorial Day Weekend, 2005

“So, this guy joins a monastery where he’s not allowed to talk.” Travis, your brother-in-law, is telling a joke. He’s told it to you before. “After five years, the head monk tells him he can say two words. ‘Tiny room,’ the guy answers.”

“That reminds me,” Travis continues, “You kids have been engaged, like, what? Two years now? That’s great. No rush to get married, not with the market the way it is in West LA. Who can afford to marry and settle down in LA? I couldn’t. Georgie Cooney can’t afford to get married in LA.”

While you’re trying to figure out whether Travis means actor George Clooney or boxer Gerry Cooney, he’s already onto his favorite topic, “Still, isn’t it time to buy a place of your own? I mean, West LA’s a great place to meet somebody, but, c’mon, are you going to entrust your kids — and I know how much my wife’s little sister wants some (you know how women are, they can’t keep a secret) — to the Los Angeles United School District?”

You have this conversation, if you could call it a conversation, each time you visit your brother-in-law’s house. Travis lives out in the Santa Clarita Valley, an hour or two north of West Los Angeles. You get on the 405 at Pico, head over Sepulveda Pass, down through the Valley, onto the 5 and up through Newhall Pass into LA County’s northern exurbs.

You’re sitting on the edge of the Travis’s deck, overlooking a canyon lined with oaks and sycamores. It’s hotter out here than back in West LA, where your $1900 per month one bedroom apartment doesn’t have air conditioning because it seldom gets over 82. It’s hot out here, but it’s not bad. There’s a breeze blowing with a hint of the far-off ocean.

Travis says, “I’d be all for you staying in LA if you were an entertainment lawyer or something where you need to be working with the stars. But you manage a drug store and Emma’s a nurse. People buy drugs and get sick everywhere.

“I bought this place in 2000 for $255,000,” Travis says, repeating a number you know by heart now. “Here we are, five years later, and the Schmidts next door just sold their’s for $810,000. So I’m up, what, six, seven hundred thousand? The home equity loans have paid for some nice vacations, I’ll tell you. My house is my ATM.

“I know what you’re thinking,” says Travis, who generally does know what you are thinking.

“You’re wondering why I’m the lucky bastard who turned 32 in 2000 and decided it was the right time in my life to get out of an apartment in LA and buy a house back when houses in California were cheap. Meanwhile, you’re 32 in 2005, when they’re expensive. Well, they seemed expensive then, too. But I took the plunge anyway.

“I also know you’re thinking you don’t have $810,000. Who does? That’s what they got mortgages for. And you’re good with numbers so you’ve already figured out what a 20 percent down payment on $810,000 is. It’s, like … a lot.

“Okay, coupla things you need to bear in mind.

“First, Emma’s told me about how your dad always talks about the years saving up for the 20 percent down payment he made when he got that 30 year fixed rate mortgage on his little place in Sherman Oaks. “That’s ancient history. Dude, nobody puts down 20 percent down anymore, no matter how iffy they seem.”

Travis’s voice has gone up a third of an octave. When he’s talking about the Lakers or whatever, he’s laidback. But when he gets going on real estate, which is more and more often over the last couple of years, he lets his inner Dennis Hopper out.

“These days, somebody arrives in California from Gautelombia and wants to buy a house, do you think they make him document his credit history? It’s in Spanish, and who knows how many million pesetas were worth a dollar in 1985, and besides, the courthouse in El Carrumbo collapsed in an earthquake anyway, so he doesn’t have a paper trail. Documents? He’s undocumented. He don’t need no steenking documents! He just pays some extra points on his rate, but that’s all on the backend. Everybody’s happy.

“Don’t you watch the news? The President says down payments are un-American because they keep minorities from buying houses. But you don’t have to be diverse to get a zero down loan. IndyMan is happy to hand them out to everybody.

“Second thing, Santa Clarita seemed like a long way out when I moved from Venice in 2000. So, maybe you got to move a little farther, like out to Palmdale, Lancaster. Antelope Valley’s the new Santa Clarita!”

You’re not quite sure how it happens, but ten minutes later, you’re standing on his driveway admiring the rims on Travis’s Lexus SUV, which are bigger than the tires on your Corolla. Soon, you’re rolling northeast on the 14, past the slanting Vasquez Rocks where, according to Travis, lots of Westerns were filmed, but you only remember them from Bill and Ted’s Bogus Journey. The highway turns north away from the mountains through the high desert. A sign says you are heading toward “Edwards AFB.”

“Edwards Air Force Base!” exclaims Travis. “T he Right Stuff, man! That’s where Chuck Taylor broke the speed barrier in 1957. This is All-American country out here,” he says, gesturing vaguely at the brownish-gray sagebrush. “Granted, it’s a haul from the jobs in LA, but with Iraq calming down now that they captured Saddam Insane, soon they’ll be pumping like crazy from those Iraqi oilwells and the price of gas will be back down to a $1.00 per gallon.”

You pass another sign. This one reads, “San Andreas Fault.” Travis doesn’t seem to notice.

Once off the highway, you see at least one person standing at every intersection twirling or jiggling a giant arrow pointing to an open house. “Human Signs,” nods Travis. “Like back in the Depression when guys would walk around wearing sandwich boards reading ‘Eat at Joe’s.’ But this is the opposite of a depression. Real estate commissions are six percent, so, on a $400k house, that’s $20k, which pays for a lot of twirling.”

Stretching off to the horizon are half-built houses and recently finished ones. Eventually, you follow one particularly active arrow to the Cypress Creek Estates. “Yeah, I know,” says Travis, “The nearest creek is 20 miles south and the nearest cypress tree is 100 miles west in Santa Barbara. But that’s not the point, the point is that everybody in Guatelombia grew up watching Baywatch and has wanted to move to California ever since. Do you know how many people there are in the world? Well, I don’t either, but, trust me, it’s a big number. There’s an endless supply of people who want to live in California. And their brothers, too! Do you think Bush is going to shut the borders? The President says, “Family values don’t stop at the Rio Loco.’”

Travis’s voice gets intense. “They’re coming, man, and nothing can stop them. It’s the American Dream!”

“Same with the money,” he continues, in a more relaxed tone. “When the Chinese get a check from Wal-Mart for a billion bucks for their latest boatload of plastic crud, they ask the smartest guy in Peking where to invest it. He calls up the smartest lad in London, who tells him, “Lend it to people buying California real estate. It’ll be safe as houses.” Nobody cares where they lend in California, just so long as it’s in California. You should see the prices they’re getting this year for dumps in Hawaiian Gardens, Bakersfield, Pacoima, Compton. Compton.

“See, in Abu Dubai, nobody knows nothing about Hawaiian Gardens, other than it’s in California. Over in Arabia, Sheik Rattleandroll thinks, ‘It’s like “Hawaii” and it’s full of “Gardens,” so how bad could it be?’

“Although, you’d figure,” muses Travis, shaking his head, “That by now, even an Arab would’ve heard of Compton.”

“There’s no stopping them. And the same with normal American people moving to the exurbs. Every year, kids get out of college and move from Mom and Dad’s house in the boring ‘burbs to an apartment in the sexy city. They love hanging out in Hollywood. But after ten years or so, they’ve found somebody. The one. They start looking at the price on those cute little cottages around the corner from their favorite restaurant on San Vicente. The price has seven digits. And it doesn’t start with a “one.” They wonder, “How does anybody buy in the city?” They finally realize: people do it family style. If they’re American and they buy on the Westside, then you know that Mom and Dad gave them a half mil, at least. If they’re Armenian, they have mom and dad move in with them, along with cousin Aram and his uncle-in-law. But Americans can’t live with their relatives. We go nuts. So, it’s out to the exurban frontier for us. It’s a perpetual motion machine.”

You pull up in front of an attractive Mediterranean-style model house. Two stories, 3,150 square feet, the sheet says. It seems enormous — both compared to your apartment and to its lot, with its miniature front yard consisting of a tiny sapling and a tinier sodded lawn. It’s hotter than in Santa Clarita, so the walk from the Lexus to the front door through the grit-laden wind has you sweating. “It’s breezy out here, but that’s good, it lowers the wind-chime factor,” observes Travis.

Then you’re hit by the blast of air conditioning, and you’re standing in the Great Room, with a 20’ ceiling. “Sure, it seems kind of big, but that’s the crucial element,” explains Travis. “What are they asking, $450k? That’s not a cost to you, that’s an investment, like joining a country club. The sticker price keeps out the riff-raff. You don’t want every peon in Guatelombia who grew up dreaming about Baywatch moving in next door to you, do you?

“What you want is like … well, look at Valencia High School near my house. It’s diverse. It’s … What does the LA Times call the neighborhood when there’s a gang shooting in South Central? … It’s vibrant. But Valencia High School is not too vibrant, if you know what I mean. Valencia’s like mostly white, some Asian, the black kids’ parents are all celebrities. The son of what’s his name, Wesley Snipe Dogg, rushed for 2,500 yards last year. The Latino kids are all from solid home-owning families, no accents, everybody’s dad is a contractor or something. You can’t afford to buy in my neighborhood if you aren’t in a cash business.”

One stair creaks loudly as you ascend to the lavish master bedroom suite on the second floor. “The construction’s just settling in,” assures Travis. “This house is only, it says here, nine months old. The owner is flipping it. Probably moving to a 4000 square foot house with the $50k he’s going to make and do it again. With a no down payment mortgage and a low teaser rate for the first two years (which you deduct on your 1040, by the way), that’s about a … a million percent return on investment. Can you get that kind of interest on your CDs?”

“In fact, I think I’m going to pick up one of these babies, too, and sell it in six months. We’ll be neighbors! Sort of. The mortgage company get a little snottier about down payments and interest rates when you tell them it’s an investment, so I’ll just check the “owner occupied” box. The broker doesn’t care. He gets his commission, then Countrywise bundles it up with a thousand other mortgages and sells it to Lemon Brothers. The Wall Street rocket scientists call this “secretization” because nobody can figure out what anything’s worth. It’s a secret.

“Lemon sells shares in the package all around the world. The Sultan of Brunhilde ends up owning a tenth of your mortgage. Do you think the Sultan’s going to drive around Antelope Valley knocking on doors to see if you’re really living there?”

“Maybe you’d like to come in with me on it, buy yourself a one-eighth share?”

 

Thanksgiving, 2005

The sky over the Antelope Valley is blue, your Marathon Sod minilawn is green, the temperature is 68, and your bride and her sister are cooking the turkey in your new granite counter-topped kitchen. Travis and you are standing in your driveway in Cypress Creek Estates, admiring the house you two own next door. Travis is explaining, “So, after ten years, the head monk, the abbatoir, tells the new guy he can say two more words. And the guy replies, ‘Roommate snores.’” By the way, this couple from Hermosa Beach counteroffered me $477k on our little investment. I told them I’d think about it. Nice people, they’d make good neighbors for you. But, I don’t think I’m going to sell it yet. I’m going to wait for an even $500k. There’ll be no problem getting that next spring. Yeah, it’s a nice neighborhood. Quiet.”

That it is. You don’t have all that many neighbors because about a third of the homes on the street appear to be unoccupied, owned by speculators waiting to flip them. And the people who do live on your street tend to start their commute to LA before dawn and get back after dark. It’s quiet, except on Sunday, when a stream of looky-loos pour through for the open houses.

 

Voice Mail, April 2006

“Hey, it’s Travis. Look, my accountant was crunching the numbers, and he says I’ve got a slight cash flow problem, what with me paying for 7/8ths of an empty house and the market not quite hitting our target price yet. So, he says that we should rent it out for awhile, just until we sell it. The thing is, what with everybody out there buying with no money down, there aren’t that many people left in the rental market. Most of the local jobs are in construction, building houses. (Well, construction and being a Human Sign.) Now, my accountant keeps the books for this contractor, who tells him he’s got some construction workers from this village down south who need a place to live. Real quiet hardworking types. You hablo un poco Espanol, right? If you need to talk to them, talk to their leader, Juan. He speaks Spanish. The rest of them only speak Mixed-Up. It’s an Indian lingo. But you won’t need to talk to them. They’re very quiet.”

 

July 2006

It’s Sunday afternoon. Travis peers down as you pry a flattened disk of lead out of the miniature crater in your driveway. “Well, they are real quiet, hardworking types from Monday through Friday,” he says. “You’ve gotta admit that. I guess they just want to relax on Saturday, have a little fiesta, drink some cerveza, shoot their pistolas in the air. It’s their culture. What are you, prejudiced?”

You look at Travis.

“Okay, okay, I’ll go talk to Juan.”

He comes back 20 minutes later. “Juan is gone, man. That’s what they kept telling me: ‘Juan is gone.’ One of the fellows had his stomach bandaged up. He just got back from the emergency room. I couldn’t quite follow what they were saying, but I think Juan had a bottle of tequila on Saturday night and stabbed this dude. Nothing serious. Just a friendly little argument. C’mon, they aren’t gangbangers, they’re working men … Okay, well, then Juan headed for the Border like OJ in his white Bronco. Juan is gone, and with the rent money they all owed us, too. Oh, man…”

 

Voice Mail, September 2006

“Hey, it’s Travis. I got good news. We’re not going to mess around anymore trying to extract our rent from some mob of illegals. No way, Jose. Instead, we’re going to get paid by check on the first of each month straight from the U.S. Treasury! The Department of Housing and Urban Development. Section 8 rent vouchers. They’re tearing down a housing project in the, uh, LA – Long Beach area, in, uh, Compton, I guess, to be precise, and they’ve got this highly respectable elderly grandmother who needs a place to stay with her family. Really cute grandkids. A few daughters, too. She wants a safe place with good schools to raise them. Actually, she’s not all that elderly. The HUD man said she’s 39. A church lady, you know, pillar of the community, big hat, all that. You’ll like your new neighbors.”

 

Voice Mail, December 2006

“It’s Travis. Okay, okay, I’ll admit that I hadn’t really thought through the part about the daughters having boyfriends, or grandma having boyfriends either, for that matter. But I think this whole Bloods v. Crips thing is being blown way out of proportion. It’s just graffiti. And lots of kids wear red these days. It’s a very In color. And these days all the young people make those goofy signs with their hands. For that matter, how can anybody know for sure that the Chevy that cruises by every night is full of MS-13 gangbangers planning a drive-by on the Bloods next door as payback for the race riots at the County Jail in Castaic? Are you sure you read the tattoos on their necks right? It’s nighttime, how can you be certain that their neck tattoos say ‘MS-13.’ Maybe they just have, like, ‘Mom’ tattooed on their necks. Did you think about that?”

 

May 2007

“So, after fifteen years, the abbadabbadoo tells the new monk he can say two more words, and—Whoa!” Travis flinches when the 120-pound Presa Canario lunges at him. The steel chain securing the dog to the front of the house across the street from your house snaps taut and its massive jaws come up short. “Man,” says Travis, shaken, “That’s one of those dogs that the Aryan Nation breeds to guard meth labs, isn’t it? What’s in that house? A meth lab? No, don’t tell me. I don’t want to know.”

“Look at this neighborhood,” he says, his dismissive gesture taking in the empty malt liquor bottles on the curb, the wheelless car jacked up on a brown front lawn, and the knots of sullen youths playing hip-hop and reggaeton on boomboxes. “All these speculators buy houses, hit a little bump in the road, need some cash, then start renting them out to lowlifes to get by until they can cash in. Property values drop like a rock. It would be no problem if just one investor did that, but when all these speculator jerks do it, the whole ‘hood is hosed.

“Oh, yeah, I came by to mention that in June the mortgage rates reset after two years. Bush put this new guy in at the Fed, Ben Barnacle, and he’s raised interest rates. So that will push up your share of the payment.”

 

Voice Mail, June 2007

“It’s Travis. Sorry to hear about you having to sell both your cars to make that new monthly nut. Taking the bus to work in that heat, man, that’s rough.

“But, that’s all history. I’ve got great news! I sold the house next door. To the Section 8 grandma. Who else would buy it? I only got what we paid for it, but I figure that was the smart play. She didn’t think she could qualify for the mortgage, but I told her to put down as her household income all the money made by all the people who have ever stayed there. What, is Washington Mutant going to be so racist as to question that a woman like her could have an income of $160,000?

“Don’t thank me for getting you out of that monthly payment. It’s the least I could do for you, bro.”

 

Phone call, October 2008

You pick up the ringing phone.

“It’s me, Travis. Long time no hear! Hey, I’m sorry about houses in your zip code being down 55 percent versus last year. Bummer.

“Anyway, I’ve been listening to Senator Omama’s speeches about how he is going to invest hundreds of billions to make America energy independent in ten years. So, I wanted to let you in on the next big thing. Alternative energy! When the Democrats get in come November, alternative energy will be bigger than houses. I’ve got great investments lined up with some start-ups in this emerging growth sector. Like biodiesel trolleys. Al Gore is this close to making a big investment. I just need a little help making the minimum required investment. They don’t need chump change. This is just for the big money boys. So, are you in or are you out?

You say nothing.

“Are you going to quit on me? Remember, quitters never prosper.”

You say: “I quit.”

Travis says: “Well, it’s about time. You’ve done nothing but bitch and moan since I met you.”

 
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I’ve long been fascinated by the Affordable Housing racket. Josh Barro writes in the NYT:

Abington House, at 500 West 30th Street near the High Line in West Chelsea, is a new luxury residential building and, like a lot of new luxury developments in Manhattan, it’s extremely expensive. The cheapest two-bedroom apartment now listed there rents for $5,850 a month. That gets you only one bathroom; a two-bed, two-bath can run as high as $8,695.

But 78 apartments in the building, or 20 percent of the total, are set aside as affordable housing under New York City’s “inclusionary zoning” program. That means 19 two-bedroom apartments are priced from $687 to $873 — about a 90 percent discount to market rents. Those apartments were granted to 19 households that make from $25,612 to $42,950 a year and won a housing lottery the city held last year.

So that’s a discount of about $75,000 per year or so, presumably for many years. After all, how anxious would you be to move if you were getting $75,000 per year, tax-free, each year for staying in your luxury apartment? So, what’s the net present value of being chosen for an affordable housing unit in this building? A million dollars? What would you do to win a million dollar gift? (I mean, not you, personally, of course, but other people, those dishonest swine.)

The link goes to a Curbed article and the link to the city lottery appears to now be dead. But that’s still the least opaque process I’ve ever come across for handing out these affordable housing goodies.

I’m remind of when I applied my son to a charter school founded by his old teachers. They set up lots of hoops to jump through to apply for the lottery such as parents having to drop off applications in person and find out if he was chosen in person. I show up to find out if he was chosen in the lottery, all nervous, and the man with the clipboard of winners, who used to teach my son math, doesn’t even bother to look at it when he tells me my son got in. I asked him to check just to make sure my son is in, and he laughs at my naivete: of course my son, who got a 5 on the Biology AP in 7th grade, is in. What do the founders of this charter school look like, idiots?

I’ve never seen an article about who gets affordable housing units in the best new buildings. I think we are supposed to believe they routinely go to single welfare mothers from the South Bronx. But if you were paying $100,000 per year for an apartment, how happy would you be about riding the elevator with the single mom’s boyfriends?

Somehow, I suspect affordable housing apartments are more likely to go to, say, the nephew of a City Commissioner of Building Safety or, say, the daughter of another real estate developer who is an adjunct instructor of creative writing at NYU for $3,800 per class, or somebody else whom the paying tenants won’t complain about.

 
• Category: Economics • Tags: Housing 
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The novelist William Faulkner once said: “The past is not dead. In fact, it’s not even past.”

I was reminded of that last week while reading what is likely the best narrative history so far of the causes of the current recession: Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner.

The book focuses upon the Washington-Wall Street-southern California connections that corrupted the mortgage business’s traditional credit standards. It recounts the excuses bandied about by these crony capitalists to justify their self-enrichment. Of particular interest is Reckless Endangerment’s documentation of the role played by that most sacred of contemporary rationalizations for the pursuit of power and money:diversity.

Although Reckless Endangerment concentrates upon events from 1991 through 2008, this story is far from over and done with. Last Friday, June 3, 2011, the Congressional Budget Office estimated that the taxpayers will have to shell out another $42 billion in the bailouts of Fannie Mae and Freddie Mac, the quasi-governmental mortgage market giants whose role in the meltdown is the chief focus of Reckless Endangerment.

Moreover, the role played by diversity in the Minority Mortgage Meltdown and the ensuing Diversity Recession is still just not understood in the conventional wisdom. Thus, earlier in the week, two New York Times reporters had scratched their head in amazement over how

“unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans.”

[Advocates and Bankers Join to Fight Loan Rules by Edward Wyatt and Ben Protess, June 1, 2011]

Hmmm. Who could imagine Wall Street and Mean Street ever teaming up to fleece Main Street?

These NYT reporters would have been less amazed if they had read this new book co-authored by their own assistant editor Morgenson. Reckless Endangerment documents how often ethno-activists, politicians, and money men teamed up for mutual profit ever since the notoriously misleading Boston Fed report of 1992 that alleged pervasive discrimination by mortgage lenders.

Morgenson won a Pulitzer Prize in 2002 for her coverageof Wall Street for the NYT. She had previously been a reporter at Forbes, where she did so well that her colleague, Peter Brimelow, now Editor of VDARE.com, made a bet that she would be Forbes’ editor one day. (This didn’t happen, and Forbes appears on the edge of extinction).

Morgenson brings a political perspective that has been out of fashion for years. I have no idea what her partisan registration is, but, judging from Reckless Endangerment,I would describe her as an old-fashioned Green EyeshadeRepublican.

Back in Dwight Eisenhower’s day, the GOP took pride in being the Sharp Pencil Party, the natural home for people with suspicious squints who like to add up all the numberstwice to make sure nobody is pulling a fast one with otherpeople’s money. The GOP had a self-confident MainStreet wing that was suspicious of Wall Street.

You can still see a lot of this attitude in Tea Party folks. Unfortunately, Americans don’t really have a vocabulary anymore for expressing the concept of being against anybody pulling fast ones.

Over time, political thinking in America has simply deteriorated into partisan ideologies based on Who?Whom? Instead of being against chicanery, we’resupposed to be against chicanery by the other side’s guys. Democrats are now supposed to assume that government can’t be corrupt because it’s governmentand therefore, by definition, good. Republicans are supposed to assume that for-profit companies can’t be corrupt because they are policed by the magic of the market.

Morgenson, who is for both honest, effective business andfor honest, effective regulation, cleverly gets around thesecontemporary prejudices by making her history’s arch-villain the Crony Capitalist-in-Chief, James A. Johnson. Johnson, chairman during the crucial years 1991-1998 of that disastrous private / public hybrid Fannie Mae, was the man who, more than anybody else, set the mortgage meltdown in motion.

Is Johnson a businessman, a politician, or a public servant? None of the above, really. He was the ultimate Washington insider.

Johnson is a seemingly bland figure, harder to notice than his colorful allies in the degradation of credit norms—like Congressman Barney Frank, 1990s Secretary of Housing Henry Cisneros, or Countrywide president Angelo Mozilo. The son of a Minnesota politician, Johnson is a Prairie Home Companion-type who was Vice President WalterMondale’s chief aide and 1984 campaign manager.

Johnson was appointed CEO of Fannie Mae in 1991 because he could pull strings in Washington to protect Fannie’s lucrative privileges. While Fannie Mae hadpreviously been seen as something of a sleepy publicutility, Johnson envisioned it as a money machine. Herealized that the implicit backing of the U.S. Treasury tobail out this government sponsored enterprise (a government-established but publicly traded for-profit company) meant billions per year in lower capital costs. Some of this vast sum could be passed on to homebuyers in lower interest rates, but another fraction could be passed on to Fannie Mae’s stockholders.

And if a few crumbs wound up in Jim Johnson’s pocket (Reckless Endangerment: “Indeed, over his nine years at the company, he took out roughly $100 million in pay), well, he knew how to forestall complaints in modern Washington.

To protect that kind of political-financial power, you have to spend money to make money. But when you have as much money as Fannie Mae, it’s remarkable how relatively little it takes to turn potential critics into supporters. By diverting relatively trifling sums, Johnson made lots of power brokers very happy with Fannie over the years.

Does Congressman Barney Frank’s boyfriend Herb Moses need a job? Put him in charge of “relaxing FannieMae’s restrictions on home improvement loans”(e.g., for gay gentrifiers).

Does the Congressional Hispanic Caucus need a donation?How does a million bucks sound?

Do housing economists need academic journals in which to publish so they won’t perish? Create two journals and give stipends to friendly economists.

Is ACORN protesting in the streets? Give them a grant! Bring them, and dozens of other racial racketeers, inside the tent. There’s plenty of money for everybody.

Have you hired all the best-connected lobbyists in Washington, but are worried that your rivals will hire the second-best? Money can fix that, too. RecklessEndangerment: “The company even paid lobbyists to agree not to lobby against it”.

Is Steve Forbes running in the 1996 New Hampshire Republican Presidential primary against the tax deductibility of mortgage interest? (Morgenson had beenhired by Forbes to be his press secretary for the campaign—a Peter Brimelow prediction that actually came off.) Well, Fannie can fix that by running ads in the Manchester Union-Leader against him.

Do politicians, such as Senators Chris Dodd (D-CN) and Barbara Boxer (D-CA), want a mortgage at below market rates? The notorious Friends of Angelo [Mozilo] loans from Countrywide Financial were usually Friends of Fannie, too. Reckless Endangerment:

“That many of these recipients were friends of Jim Johnson was no coincidence. Indeed, he often acted as a kind of super-powered mortgage middleman; upon hearing of a friend’s home-loan needs, he would call Mozilo on his private line and provide the particulars.”

Johnson never forgot a friend or forgave an enemy. The velvet fist of Fannie Mae made sure that the GSE’shard-to-defend privileges were not imperiled by Congress or their hapless nominal regulator, the intimidated Office of Federal Housing Enterprise Oversight.

Fannie Mae was hardly the only culpable party, though. Morgenson and Rosner observe:

“Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street.”

When Johnson retired from Fannie Mae in 1998, he went on the board of directors of investment bank Goldman Sachs. Hank Paulson, Goldman’s CEO (and future Treasury Secretary under George W. Bush), liked his style so much when it came to his own salary that he made Johnson head of the Goldman board’s compensationcommittee, which set Paulson’s pay.

One hand washes the other.

Washington corruption is as old as the city, but Johnson’s peculiar genius was that he made it hugely respectable. Johnson used Fannie’s lucre so adroitly that by 1997 he was chairman not only of Fannie, but also of two other Washington institutions of great prestige: the Kennedy Center for the Performing Arts and the Brookings Institution liberal think tank.

One key to Johnson getting away with all this for so long (he never suffered a reversal until the summer of 2008, when he had to resign his post vetting Barack Obama’s Vice President possibilities because the Friends of Angelo loans became public): this Norwegian-American repeatedly and shamelessly played the Race Card.

Did Johnson loudly hop on the diversity bandwagon for lowering credit standards to protect Fannie’s perquisites or to grow his portfolio? Probably both.

When he took over Fannie Mae in 1991, Johnson made a $10 billion commitment to lower-income borrowers. Morgenson and Rosner report: “The idea, according to former employees, was to finance so much low-income housing that Fannie Mae’s government perquisites could never be taken away.”

In 1992, the Democratic majority in Congressed passed (and George H.W. Bush signed) the reassuring-sounding “Federal Housing Enterprises Financial Safety and Soundness Act”. Reckless Endangerment:

“But the law had another key element that would, more than any other single act, lead to the disastrous home lending practices of the 2000s … While historically Fannie and Freddie supported housing by buying safe mortgages when other sources of capital for borrowers dried up, now the companies’ focus on soundness was diluted by the requirementthat they serve the housing needs of ‘low-income and underserved families.’”

Johnson invited Fannie’s new ally ACORN to help advise the Democrats to set quotas of 30 percent for inner cities.

Then, in October 1992, the Boston Fed released a report that, in Reckless Endangerment’s summary, “showed that black and Hispanic loan applicants were far more likely to be rejected by banks than were whites”. [Mortgage lending in Boston: Interpreting HMDA data (Working Paper 92-7)]

This finding of disparate impact was rapturously received. But, as Morgenson and Rosner note:

Forbes magazine was among the few media outlets to question the study’s findings. For an article published on January 3, 1993, staffers Peter Brimelow and Leslie Spencer interviewed [Alicia] Munnell, who revealed yet another problem with the analysis. Munnell told Forbes that in preparing the study, Fed researchers looked at default rates across census tracts and found that minorities do not tend to fail more often on their loans than whites.

“What we found was, there was no relationship between the racial composition of the tract and the default rate,” Munnell told Forbes. “So it wasn’t true that tracts with large minority populations had higher default rates.”[VDARE.com note: See The Hidden Clue, By Peter Brimelow and Leslie Spencer, Forbes ,January 4, 1993]

“Such a finding should have been a signal to the researchers that their discrimination findings were off base, Forbes contended.After all, if bias were at work in minority neighborhoods, default rates in those areas would have been lower than among white areas, indicating that bankers were refusingloans to legitimate minority borrowers.

“Munnell agreed that discrimination against blacks should show up in lower, not equal, default rates. ‘You need that as a confirming piece of evidence,’ Munnell told the Forbesreporters. ‘And we don’t have it.’”

(For Peter Brimelow’s rueful retrospective on the totalindifference with which this devastating refutation wasgreeted, see here. By an amazing coincidence, Richard F. Syron, who as CEO of Freddie Mac was my own Johnson-type candidate for architect of the disaster, was at the time president of the Boston Fed, where he hailed the study with the arrogant announcement: “Comports with common sense, no more studies needed.”

(Syron “earned” $38 million in 5 years at Freddie Mac. In 2004 he rejected a memo from Freddie’s chief riskofficer, David Andrukonis, saying that Freddie’sincreasingly shoddy underwriting standards were threatening to destroy the firm. But I now think that Morgenson and Rosner make a fairly good case that Johnson was the more central, more historic figure.)

Black politicians, needless to say, began to complain that Fannie was abetting bank discrimination by buying racist mortgages. Morgenson and Rosner:

“James Johnson saw the opportunity for Fannie Mae in this potential problem: Lending to minorities could help his company’s expansion effort as well as its image. He was soon fanning the flames lit by the Fed’s report. ‘We see evidence that there are a significant number of prospective homebuyers in this country whose only barrier to achieving their dream of home ownership is not their economic status, but their racial status …’”

Johnson gave ACORN and La Raza grants and had them join with bankers and realtors on an advisory council:

“Fannie Mae offered to begin buying new types of mortgages to expand its affordable housing reach. This allowed the company to grow its operations, and its earnings, whilepositioning itself as a do-gooder. … These[credit] standards had for decades acted as a kind of governor on lax lending among banks interested in selling loans to Fannie. But amidcries of racial discrimination, risk-averse practices were jettisoned.”

As Morgenson and Rosner write, “down-payment requirements were the first to go”, from thetraditional 20 percent to “5 percent or less”:

‘Affordable housing was the price they would have to pay keep their benefits,’ recalled one industry official who was on handduring the legislative process.”

In lending, there had traditionally been a hierarchy of respectability based on the trustworthiness of borrowers. At the bottom were loan sharks, pawnbrokers, payday firms, subprime lenders and other dubious operators. At the top, Fannie Mae was considered staid but eminently respectable because, ever since its creation by the Roosevelt Administration in 1938, it had aimed at serving the average American homebuyer. (In passing, it’s worth noting that New Deal reforms worked better than subsequent liberal innovations because they were primarily aimed at helping average Americans—not at subsidizing minorities.)

Under Johnson, however, Fannie began using its prestige to encourage risks. Morgenson and Rosner:

“Because Fannie was the leader in housing finance, its actions set the tone for private-sector lenders across the nation. ‘They were omnivores,’ the former executive said. ‘The further they moved out on the risk curve, the more they pushed the market to follow.’”

What Morgenson and Rosner are reporting isn’t wholly a new story. Nearly two years ago on VDARE.com, I reviewed Alyssa Katz’s insightful (but sadly overlooked) book Our Lot recounting this same 1990s history, but from a more liberal point of view. Looking back from 2009, Katz asked:

“How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages? … It all started with the best of intentions, with … the activists who demanded bank loans for the poor and urban.”

To Jim Johnson, his campaign to lend one trillion dollars to ten million incremental homeowners was “nothing less than a civil rights crusade”.

Especially disastrous was the symbiotic relationship Johnson cultivated with Countrywide’s Mozilo.

In 1995, Mozilo agreed with HUD secretary Henry Cisneros to make Community Reinvestment Act-like pledges to lend to minority communities. Mozilo became the leading private sector enthusiast for the ClintonAdministration’s National Homeownership Initiative. In 1998, Morgenson and Rosner report,

“Jim Johnson had agreed to charge Mozilo’s company far lower guarantee fees than its rivals on mortgages Fannie Mae bought from the company and sold to investors. … Countrywide soon became the single biggest seller of loans to Fannie Mae. … Countrywide supplied 26 percent of the loans purchased by Fannie in 2004 …”

Morgenson and Rosner argue: “More than any other mortgage lender, Countrywide was at heart a Fannie Mae clone”:

“Mozilo’s friendship with Johnson had given him a front-row seat for the Fannie Mae way—the deep political focus, the co-opting of regulators, the manipulation of public opinion,and extensive granting of favors to friends and potential foes.”

Morgenson deserve credit for repeatedly emphasizing the role that racial politics played in justifying the credit debacle. In contrast, we saw a couple of weeks ago that Peter Wallison’s dissent to the financial crash report to Congress avoided mentioning the M-word (“minority”),merely saying the quotas were aimed at “lower income”borrowers. To their credit, Morgenson and Rosner use farfewer PC euphemisms.

They also make clear that, while the system of mortgage backscratching perfected by Johnson was very good for racial organizers like ACORN and La Raza, it wasn’t good for the average black or Hispanic in the long run—or even in the short run.

The “diversity” rationale empowered boiler room operators like Countrywide to target, in the name of closing the racial gap, innumerate blacks and Hispanics with exploitative subprime loans. One former Countrywidebroker told Morgenson that Countrywide barely broke even on loans in Santa Monica, a high IQ white community home to screenwriters and Hollywood agents. In contrast, at Countrywide’s Slauson office—in the ‘hood under the LAX flight path—brokers were expected to pile on points in the fine print because the borrowers seldom crunched the numbers themselves.

Was this predatory lending? Sure!

But, remember, it was also predatory borrowing,predatory brokering, predatory securitizing, and so forth.

In general, Morgenson and Rosner’s perspective is quite similar to the one I’ve been offering since 2007-2008. (Neither I nor VDARE.com are cited).

But this brings me to a criticism of Reckless Endangerment. In Johnson’s defense, he was a more prudent crony capitalist than those who came after him in the Bush II years. Johnson maintained a certain level of cynicism that kept him from, say, pushing hard for ridiculous excesses such as zero down-payment mortgages.

Like Katz’s 2009 book, Reckless Endangerment focuses upon how Democrats like Johnson had slowly undermined the system in the 1990s.

But the Housing Bubble didn’t get supersized until after George W. Bush’s October 15, 2002 “White House Conference on Increasing Minority Homeownership”. There, the Republican President recklessly denounced down-payments as the foremost hurdle to closing the racial gap in homeownership.

That turning point has disappeared down the memory hole—Reckless Endangerment doesn’t mention it—perhaps because it doesn’t fit anybody’s narrative.

But, as I’ve pointed out repeatedly, it was the Democrats in the 1990s who loaded the gun, but, more than anybody else, it was George II who pulled the trigger.

So we’re still waiting for the book that will give us the inside story on the Bush Bust—the Republicans’ catastrophic 2000s—and its contribution to the Crash of 2008.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The May issue of the conservative magazine American Spectator features The True Story of the Financial Crisis by Peter J. Wallison, [Email him]an American Enterprise Institute fellow and one of the ten members of Congress’s Financial Crisis Inquiry Commission, which reported in late January. Wallison dissented [PDF] from the final report. His article demonstrates the strengths and weaknesses of mainstream conservatism in the Obama Era.

Wallison explanation for his dissent is all too credible:

“There was no alternative. The Commission’s management—particularly its chairman, Philip Angelides, a former Democratic treasurer of California and unsuccessful gubernatorial candidate—would not allow the staff to pursue any theories about the causes of the financial crisis other than those embodied in the standard left-wing narrative. And in the end a majority of the commissioners—never having been presented with any contrary evidence—signed on to a report that said the financial crisis could have been avoided if there had been better regulation of the private sector.”

(Helpful VDARE.com links added to quotations throughout).

Wallison notes acidly:

“The question I have been most frequently asked about the Commission is why Congress bothered to authorize it at all. Without waiting for the Commission’s report, Congress passed and the president signed the Dodd-Frank Act (DFA), far-reaching and highly consequential regulatory legislation that I believe will have a strong adverse effect on U.S. economic growth in the future. In enacting the DFA, Congress and the president acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President’s chief of staff—’Never let a good crisis go to waste.‘”

The Obama Administration is now suing more banks for not lending enough to minorities—inevitably weakening credit standards in the process, which was exactly the mistake that both Wallison and I believe led to the Crash of 2008. As a member of the Establishment Beltway Right, Wallison could be an important voice in opposing this farcical, but apparently inevitable, rerun of history.

But, unfortunately, Wallison wimps out on explaining exactly what these “housing policies” were about: getting more mortgage money into the hands of blacks and Hispanics. What the U.S. had in 2007-2008 was a”Minority Mortgage Meltdown“, and it precipitated our first “Diversity Recession“. Wallison cannot bring himself to be so frank.

Overall, Wallison puts forward an argument similar to what I’ve been making since subprime mortgages went south in early August 2007: the cause was the degradation of traditional mortgage credit standards. Traditional credit standards were overridden on the grounds that they were just excuses for racial discrimination (although VDARE.com Editor Peter Brimelow and Leslie Spencer had exploded the Boston Fed’s alleged proof of this discrimination in ForbesMagazine back in 1993, to no applause).

Wallison writes:

“So, for example, while one in 200 mortgages involved a down payment of 3 percent or less in 1990, by 2007 it was one in less than three. Other credit standards had also declined.”

As we saw in newspaper headlines at the time, bad mortgages led to the 2008 crash. A domino effect ran from dubious mortgages, primarily in the four Sand States, to the whole world through the newly-invented mechanism of financial derivatives. Wallison recounts:

“The inquiry has to begin with what everyone agrees was the trigger for the crisis — the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few states –California, Arizona, Nevada, and Florida…”

Unfortunately, Wallison puts too much confidence in the good faith of liberal pundits when he continues:

“No one disputes that the losses on these mortgages and the decline in housing values that resulted from the ensuing foreclosures weakened financial institutions in the U.S. and around the world and were the precipitating cause of the crisis.”

Actually liberal pundits like Paul Krugman or Brad DeLong quite commonly do dispute exactly that, when challenged about the impact of federal interference in the mortgage markets. They imply that the worldwide spread of the crisis means that the history we watched unfold didn’t really happen.

It’s pettifoggery as ridiculous as somebody arguing that because the worst fighting during World War I was in France and Belgium, then what could the assassination of the Archduke Franz Ferdinand in Sarajevo have to do with starting the war? But it often works on the gullible.

There are three main differences between my analysis and Wallison’s:

In Wallison’s retelling, however, the Community Reinvestment Act and the Fannie Mae and Freddie Mac quotas were solely about making mortgages more available to “low-income” borrowers.

That’s an airbrushing of the history that’s readily available to anybody with a web browser and a search engine. But it’s characteristic of cowardly mainstream Republican thinking in the Obama Era.

  • Second, Wallison pushes his own argument beyond the bounds of plausibility by claiming “nothing else” but federal housing policies caused the 2008 collapse.

Wallison is certainly right to direct attention to the baneful impact of the feds in initiating the disaster. Nevertheless, why does he feel the need to make the unlikely assertion that nothing else was responsible? That’s like saying that the assassination of the Archduke Franz Ferdinand and nothing else was responsible for World War I, or that Pearl Harbor was the sole cause of American involvement in World War II.

With events of this historic magnitude, there are always going to be multiple roots. Yet it’s fair to say that Pearl Harbor was the direct cause of America going to war.

And without overstating the role of Pearl Harbor, America learned a crucial lesson from it: don’t allow sneak attacks.

When I think back on my life, it’s striking how much of the energies of people close to me were devoted to preventing another Pearl Harbor. My uncle spent much of WWII as a weatherman in the godforsaken Aleutian Islands keeping an eye out to make sure the Japanese fleet didn’t follow a storm front across the North Pacific as they had in December 1941. Four decades later, my brother-in-law was in even more remote Thule, Greenland watching radar monitors of big Soviet Bear bombers playing games over the Arctic. My father worked for years on the Lockheed F-104, a minimalist “missile with a man in it” fighter designed to intercept these Soviet nuclear bombers.

America took Pearl Harbor seriously. And guess what? We actually learned lessons. For almost sixty years after December 7, 1941, the U.S. spent a fortune to detect, deter, and defeat any more sneak attacks, and it worked.

But there’s no evidence that anybody has learned much of anything from the mortgage meltdown.

  • Third, Wallison puts most of the blame on the Clinton Administration. In contrast, I see the Clinton Administration (along with the first Bush Administration) as loading the gun. But the second Bush Administration pulled the trigger.

The Democrats’ 1990s efforts to funnel more mortgage money to their minority and lower income constituents have been detailed in two books, both nearly universally ignored. Alyssa Katz’s 2009 work Our Lot, described, from the perspective of an abashed liberal, how Clinton’s Housing and Urban Development secretaries Henry Cisneros and Andrew Cuomo (now governor of New York) and Fannie Mae chairman Jim Johnson had tilted the credit evaluation system in favor of minorities. Paul Sperry’s 2011 book The Great American Bank Robbery recounts this history from a conservative perspective.

Still, the Clinton Administration felt it had to keep its minority mortgage machinations on a small scale to avoid attack from Republicans. But when George II took power, other Republicans took their eye off the ball, trusting their man in the White House to look after their interests.

Uh-oh.

Bush apparently really believed he could bring Hispanics into the GOP, despite overwhelming evidence to the contrary. A major feature of his campaign was the”ownership society“, especially expanding homeownership among minorities.

It seemed like a free lunch: just pass the word to regulators and lenders that the President looked favorably on firms taking bigger risks to lend more to minorities, and the magic of the market would turn Democratic Hispanics into home-owning Republicans. What could go wrong?

Bush’s role in the mortgage meltdown has been almost universally overlooked—because Republicans like Wallison want to blame it on Democrats, and Democrats don’t want any blame associated with minorities.

George W. Bush himself, however, recently conceded a fair amount of my case against him. On p. 449 of the ex-President’s bestselling memoir Decision Points, Bush writes:

“At the height of the housing boom, homeownership hit an all-time high of almost 70 percent. I had supported policies to expand homeownership, including down-payment assistance for low-income and first-time buyers. I was pleased to see the ownership society grow.”

Bush doesn’t mention that he had entitled the main venue for promoting expanding homeownership the White House Conference on Increasing Minority Homeownership. There, on October 15, 2002, he called for 5.5 million additional minority-owned homes by 2010.

On the other hand, Bush’s misbegotten effort had largely disappeared down the memory hole, so I must say that I’m impressed that he dredges it up in order to accept some of the blame. He writes:

“But the exuberance of the moment masked the underlying risk. Together, the global pool of cash, easy monetary policy, booming housing market, insatiable appetite for mortgage-backed assets, complexity of Wall Street financial engineering, and leverage of financial institutions created a house of cards.”

That’s a pretty reasonable list of causes Bush gives, especially compared to Wallison’s excessively narrow focus.

I would add to Bush’s list the Hispanic population growth that the President’s tolerance of legal and illegal immigration and his push for more home construction facilitated. The rising population made it seem for a while as if all that home construction in the exurbs actually made sense.

Bush concludes:

“This precarious structure was fated to collapse as soon as the underlying card—the nonstop growth of housing prices—was pulled out. That was clear in retrospect. But very few saw it at the time, including me.”

Bush’s list of causes sounds old-fashioned for a Republican, in that it attributes a role to market excess. During the Obama Era, in contrast, a peculiarly dogmatic free market ideology seems to have become popular among many Republicans.

Why?

As demographic change slowly turns the Democratic Party into the Nonwhite Party, the GOP is becoming, by default, the White Party (relatively speaking). There are worse things a party could be. Yet this is considered by the GOP elite to be too horrifying to admit.

To rebuff the Democrat’s intolerable charge that white Republicans look to the GOP to protect the interests of themselves and their posterity—to adapt the preamble to the U.S. Constitution, a wholly white creation—many white Republicans during the Obama Era have embraced the idea that they act solely on ideological principles.

In this worldview, the private sector can only go wrong when the government holds a gun to its head.

But I spent many years in the business world. I find this an overly flattering view of my own and my former colleagues’ prowess. We regularly fell for extraordinary popular delusions and the madness of crowds, even when we weren’t being prodded along by the government.

Some Republicans looking for an ideology have turned to the late novelist Ayn Rand. Yet, while the recent low-budget movie version of Atlas Shrugged may have flopped at the box office, it was a welcome reminder that Rand herself held a more three-dimensional view of the potential culpability of individuals in all walks of life.

Atlas Shrugged is full of crony capitalists who corrupt the politicians and bureaucrats as much as the government corrupts them. Rand would have been outraged by bankers who promoted bad loans in the name of diversity, such as Angelo Mozilo of Countrywide, Kerry Killinger of Washington Mutual, and Roland Arnall of Ameriquest.

Wallison, apparently, is not. And that leaves his Republican Party ominously vulnerable, not just to race hustlers, but to the same corporate con-men whose blind quest for cheap labor drove the Bush Administration to its disastrous amnesty defeats of 2006 and 2007.

 

[Steve Sailer (email him) is movie critic for The American Conservative. His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S “STORY OF RACE AND INHERITANCE”, is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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We keep satirizing this, but now a Washington Post news story really is headlined

Minorities hit harder by foreclosure crisis

“Minority homeowners have been disproportionately affected by the foreclosurecrisis and stand to lose homes at a faster pace than white borrowers in the future, according to a report released Friday by a nonprofit research group. … The ‘analysis suggests dramatic differences in how the foreclosure crisis has affected racial and ethnic groups,’ the report said. ‘African American and Latino borrowers have borne and will continue to disproportionately bear the burden of foreclosures.’ “

(By Renae Merle, Saturday, June 19, 2010)

If you translate this out of the evasive passive voice and into the active voice, you come up with something more informative, namely:

AFRICAN AMERICAN AND LATINO BORROWERS DEFAULTED AND WILL CONTINUE TO DEFAULT DISPROPORTIONATELY.

But defaults couldn’t possibly be the fault of the defaulters, if the defaulters are minorities, could they? So instead, Felix Salmon of Reuters asks Are foreclosures racists? June 18, 2010:

“If you’re a high-income Latino with a mortgage, you’re almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, theforeclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending.”

Now, you might think that foreclosure rate has something to do with, say, blacks and Hispanics having remarkably fewer financial assets to use as safety cushions in case housing prices don’t continue to rise. After all, a 2007 Federal Reserve Board report to Congress (PDF) noted:

“Black and Hispanic families are less likely than non-Hispanic white families to have any financial assets, so the disparity in median financial assets for all families (rather than just those with financial assets) is evenlarger, with the overall medians for black and Hispanic families roughly 5 percent to 7 percent of the non-Hispanic white median.”

Moreover, African-Americans and Latinos are less likely than whites to have prosperous relatives who can help them out with a loan if they are in danger of defaulting.

You might think that, but being aware of those facts just shows you are a racist. Salmon [Email him] writes:

“I’ll hazard a guess and say that this probably has something to do with a lot of middle- and high-income Latinos in California and Arizona being sold subprime mortgages, even when they qualified for a prime loan.”

The Washington Post’s Merle agrees that discrimination is the cause:

“Research has shown that minority borrowers were more likely to receive subprime loans during the housing boom even if they had credit scores, incomes and loan sizes similar to those of whites. Some housing experts say that minority borrowers received higher rates on subprime loans compared with similarly situated white borrowers, resulting in highermonthly payments and quicker defaults.

“’I think it reflects that minority borrowers were targeted by the sellers of these [risky] mortgages,’ said Barry Zigas, director of housing and credit policy at the Consumer Federation of America.”

Obviously, minority borrowers were targeted—the federal government has been promoting mortgage lending to minorities for more than 30 years.

But if blacks and Hispanics were more creditworthy than lenders were giving them credit for being, then they’d have lower foreclosure rates than whites, right? But this report is about how they have higher foreclosure rates. (This point was first made in Forbes magazine by PeterBrimelow and Leslie Spencer back in 1993—when it couldhave saved us all a lot of trouble).

In fact, blacks and Hispanics have even worse foreclosure rates than this study claims. Although the Post and Salmon don’t mention it, the report flat-out admits that its crude methodology underestimates the gap in default rates between whites and Non-Asian Minorities:

“Like all estimates, ours has limitations. Most importantly, our method only captures differences in foreclosure rates between racial and ethnic groups that are due to differencesin distributions of loans along the four dimensions that we use when calculating foreclosure rates (i.e. loan year, state, occupancy and loan segment). … Within the list of potential factors not included in our analysis, several tend to be associated with both higher foreclosure rates and borrowers of color. As a result, our results are likely tounderestimate racial and ethnic disparities …”

The three researchers from the Center for Responsible Lending (Debbie Gruenstein Bocian, Wei Li, and Keith S. Ernst) don’t actually have data on foreclosures by race. Instead, they have federal data by race on who receives mortgages and they have private data on who fails to pay them back (but the foreclosure data doesn’t mention the race of the defaulter). Instead, the CPL is, as they confess, “implicitly assuming” that the foreclosure rates are identical across races for each type of loan (e.g., 2006 California owner-occupied subprime).

Fortunately, other researchers have actually done the hard work of matching public race information with private foreclosure information, mortgage by mortgage. And they have found the CPL’s assumption of racial equality in foreclosure rates within segments to be wrong.

For example, the 2008 study Lending in Low- and Moderate-Income Neighborhoods in California (PDF) by Dr. Elizabeth Laderman and Dr. Carolina Reid of the SanFrancisco Federal Reserve Bank calculated foreclosure rates by race on 239,000 mortgages in California handed out during the Bubble:

They concluded:

“We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as whiteborrowers.”

This shouldn’t be a new discovery.

The March 2004 report Analysis of FHA Single-Family Default and Loss Rates for the Department of Housing and Urban Development by Robert F. Cotterman showed that black and Hispanic default rates on Federal Housing Administration mortgages handed out in the 1990s were more than twice as bad as the white rate. Even when adjusted for FICO scores and other objective factors related to credit risk, minority default rates still look worse.

Cotterman observes:

“Blacks, Hispanics, and those in judicial foreclosure states and underserved areas have higher conditional loss rates, other things the same.”

A careful 2008 Boston Federal Reserve study, Subprime Mortgages, Foreclosures, and Urban Neighborhoods, by Kristopher S. Gerardi and Paul S. Willen found that blacks and Hispanics had higher foreclosure rates on subprime mortgages in Massachusetts back through the late 1990s.

Minority default rates are not a minor technical issue. The volume of lending to minorities during the Housing Bubble was much vaster than is widely understood. According to the federal Home Mortgage Disclosure Act database, minorities received half of all subprime mortgage dollars nationally during the 2004-2007 Housing Bubble. At the Ground Zero of the disaster, California in 2006, minorities got 77 percent of all home purchase subprime dollars and 56 percent of total home purchase dollars.

Mortgages were the fundamental units out of which the financial industry, private and public, built their pyramid schemes.

These fast-buck artists could get away with it for a simple reason: in our culture today, when bankers (such as Angelo Mozilo of Countrywide, Roland Arnall of Ameriquest, Richard Syron of Freddie Mac, and Kerry Killinger of Washington Mutual) and politicians (such as Henry Cisneros and George W. Bush) demand more lending to minorities, they aren’t derided as conmen, moonshooters, fast-buck artists, usurers, boiler-room operators, suckers, or fools.

Instead, they are praised as financial statesmen winning the war against racist redlining.

Which brings us to today.

It’s time once again to trot out the biggest cliché in all of journalism: philosopher George Santayana’s observation that

“Those who cannot remember the past are condemned to repeat it.”

Here we are, almost three years after the subprime market tanked in the summer of 2007 and 20 months after the economy as a whole followed subprime down the drain. And our country’s big guns are still trained not on learning from our mistakes, but on continuing to obliterate supposed stereotypes about the creditworthiness of minorities—the same obsolete obsession that helped get us into this mess.

This isn’t to say that the subprime-initiated mortgage meltdown was the only cause of the crash, or that the crash wouldn’t have happened later anyway. What I’m saying is that mortgages were the direct impetus of the economic disaster, just as the Wall Street Crash ofOctober 1929 led to the Great Depression or theassassination of Archduke Franz Ferdinand in the summer of 1914 was the direct cause of the Great War. Similarly, America may well have eventually gotten involved in WWII if Pearl Harbor had never happened, but PearlHarbor was the direct cause of our entry into the Second World War.

In the cases of 1914, 1929, and 1941, a huge amount of intellectual effort has been devoted to understanding these precipitating events. In contrast, the Main Stream Media account of the causes of the Housing Bubble and Bust are still severely lacking, largely because everybody who was anybody—e.g., Bill Clinton, George W. Bush, and Barack Obama—were all in essential agreement thatminorities should get more mortgage dollars.

And they were all wrong.

Unfortunately, public discourse in modern America mostly doesn’t exist to find answers to important questions. Instead, it exists to furnish talking points to partisans for attacking other partisans. Since there was broad agreement that minorities should borrow more, nobody is in any hurry to revisit this bipartisan blunder.

Consider the Federal Reserve Board dissertation from which I quoted above:

Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit

Submitted to the Congress pursuant to section 215 of the Fair and Accurate Credit Transactions Act of 2003

August 2007

The second paragraph of this Fed study mandated by the 2003 Equal Credit Opportunity Act (ECOA) explains that it was done to determine if “credit-scoring models may have adverse effects on certain populations,particularly minorities“. The legal Theory of Disparate Impact states that any evidence of black or Latino underperformance in anything is evidence of “discrimination” unless rigorously proved otherwise.

But, as this graph from the Fed study of 301,536 individuals’ credit history through 2003 shows, blacks and Hispanics had lower credit ratings on average (using a 0 to 100 scale devised by the Fed researchers).

In other words, the Fed spent the Housing Bubble years of 2003-2007 compiling a 304-page report demanded by Congress on whether credit scoring systems (e.g., FICO scores) were irrationally preventing minorities from borrowing enough.

This report wasn’t worked on from 1963 to 1967, when the Civil Rights movement triumphed, but from 2003 to 2007, a period in which exactly the exact opposite problem—minorities being loaned more than they could afford to repay—was about to bring down the American economy.

I’ve called that the Guns of Singapore Syndrome—although that’s unfair to the otherwise incompetent British commanders who lost that city in early 1942 in what Winston Churchill called the “worst disaster” in the history of the British Empire. The British had famously installed 15″ coastal cannons aimed to protect Singapore from attack by sea from the south, only to have the Japanese army attack by land from the north. (Actually, the British did manage to swivel most of the guns around—although, unfortunately, they were furnished largely with armor-piercing anti-battleship shells ineffective against infantry).

In contrast, our elites haven’t managed to swivel much at all. They’re still acting as if it’s 1967 and the perceived problem is discrimination against minority borrowers. They’ll go so far as to change the name of what they are denouncing from redlining (the bête noire of the Clinton and Bush Administrations) to reverseredlining (what Obama is out to stomp), but that’s it. They aren’t going to learn anything. They are simply allergic to facts.

Now, you might think that it would have been more sensible for Congress to have the Fed study why minorities were getting so many loans they couldn’t payback. But, no, our Guns of Singapore are permanentlypointing out to sea.

For instance, that 2007 Fed study of the credit scores and repayment performance on all types of credit over the subsequent 18 months found that rather than credit scoring having an unfair impact on blacks, blacks had an unfair impact on credit scoring. The biggest problem with the predictive validity of credit scores turned out not to be that they were biased against African-Americans, but that credit scores were biased in favor of African-Americans. Blacks not only had lower average credit scores, but they were significantly less likely to repay their loans than whites with the same scores:

“The analysis conducted for this study finds that credit scores consistently predict relativeloan performance within all population groups; that is, for all populations, the percentage of individuals experiencing a serious delinquency on one or more of their credit accountsconsistently declines as credit scores increase….

“The analysis also finds that some groups perform worse (experience higher rates of serious delinquency) on their credit accounts, on average, than would be predicted by the performance of individuals in the broader population with similar credit scores. For example, on average, blacks perform worse than other racial and ethnic groups with similar credit scores.”

In other words, FICO scores work overall within groups at predicting likely deadbeats. The problem is between groups—but the bias is in the opposite direction of what Congress wanted to find!

You’ve probably read a lot about credit over the last three years. How often have you heard the conclusions of this 2007 Fed study mentioned?

I hadn’t heard of it until last week! And I’ve written on the subject dozens of times going back some three years.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Recently, I’ve been trying to answer the question that nobody else wants asked about the causes of the Great Recession: what percentage of defaulted mortgage dollars did minorities account for?

In doing so, I’ve stumbled upon another important conundrum: As the Federal Reserve continues to take on more power, are the twelve regional Federal Reserve Banks above the law?

Specifically, can the Fed evade the Freedom of Information Act by claiming that the regional Federal Reserve Banks are private institutions not subject to the FOIA?

As you’ll recall, as part of the crusade against “racist” redlining, the Home Mortgage Disclosure Act (HMDA), passed by Congress in 1975 and implemented by the Federal Reserve Board’s Regulation C, tracks whether lending institutions give enough mortgage dollars to minorities.

The government, however, does not track whether minorities pay back these loans.

My theory has been that you get more of what you measure, and less of what you don’t measure. If the federal government tracks lending to minorities but not repayments by minorities, we’ll inevitably tend toward seeing more of the former and less of the latter.

This is not merely an academic question. The mortgage crash kicked off the current recession—it’s our first Diversity Recession. So isn’t it time we were allowed to know the facts about the mortgage meltdown?

Fortunately, in late 2008 “a consortium that included the Board of Governors of the Federal Reserve System and eight regional Federal Reserve Banks” purchased, for a large sum, a copy of the private Lender Processing Services (formerly “McDash”) dataset. [FRB of Boston Public Policy Discussion Paper No. 09-2(PDF)]Thisallows Federal Reserve economists to calculate the default rates by ethnicity.

Unfortunately, Federal Reserve employees have not been in any hurry to publish this historically and politically crucial information.

But two economists at the Federal Reserve Bank of San Franciscohave let slip, in the midst of a paper defending the Community Reinvestment Act, that mortgages issued to minorities during the bubble years in California had much worse foreclosure rates than mortgages given to non-Hispanic whites.

Below is a chart of the foreclosure ratios relative to non-Hispanic whites adjusted for income and credit scores. The numbers are found on pp. 13-14 of Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown by Dr. Elizabeth Laderman and Dr. Carolina Reid of the San Francisco Fed.

In this sample of 239,101 mortgages made in California in 2004-2006, blacks defaulted 3.3 times more often than non-Hispanic whites with the same income and FICO score. Hispanics defaulted 2.5 times more often than similar whites, and Asians 1.6 time more.

Presumably the unadjusted default rate ratios, at least for blacks and Hispanics, are even worse. After all, blacks and Hispanics tend to have lower income and lower credit scores, so the Laderman-Reid adjustment makes minorities look better.

Even without being allowed to know the raw ratios, we can infer that minorities accounted for most of defaulted mortgage dollars in California. After all, they accounted for a majority of home purchase mortgage dollar borrowing in California in 2006, according to the HMDA. Hence, with their much higher default rates, minorities must have accounted for a landslide majority of default dollars in the GoldenState.

And California alone accounted for a sizable majority of defaulted dollars. California plus the other three sand states (Nevada, Arizona, and Florida) amounted to about seven-eighths of the losses that kicked off the economic crash.

We know from the HMDA database that in 2006 in California,minorities borrowed 77 percent of subprime home purchase dollars and 56 percent of all home purchase dollars (not counting borrowers of uncertain ethnicity and couples of mixed ethnicity).

Judging from Laderman and Reid’s adjusted foreclosure rates, minorities accounted for at least 70 percent of the dollars lost in California.

And California accounted for a sizable majority of all the defaulted dollars in the country. So California’s minorities alone might have accounted for about half the lost money. (Of course, huge amounts of the blame should also go to Wall Street rocket scientists who leveraged mountains of debt upon pebbles of probability that it would be paid back.)

If we were allowed to see the unadjusted default rates for California, we could know much more about what actually set off the Crash. As citizens, shouldn’t we have that right?

I requested the unadjusted numbers from Dr. Laderman and Dr. Reid via email, but they wouldn’t provide them.

So I filed a Freedom of Information Act request with the Federal Reserve Board in Washington D.C. asking for the 58 raw numbers in Laderman and Reid’s work that I needed to calculate the unadjusted foreclosure rates. I offered to pay for the clerical work necessary toemail them to me.

After many weeks of delay, the Board of Governors of the Federal Reserve replied with an “adverse determination” denying my request.

They offered two excuses:

  • “The information you seek does not currently exist in the form you request.”

Since it obviously does exist in readily available form (Laderman and Reid couldn’t publish the adjusted ratios without first calculating the unadjusted ratios), the Board of Governors quickly moved on to the heart of their rationalization for refusal:

  • “Even assuming the information could be derived andproduced in the format you seek, the resulting table, like the underlying data set would be a record of the Federal Reserve Bank of San Francisco, not the Board.Accordingly, we cannot provide you with any suchinformation.”

In other words, sure, we’ll admit that the Freedom of Information Act applies to the Board of Governors of the Federal Reserve, but the Federal Reserve Bank of San Francisco is a private entity, so it’s above the law.

This sounded absurd, but I quickly discovered that the Board of Governors had made the exact same defense when Bloomberg News sued the Fed under the FOIA to get the inside story on the bailout of Bear Sterns in 2008. The Fed Board of Governors replied, in effect,“Hey, that wasn’t us, that was the Federal Reserve Bank of New York that bailed out Bear Stearns. And they ain’t subject to the FOIA. Ha-ha!”

Fortunately, the August 24, 2009 decision by Loretta A. Preska, Chief United States District Judge, in Bloomberg L.P. v. Board of Governors of the Federal Reserve System found that the Fed had to pony up toBloomberg the Bear Sterns documents within five working days.

Judge Preska’s decision begins:

“This action concerns whether the Freedom of Information Act (“FOIA”, 5 U.S.C. 552, compels the Board of Governors of the Federal Reserve System (the “Board”), when responding to FOIA requests, to search for records held at the Federal Reserve Bank of New York (“FRBNY”) …”

However, just because the Fed has to kow-tow to Bloomberg News, which was founded by Michael Bloomberg, the Mayor of New York and Numero Ocho on the Forbes 400, doesn’t mean it is going to apply the same logic to a private citizen like myself.

It’s not clear from Judge Preska’s decision whether she has cast doubt on the Fed’s claim that the Freedom of Information Act doesn’t apply to its member banks in general, or just in the Bear Sterns case.

Before starting legal action against the Fed, an institution with, literally, infinite financial resources with which to wage legal warfare against me, I’d like to appeal to the lawyers among VDARE.com’s readers. Does Judge Preska’s opinion give me a legal leg to stand on?

Moreover, does anyone else object to the claim of the Fed, which is arrogating ever more power, that it can avoid the Freedom of Information Act by delegating work to its regional banks?

I have also filed an appeal with the Fed, which I ended with these words:

“… let me conclude by appealing to your public-spiritedness. All Americans have a strong interest in having the facts about the roots of our current economic downturn made public rather than continue to be kept secret. If we aren’t allowed to learn from the past, how can we avoid repeating it?”

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Our Lot: How Real Estate Came to Own Us by Alyssa Katz, [Emailher] a liberal journalist and NYU journalism professor who writes for Mother Jones, is the best book yet on how the sacred cause of “diversity” merged with pedal-to-the-metal capitalism to bring us the Great Mortgage Meltdown.

The book hasn’t garnered the attention it deserves—probably because it makes clear the bipartisan responsibility of both her opponents on the Right and her friends on the Left.

Our Lot focuses equally on the misdeeds of both capitalists and leftists. But I won’t give the boiler room boys as much attention in this review because they’re a more familiar tale, while Katz’s reporting on the role of her side is compelling testimony against interest.

Katz is remarkably frank about how government programs and political pressure to boost minority homeownership helped blow up the economy. She’s particularly good at explicating how leftist housing activists, such as ACORN and Gale Cincotta, the godmother of the Community Reinvestment Act, worked with Democratic politicians such as Bill Clinton, HUD Secretary Henry Cisneros, and Jim Johnson, CEO of Fannie Mae, to lay the groundwork for the Bubble and Bust.

Katz doesn’t devote quite as much depth to the Bush Administration’s culpability (which, to my mind, is even greater). Perhaps she lacked Republican contacts to give her the kind of inside story she got on her own party’s mistakes.

Still, Our Lot makes clear that on housing policy, the Clinton-Bush years form a single continuum with one overarching plan: boost theminority homeownership rate by lowering credit standards. I call it the Era of Multi-Culti Capitalism.

And there’s little reason to think that its lessons have been learned yet.

Katz begins her book in 1972, in the collapsing Austin neighborhood on Chicago’s Far West side, where Gale Cincotta was a Greek-American housewife.

Fortuitously for me, Our Lot fills in the political backstory of my own in-laws’ lives. My wife grew up in Austin, which had been a peaceful,densely populated working class where small children could play safely on the crowded sidewalks. Suddenly, in the late 1960s, middle class blacks began buying into the neighborhood.

Friends warned my late father-in-law, a classical musician and union leader, to flee, that underclass blacks would follow. But he and my late mother-in-law, a schoolteacher, resolved to show that integration could work.

After my future wife was mugged twice and her younger brother once, however, my in-laws finally sold in 1970—losing half their life savings.They moved 63 miles out of Chicago, to a dilapidated farm where they lacked running water for their first two years. (And my father-in-law started voting Republican.)

How did this disaster hit Austin? Katz demonstrates that it was the direct result of a 1968 change in the Federal Housing Administration, which set off a bubble and bust in America’s inner cities, like a smaller precursor of this decade. As in 2005,

In 1972, in Chicago and in every other city in the nation, almost anyone could get a home mortgage, including borrowers who didn’tearn enough to pay them off, on just about any house, for any reason. … And just like the recent adventure in lending beyond any rational limits, the mortgage disaster of theearly 1970s was born from a lofty ideological conviction that enabled the basest of crimes and most foolish of gambles under its cover, insulated from almost any scrutiny until the damage was already done.”

Franklin D. Roosevelt had started the Federal Housing Administration to insure home loans, and Fannie Mae to buy loans from lenders.Together, these agencies created the familiar template of 30-year-year fixed rate mortgages with a moderate down payment that underpinned the growth of home-owning suburbanites after WWII.

FDR’s FHA, however, was reluctant to back loans in black neighborhoods—a practice that Cincotta later dubbed “redlining”. Eventually, in 1968, liberal Illinois Republican Senator Charles Percy and the Johnson Administration revamped the FHA in a more politicallycorrect direction. Katz explains:

The FHA was now, in effect, a front in the War on Poverty. … Under the new regime, homebuyers living in Chicago and other innercities weren’t just eligible for loans. Lenders who signed up to sell FHA-insured mortgages were asked to do everything they could to make sure the buyers got them.”

Of course, the results of the Federal government’s encouraging mortgages with down payments of never more than $500 were absolutely predictable:

“Across the country, neighborhood destruction became a booming business, financed by the federal government. In Chicago they called it ‘panic peddling.’ In New York, it was ‘blockbusting.’ … The FHA-insured loans threw gasoline on that smoldering fire. … Indeed, the insurance made it profitable to seek out the most impoverished and unreliable borrowers, since the sooner a borrower defaulted on a loan, the more quickly the lender would get paid back in full by FHA.”

In Chicago, Gale Cincotta started a national coalition of “community activists”, who helped pass the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977. Cincotta remains a heroine to the author, although she can’t quite make clearCincotta’s logic. If the feds encouraging lending to minorities had destroyed Austin, how was more hair of the dog that bit you supposed to fix Austin?

Sadly, Austin remains unfixed. On a visit to Chicago earlier this month, my wife drove by her old house. Her former home had no doorknob, just an empty hole in the front door. But at least it was still standing, unlike two large apartment buildings on her old block, which are now just crabgrass-covered vacant lots.

Cincotta died in 2001—across the municipal border from Austin in OakPark. In telling contrast to Austin, that prosperous suburb that had succeeded in saving its famous district of Frank Lloyd Wright homes (where my father was born in 1917) by limiting the number of blacks allowed to move in through its notoriously illegal but effective black-a-block quota.

Katz notes that Cincotta’s organization of the left, combined with the invention of mortgage securitizing by investment banker Lewis Ranieri in 1983, made possible the disasters of this decade.

Cincotta began siccing her “pushy capitalist radicals” on Fannie Mae, which remained reluctant to buy the dubious mortgages of likely deadbeats. Still, Katz writes, “The reality was that to meet its growth objectives, Fannie Mae needed these poor people as much as the poor people needed them.”

Looking back from 2009, Katz asks:

“How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages? … It all started with the best of intentions, with … the activists who demanded bank loans for the poor and urban.”

Democrat Jim Johnson took over as CEO of Fannie Mae in 1991. He soon came up with a nice round number as a goal: one trillion dollars to lend by 2000 to ten million incremental homeowners. Katz writes:

“Jim Johnson only needed to point to the Atlanta Journal-Constitution’s [Pulitzer Prize-winning investigative series] The Color of Money to show that he was embarking on nothing less than a civil rights crusade. …”

Fannie Mae wanted to raise the homeownership rate to 75 percent, which meant, Katz notes, that “Consumers would have to borrow more and pay less up front.”

Johnson, whom Barack Obama had put in charge of vetting his Vice-Presidential candidates until it was revealed that he had snagged a cheap mortgage as a “Friend of Angelo” [Mozilo], quickly found a private partner:

“By 1993, he’d made a deal with [Mozilo's]Countrywide to buy $2.5 billion in loans for lower-income and minority borrowers. Financially, these homebuyers would be a motley lot, with no money in the bank, other debt to deal with, and less than stable employment. … Fannie Mae targeted much ofits advertising budget to Black Entertainment Television and made a sponsorship deal withUnivision, the dominant Spanish-language TV network. … The advertising campaign explicitly targeted young families, newimmigrants, and single parents.”

Katz points out the culture-changing role that Fannie Mae played:

“More than anything, Fannie Mae made working people comfortable with the idea oftaking on vast debt as the price for participating in the American Dream. From 1989 to 2004, mortgage debt for low-income people increased by 46 percent, compared with just 15 percent for upper-middle-income and 5 percent for high-income.”

Johnson, to his credit, retained important limits on debt, such as 3 percent minimum down payments. But George W. Bush would go to war against down payments in 2002.

Meanwhile Johnson’s allies in the Clinton Administrationdecided to goose the homeownership rate to at least 67.5percent. But who was left to lend to? Katz comments:

“The reality was that the consumers the[mortgage] industry had depended on … were spoken for. More than nine of every ten suburban middle-class white households owned their homes. If the industry were going to grow, it would have to tap new borrowers, and HUD’s research team concluded thatthose were going to be urban, black (only 43 percent were homeowners), Latino (41 percent), and people under age thirty-five (just 38 percent).”

So Clinton decided to enlist the real estate and financialindustries in Fighting Racial Bias for Fun and Profit. Katzquotes him from a 1994 speech to the National Association Of Realtors Conference:

” ‘I want to target new markets, underserved populations, tear down the barriers of discrimination wherever they are found,’ he proclaimed to cheers at the Realtors’ annual convention.”

Did Clinton really believe that in 1994 lenders were passing up profits out of prejudice? This theory was always economically illiterate. AsGary Becker’s Ph.D. thesis (based on a suggestion by his adviser, Milton Friedman) pointed out, if firms were irrational ly discriminatingagainst minorities, it would be profitable for nondiscriminators to enter the market and cash in. The much-hyped 1992 Boston Fed report that claimed to prove discrimination existed was easily refuted at the time by Peter Brimelow and Leslie Spencer in Forbes Magazine, when they demonstrated that it had misunderstood the meaning of mortgage default rates. But no-one wanted to hear that.

Still, if you had doubts about discrimination claims, Clinton had another argument for you: his National Homeownership Strategy would transform dissolute renters into respectable middle class citizensthrough the responsibility-generating magic of owning a home.

Unfortunately, this theory was based on the usual socialengineer’s misperception that correlation equals causation. Katz writes:

“Eventually, scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one’s home, the homeowners and tenants really aren’t all that different.”

And, it turns out, some people just aren’t responsible enough or capable enough to buy a home.

Hiring diverse mortgage brokers only exacerbated the situation:

“The experience in neighborhoods confirmed what Fannie Mae’s market research was also discovering: Borrowers who were new to home buying, especially if they were members of minority groups, tended to care more about how they were treated by the person selling them a loan than about the financial soundness of the loan itself. If it were a friend or a family member selling the mortgage or property, so much the better.”

Subprime lending grew—but as long as Fannie and Freddie wouldn’t bless it, the problem might remain chronic rather than critical. However, under Clinton the mandates were already in place that were pushing Fannie and Freddie to covertly back subprime mortgages. Katz:

“Remember what [community activists] won back in 1991: By now, nearly half of the loans financed by Fannie Mae and Freddie Mac had to go to low-income borrowers and urban communities. … “

But where can you find enough borrowers who are both poor and prime? Fannie and Freddie couldn’t. So they started buying mortgage-backed securities that mixed some subprime in with prime. Katz explains:

“By buying prime-heavy portions of the securities as investments, Fannie and Freddie could meet Congress’s quotas for the number of loans they had to finance for low-incomeborrowers. … But because the riskier parts of the pools consisted almost exclusively of subprime loans, Fannie Mae and Freddie Mac were effectively putting their billions intofinancing subprime lending…”

Momentum was building: “Under HUD secretary Andrew Cuomo, the Clinton administration gave a parting gift to the burgeoning subprime industry”: Cuomo raised the government-sponsored enterprises’ quotas for lower-income borrowers from 40 percent to 50 percent.

Most of the pieces were now in place for the foolhardy Bush Administration to push to a cataclysmic conclusion. That didn’t stop Bush from adding his special flavor, though:

“To this brew, George W. Bush added something quite peculiar for a conservative: a racial quota. Under pressure from the Bushadministration, which had launched an investigation into their financing practices, in 2002 Fannie Mae and Freddie Mac together committed to finance $1.1 trillion in loansspecifically for minority borrowers. … By the time George W. Bush left office, HUD decreed, three out of every five mortgages financed by the government loan funds would have to go to the poorer half of America …”

Katz doesn’t give Bush as much of a drubbing as he deserves. But she does tell the story of a Mexican carpenter in Arizona, Jorge Sotelo, who was employed doing the jobs Americans just won’t do (namely, building houses Americans just can’t afford). This immigrant had such a bad credit history that he couldn’t qualify for even a subprime mortgage. So he had to have his uncle to sign for it:

“Sotelo thought it was a joke when, in March 2004, his boss at a construction firm told him to prepare to meet the president, not of the company but of the United States. Jorge Sotelo would appear with George W. Bush as an exemplar of minority homeownership. … ‘No tienes que estar nervioso. Esto va a ser muy sencillo y muy divertido,’ President Bush reassured Sotelo backstage… ['No need to be nervous. This is going to be very simple andvery fun.']”

By the way, Katz runs into the same problem I’ve had finding coherent quotes in transcripts of Bush’s speeches: he always mangled key phrases:

“’There is a minority homeownership gap in America,’ Bush shared with the audience in the vast hangar. ‘Not enough minorities own their homes. It seems to me’—he paused to thump his palm on his chest, confessionally—’like it makes sense to help all people own their own homes.’ Bush peered down to a lectern to locate the number he was looking for. ‘Five point five new—million new minority homeowners into homes over the next fiveyears.’” [Transcript]

The President invited Sotelo and his wife to a White House Christmas party that year, but the expense left them short of cash. And they wanted two new cars.

“So they were grateful when they started getting offers for home mortgages that would let them get cash back in the transaction. In the two years since Jorge Sotelo’sconvergence with George W. Bush, Jorge had turned from a pariah into a desirable customer.”

Sotelo extracted $246,000 out of his home equity—which is a lotmore than the house is worth today. But don’t worry:

“Sotelo’s got it all figured out. With a low enough mortgage payment, they could cover the bills by renting the Avondale house to a tenant. He’d move his family out to a new place.

They’d be renting that home, right?

“’Oh, no,” says Sotelo, surprised at the question. ‘We’ll own it.’”

Katz sums up this decade:

“This was everything Gale Cincotta had fought for—and a worse nightmare than she could have imagined.”

The Mortgage Meltdown, and the Diversity Recession that it has precipitated (if we’re lucky), are worse nightmares than any of us could have imagined.

Unless we look frankly at the causes, it will all happen again.

Alyssa Katz goes at least some way to doing that.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The Securities and Exchange Commission filed an insider-trading civil suit earlier this month against perhaps the most widely loathed wheeler-dealer of the Housing Bubble: Angelo Mozilo, co-founder and longtime CEO of Countrywide Financial Corporation, the largest mortgage lender at the peak of the boom.

The Economist writes: “As is the way these days, the SEC’s case rests largely on internal emails.”[Accusing Angelo June 5, 2009]The SEC released excerpts from Mozilo’s emails to even more aggressive Countrywide executives in which the boss privately questioned his own firm’s new lax credit products. For example, on April 17, 2006, he sensibly lambasted Countrywide’s subprime 80/20 loans (in which borrowers would fund their nominal 20 percent downpayment by taking out a simultaneous second mortgage)

“In all my years in the business I have never seen a more toxic prduct [sic]. It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.]”

Unfortunately, Mozilo’s intermittent spasms of skepticism didn’t have much effect—because he was also:

  • Imploring government regulators to allow more zero down payment mortgages and liar loans in the name of fighting racist redlining;
  • Publicly reassuring investors about the creditworthiness of Countrywide’s increasingly bottom-of-the-barrel borrowers;
  • And…accelerating his own stock sales.

In February 2007, Countrywide’s shares peaked at over $45. The following summer the subprime resale market collapsed, setting off the current global economic collapse. Mozilo was lucky to talk hapless Bank of America into buying Countrywide in 2008 for less than one-tenth of its peak price.

Still, you can’t say that Mozilo didn’t warn you in countless speeches over the years that Countrywide’s corporate strategy depended upon pouring colossal sums down the rathole of lending to underserved Americans(i.e., minority and lower income borrowers).

For instance, in the top story in National Mortgage News on February 17, 2003:

“Mr. Mozilo labeled downpayments as ‘nonsense’ and said credit score requirements are ‘still much too high.’… the outspoken industry leader called on his colleagues to ‘take a chance on making mistakes rather than foreclose on the opportunity’ to put minorities and other underserved families into homes of their own.”

Or consider Mozilo’s January 14, 2005 press release that trumpeted Countrywide’s commitment of one trillion dollars through 2010 to politically favored groups:

“The $1 Trillion We House America Challenge … embodies Countrywide’s long-standing commitment to lead the mortgage industry in closing the homeownership gap for minority and lower-income families and communities,” said Countrywide Financial Corporation Chairman and CEO Angelo Mozilo…

And that was up $400 billion from the $600 billion Mozilo had promised in 2003 during a prestigious Harvard address entitled The American Dream of Homeownership: From Cliché to Mission.

I may have mentioned this before—but a trillion dollars here, a trillion dollars there, pretty soon we’re talking about real money.

And that trillion dollar figure was not just talk. Mozilo testified to Congress on March 7, 2008:

“To date, we have met $850 billion of that goal, and we remain committed to beating the goal by 2010.”

Countrywide’s reckless strategy in 2005-2006 is readily visible in the federal government’s Home Mortgage Disclosure Act database. This graph shows Countrywide’s subprime lending in just the Riverside-San Bernardino exurbs of Southern California, which are home to close to one-tenth of all the defaulted dollars in America. In the Inland Empire, Countrywide quintupled its subprime lending in one year, with the great majority going to minorities.

This 2005 data was downloadable by investors and journalists in October 2006, months before Countrywide’s stock price reached its apogee. But who would be so uncouth as to use the HMDA database to raise doubts about minorities’ ability to repay mortgages? The HMDA exists to help the federal government and community organizers drive more lending to minorities, not less!

The roots of Countrywide’s catastrophic trillion dollar pledge go back to the early years of the Clinton Administration. As Steve Malanga explained in the Spring 2009 City Journal:

“Pressuring nonbank lenders to make more loans to poor minorities didn’t stop … If it didn’t happen, Clinton officials warned, they’d seek to extend [Community Reinvestment Act] regulations to all mortgage makers. … To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.”[Obsessive Housing Disorder]

Interestingly, the Secretary of Housing and Urban Development who signed that 1994 deal with Countrywide was Henry Cisneros, who later served on Countrywide’s Board of Directors from 2001 to 2007, the Bubble Years. Cisneros made over $6 million from Countrywide fees and stock options.

In his 2005 “$1 Trillion We House America Challenge” press release, Mozilo announced:

“We have also called upon one of our esteemed directors, the Honorable Henry Cisneros … Henry will put to use his long and respected experience as an advocate for affordable housing who understands the benefits to communities of homeownership.”

Cisneros chimed in:

“Countrywide’s $1 trillion commitment is very tangible proof of this company’s commitment to fair, affordable and responsible lending. This company is leading the industry in closing the homeownership gap …”

An October 18, 2008 New York Times article about Cisneros by David Streitfeld and Gretchen Morgenson, Building Flawed American Dreams, recounts:

“But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Mr. Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development. He had President Clinton’s ear, an easy charisma and a determination to increase a homeownership rate that had been stagnant for nearly three decades. Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all.”

Cisneros rationalized to the NYT:

“It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance. ‘You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ he says. ‘But you really are just given a sledgehammer and an ax.’ “

Mozilo was hardly a victim of the politicians, however. They were co-conspirators.

For example, Mozilo notoriously provided special discount mortgages to a host of politically connected Friends of Angelo,” such as the chairman of the Senate Banking Committee, Chris Dodd (D-CN).

Mozilo pocketed an estimated $387 million from 2002 through 2006. As it turns out, of course, it would have been cheaper for all concerned if the Friends of Angelo in Congress had simply voted to give $387 million of the taxpayers’ money to Mozilo.

A tell-tale sign: According to his employment contract, Countrywide paid $95,000 annually for Mozilo’s country club dues at Sherwood Country Club in Thousand Oaks, CA, Quarry Country Club in La Quinta, CA and Robert Trent Jones Golf Club in Gainesville, VA.”Why did the Southern California financier belong to a golf club in the Washington D.C. suburbs? Obviously, to aid in schmoozing Washington politicians, regulators, and Fannie Mae / Freddie Mac executives, who bought vast quantities of mortgage-backed securities from Mozilo.

Back when Mozilo was riding high, Jeff Bailey’s New York Times profile of him pointed out:

“By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. ‘If it wasn’t for them,’ he said of Fannie and Freddie, ‘Wells knows they’d have us.’” [The Mortgage Maker vs. the World, October 16, 2005]

(By the way, from the Unfortunate Metaphor Department:

“’We didn’t really know what we were buying,’ said Marc Gott, a former director in Fannie’s loan servicing department. ‘This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.’ “[Pressured to Take More Risk, Fannie Reached Tipping Point, Charles Duhigg, New York Times, October 4, 2008])

It’s crucial to understand the subtle way in which government pressure for more minority lending affected the mortgage industry—selecting for success those executives like Mozilo who were both wildly ambitious and true believers in the diversity mantra.

As I pointed out in my VDARE.com analysis of the 2008 failure of Kerry Killinger’s Washington Mutual after it had pledged $375 billion in CRA lending to win FDIC approval for acquisitions, the government can’t force financial institutions to lend to likely deadbeats. You can always stay small and under the radar.

What the government can do, using a host of threats, is block from growing big those firms whose executives don’t share its dogma that lending more to minorities is a great idea.

Further, the government can excommunicate with anti-discrimination lawsuits anybody who expresses his skepticism on paper (or pixels). Imagine if a financial executive’s private emails turned up in discovery for a lawsuit had read: “Why are we lending so much money to Mexicans in the Inland Empire? How can Mexicans ever pay off these huge mortgages?” He would have been flayed alive in the press and in the courts.

So nobody in Corporate America puts their Doubts about Diversity into text where plaintiffs’ attorneys can later read them.

And that means they mostly don’t get communicated anymore—which explains much about why the Mortgage Meltdown, which has been highly concentrated among minority borrowers, was a surprise to so many.

Over the decades, the federal government changed the entire culture of the mortgage industry from penny-pinching skeptics to politically correct pollyannas.

Nobody took less persuading, however, than Mozilo. He always felt discriminated against by the old WASP financial elite. He said: “At least in my generation, when you are Italian in the financial services industry, you are terribly underestimated. A natural reaction for some in the financial community was to infer or suggest that perhaps you were associated with the Mafia.”

Bailey’s 2005 NYT article about Mozilo begins:

“A touch of resentment—based on income, education, social class—motivates countless ambitious people, though few will admit to it once they become successful. An exception is Angelo R. Mozilo … Modest origins—a butcher’s son from the Bronx who worked his way through Fordham University—drove Mr. Mozilo to push Countrywide past the mortgage businesses of far larger companies, including Citigroup, Wells Fargo and Washington Mutual. He readily admits to having a chip on his shoulder …”

Connie Bruck’s fairly sympathetic new article, Angelo’s Ashes: The man who became the face of the financial crisis, in the June 29, 2009 New Yorker (an abstract is online here) documents

just how driven Mozilo always has been by his Commitment to Diversity. Mozilo’s sister told Bruck:

“He was always this Italian guy people didn’t want to accept. When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”

(Actually, in many photographs, Mozilo looks less brown than orange, more like an Oompa-Loompa in Willy Wonka and the Chocolate Factory, or the victim of a bad spray-on tan.)

Bruck notes:

“Mozilo always saw himself as providing mortgages to many who were like him — disenfranchised. (‘So they’re not upper-middle-class white people—so what?’ he would say. ‘They’re Hispanics, and maybe their money is not in a bank—but they are responsible.’)’

Bruck’s article suggests that Mozilo actually believes what he told Congress in 2008:

“By the early 1990s, the government had recognized the obvious truth that our housing finance system was leaving major segments of society behind. In 1992, a landmark study by the Federal Reserve Bank of Boston made it clear that there were systemic underwriting issues relating to the treatment of African American and Hispanic borrowers. Policymakers called upon the mortgage industry to change their practices and redouble their efforts to better serve minorities and underserved communities. While many in the industry discounted the Boston Fed study as flawed, at Countrywide, we stepped up to the challenge by creating our affordable lending initiative known as ‘House America.‘ “

Bruck’s New Yorker article supports Mozilo’s sincerity—or self-delusion:

“… In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. … Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. …”

(This Boston Fed report was the one that Peter Brimelow and Leslie Spencer easily refuted in Forbes Magazine at the time, by demonstrating that it had misunderstood the meaning of mortgage default rates. But no-one, not just Mozilo, wanted to hear that.)

In 2002, a UCLA business professor named Eric Flamholtz suggested to Mozilo the disastrous strategy of trying to grow Countrywide’s share of the mortgage market from ten percent to an oligopolistic 30 to 40 percent. But to pursue its goal of market dominance, Countrywide’s marginal customers would inevitably have to be drawn increasingly from the ranks of those who had never qualified for a mortgage before: in other words, they’d be largely minority.

Result: Mozilo grew into the ultimate embodiment of the type of financial executive the federal government had been cultivating: a monster of ambition combined with a diva of diversity.

Bruck goes on:

“By 2004, Countrywide had become a leading U.S. mortgage lender to what it called ‘multicultural market communities.’ Mozilo always described Countrywide’s inclusion of minority and immigrant populations as both business and mission, and he had become perhaps the single most important advocate of those who believed in advancing homeownership as a means of achieving a more equitable society.”

According to The New Yorker, my kind of thinking about the Minority Mortgage Meltdown is personally and politically offensive to Mozilo:

“Several years ago, at the Midwinter Housing Conference, in Park City, Utah, after hearing some mortgage bankers saying that minorities didn’t deserve loans, he declared in a speech, ‘Homeownership is not a privilege but a right!’ Now he abhors the idea that the retrograde view has gained credence. As the Fox Business Network anchor Neil Cavuto said last September, ‘Loaning to minorities and risky folks is a disaster.’”

Sorry about that, Angelo. Tell you what: don’t worry yourself about bringing down the world financial system.

[Steve Sailer (email him) is movie critic for The American Conservative. His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S “STORY OF RACE AND INHERITANCE”, is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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What went wrong with the economy?

Lots of things, obviously.

Yet, there is one thread of cause and effect that is more central than any other.

I’ve begun, with the assistance of a sociologist, a sizable

statistical analysis of the causes of the crash.

  • First—what happened?

We can observe the crash all the way back to the winter of 2007, when subprime lenders, frequently headquartered in Southern California, began to go belly-up at an accelerating rate.

The big banks and investment houses had put too much trust in mortgages, and thus fell victim to predatorysecuritizing—the 21st Century mirror image of old-fashioned predatory lending. The Street was snookered by conmen—borrowers, mortgage brokers, and lenders—closer to the actual street, who had a more realistic idea of how little chance there was of these mortgages ever being paid back.

The financial wizards assumed that if a recession came along, the default rate would subsequently go up, but they never counted on defaults causing a recession. Of course, it’s exactly what you are not expecting that you are most vulnerable to.

  • Second—where did it happen?

So far, though, defaults haven’t been a massive problem nationwide. RealtyTrac reported last month that the top 26 foreclosure rates in the country are all found inmetropolitan areas in just the four Sand States: California, Arizona, Nevada, and Florida.

Indeed, due to its enormous population and outlandish home prices during the Housing Bubble, California alone accounts for a substantial majority of defaulted dollars.

  • Third —when did it happen?

If California, more than anywhere else, was the place, then 2006 was the time. Subprime lending exploded in the wake of President George W. Bush’s 2002 White House Conference on Increasing Minority Homeownership, which served as the Housing Bubble’s kickoff rally. By 2006, borrowers were scraping the bottom of the barrel.

DataQuick reported recently on California mortgages:

“Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3million in 2006, 8.5 percent have so far resulted in default.”

So, we know the What, the Where, and the When. What about—

  • Fourth—Who did it happen to?

Look at this pie chart:

It shows subprime lending in California by ethnicity. In 2006, lenders handed minorities 77 percent of subprime dollars. Hispanics alone got a majority: 53 percent.

This data is from the federal Home Mortgage Disclosure Act website. (See reports 4-2 and 11-3). The federal government keeps careful track to make sure that minorities get enough mortgage money. But, strangely, it pays no attention whatsoever to whether or not minorities are paying back their mortgages.

Private firms such as RealtyTrac and DataQuick countforeclosure filings, but they don’t record them byethnicity.

To get a sense of who is defaulting on their mortgages, we can match data up geographically from the government’s HMDA database and from RealtyTrac’s Q1-2009 table of foreclosure rates in metropolitan statistical areas (MSAs) with populations of at least 200,000. (Thanks to RealtyTrac for emailing a file not publicly online.)

Let’s first focus on subprime lending, which accounted for over a quarter of all dollars lent in California in 2006 for home purchases—i.e., to buy a home, not for refinancing or repairing an already owned home. (The ethnic patterns for refis are similar but not quite as ethnically skewed. But it was easy home purchase mortgages that inflated the Bubble the most.)

In California, subprime only accounted for 14 percent of all borrowing by non-Hispanic whites, but 47 percent of borrowing by Latinos and 52 percent by blacks.

This graph shows the strikingly close relationship between ethnicity and default rates among California metropolitan areas.

Let’s focus first on the lower left corner of the chart. Among the 20 largest MSAs in California, the lowest foreclosure rate is found in bucolic Chico in Northern California (0.80 percent), followed by three affluent coastal regions: San Luis Obispo (0.84), Santa Cruz (0.90), Santa Barbara (0.98).

In these towns, subprime loans to non-Asian minorities accounted for merely six to ten percent of mortgage dollars (prime and subprime).

The worst foreclosure rates are in the graph’s upper right: Merced (4.21 percent), Stockton (3.72), the huge Inland Empire of Riverside and San Bernardino counties (3.54), and Modesto (3.42).

In these hot inland regions, subprime loans to non-Asian minorities accounted for 30 to 36 percent of all mortgage dollars.

The correlation coefficient showing the goodness of fit of this very simple model is r = 0.89, which is extremely high. (A rule of thumb in the social sciences is that an r of 0.2 is “low,” 0.4 is “moderate” and 0.6 is “high.”)

What about all the white people who took out subprime loans—like that defaulting New York Times reporter who covers the Federal Reserve Board?

Well, in California, the epicenter of the economic collapse, there just weren’t all that many white subprime borrowers relative to the large number of subprime minorities. Subprime loans to non-Hispanic whitesaccounted for only 6 percent of all home purchase dollarslent in 2006, while subprime loans to minorities accountedfor 21 percent.

Not surprisingly, there is only a vague relation between white subprime loan shares of total lending and the default rate:

The correlation coefficient is just 0.21.

The May 15 New York Times noted in the passive voice:Minorities Hit Hardest by Foreclosures in New York [byMichael Powell and Janet Roberts]. One of my readers commented:

“As Orwell might have said, this shows why good writing produces clear thinking. To put the headline in the active voice: ‘MinoritiesDefault More than White Borrowers.

The NYT ‘s Powell and Roberts blamed reverseredlining and argued that the high minority default rate observed in New York was the fault of lenders chargingtoo high a risk premium. Yet a recent study by the Federal Reserve of New York economists Andrew Haughwout, Christopher Mayer, and Joseph Tracy, Subprime Mortgage Pricing: The Impact of Race, Ethnicity, and Gender on the Cost of Borrowing, did not find that black or Hispanic borrowers had to pay too much relative to their risk factors.

Indeed, if you stop and think about it, you’ll realize that the fact that so many of the lenders who strove to serve “underserved” minority communities, such as Washington Mutual and Countrywide, are now out of business or are on taxpayer life support suggests that lenders charged blacks and Hispanics on average too lowof a risk premium.

This is exactly how Peter Brimelow and Leslie Spencer said risk premiums worked in their definitive Forbesrefutation of the mortgage discrimination myth back in 1993. Of course, nobody listened.

What if we look at total lending, with prime and subprime aggregated together?

Minorities borrowed 56 percent of all dollars, prime and subprime, in California in 2006.

The correlation between total non-Asian minority borrowing and default rates is still very high, with an r = 0.81:

In sharp contrast, the white share of total lending is inversely correlated with defaults;

One problem with this analysis is that it’s not granular enough. For example, RealtyTrac’s report lumps together Los Angeles County and Orange County into one vast MSA.

If you look within MSAs, however, this pattern of the Housing Bust being worse in heavily Non-Asian Minority neighborhoods is even more evident.

For example, DataQuick has a useful list of the change in average home sale price from 2007 to 2008 for hundreds of California neighborhoods. (Price declines correlateclosely with foreclosure rates.)

Within vast Los Angeles County, the seven communities with the sharpest price declines are rapidly Hispanicizing Palmdale, Lancaster, and Little Rock in the high desert, San Fernando and Pacoima in the all-minority north end of the San Fernando Valley, and Maywood and Compton in South Central. (Maywood is all Latino, while Compton, the spiritual home of gangsta rap, is now majority Latino.)

In contrast, the only LA County communities to enjoy price increases in 2008 were the expensive beach towns of Malibu and Venice, idyllic Avalon on Catalina Island, San Marino (Pasadena old money and Hong Kong zillionaires), and Brentwood (which you may recall from the OJ Simpson trial).

Perhaps it’s not fair that the rich got richer while the poor got, well, free rent until the sheriff finally tossed them out. Yet, it’s important to understand what happened—even though few politicians and pundits seem interested.

This is hardly the only cause of the financial crisis. Still, this is, more than anything else, the central chain of cause and effect of recent history.

Which brings us to the final question:

  • Fifth—Why did it happen?

Why did California crash the country?

In a word: diversity.

Diversity is a word with diverse meanings these days. And, not surprisingly, diversity contributed in diverse ways to the mortgage catastrophe. It’s important not to oversimplify this explanation and blame everything on the Community Reinvestment Act or any other single mistake.

Instead, the root cause was the elite’s intoxication with the concept of diversity—and its concomitant suppression of dissent.

For example, the massive immigration into California unsurprisingly increased demand for housing while decreasing the percentage of the population who weregood credit risks. Last week, the Pew Hispanic Centerreleased its multiple regression study of foreclosure ratesby county, “Through Boom and Bust: Minorities, Immigration, and Homeownership.” It wound up with an unwelcome finding much like mine:

“Of the several demographic attributes included in the analysis, the immigrant share of the county population is the one that emerges as the most important correlate withthe foreclosure rate. And within the immigrant population, the share of foreign-born Latinos stands out as a more notable influence than the share of non-Hispanic immigrants.”(Appendix Table A5).

One obvious reason for this correlation: Latin American immigrants brought with them a fiesta culture not conducive to thrift.

But the federal government’s war against redlining discrimination made it a legal offense for financial firm employees to point out inconvenient facts like this—engendering what Orwell called “protective stupidity”.

In the long run, however, stupidity isn’t terribly protective. Reality always gets its revenge.

Or, to quote Kipling, as I did on VDARE.COM in a now-forgotten context long ago: “The Gods Of The Copybook Headings With Terror And SlaughterReturn.”
[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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[See also Time For Another Pujo Committee? by Peter Brimelow]

During the Republican Presidential primary campaign in 2007 and early 2008, Congressman Ron Paul (R-TX) insisted on talking about such outré topics as the dangers of the Federal Reserve System and fiat money, for which he was widely snickered at. Back then, everybodyjust knew that the geniuses at the Fed had solved all our fundamentaleconomic problems. Now the only one that remained was (as Barack Obama kept pointing out) how to more equitably divvy up the endless stream of wealth.

Granted, when your kids would ask you why a dollar bill was worth a dollar, you’d start out confidently enough, but soon find yourself waving your hands around and answering their increasingly skeptical questions with “Because Daddy says so!”

Yet, even though you, yourself, might be a little hazy on the details, you could be confident that Alan Greenspan and his protégé BenBernanke had this money thing all figured out. So, why listen to Ron Paul talk about something as obviously obsolete as the gold standard?

Early 2008 sure seems like a long time ago now …

Perhaps not surprisingly then, one of the surprise bestsellers of 2009 is Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr., a historian with the Ludwig von Mises Institute. Despite almost no reviews in what Treasury Secretary Tim Geithner might euphemize as the legacy press— Woods’s book (with its Foreword by Rep. Paul) has risen as high as #11 on the New York Times bestseller list.

Woods points to six main causes for the current economic travails, which began with the rise in mortgage defaults in 2007 (largely in the four Sand States). His assessment overlaps considerably with the under-reported aspects that I’ve emphasized:

The great sportswriter A. J. Liebling boasted: “I can write better than anybody who can write faster, and I can write faster than anybody who can write better,” and Woods does a fine job of hitting Liebling’s sweet spot in lucidly presenting an Austrian School of Economics analysis of our current troubles.

The “Austrians” (most of whom are American these days) have been waiting a long time for an opportunity to make their case.

Austrian Economicsis one of the field’s various schools, such as the Chicago School, Keynesianism, and Marxism. Its founders were U. of Vienna thinkers such as Ludwig von Mises and Friedrich Hayek, and its American champions include Henry Hazlitt and Murray N. Rothbard.

In recent decades, the Austrians have lost out on most of the economics professions’ glittering prizes to neoclassical economists. Mainstream academics make the simplifying assumption that the economy will achieve “equilibrium,” a simplification that allows them to engage in dazzling displays of mathematical complexification. These “proofs” have routinely impressed editors of academic journals andthe Nobel Prize committee. During the years of apparent economic stability from 1983-2006, their assumption that “equilibrium” was a good assumption for modeling the real world economy came to seem reasonable.

The Austrians continued to eschew complicated mathematics as unrealistic in depicting an-ever changing economy, a stance which hurts them professionally in publish-or-perish universities.

Steve Keen, a non-Austrian economist at the U. of Western Sydney (and a leading figure in what I might call—to maximize confusion—the nascent Austr alian School), explained in his 2001 book Debunking Economics: The Naked Emperor of the Social Sciences:

“Far from arguing that capitalism is the best social system because of the conditions which pertain inequilibrium, Austrian economists argue that capitalism isthe best social system because of how it responds to disequilibrium.

“Disequilibrium” is a fair description of the current state of the economy. Keen goes on:

“The Austrians emphasize the importance of uncertainty in analyzing capitalism, whereas neoclassical economists, as we have seen, either ignore uncertainty, or trivialize it by equating it to probabilistic risk.”

As we’ve observed over the last 20 months, Wall Street rocketscientists marinated in mainstream economic assumptions badly underestimated the riskiness of complex mortgage-based assets. The math whizzes at AIG, Bear Stearns, and the like assumed that the risk of a borrower defaulting followed a normal probability distribution(a.k.a., a “bell curve”) and thus randomness could be diversified away by bundling huge numbers of mortgages together. Assuaged by that comforting assumption, not enough Wall Street analysts paid attention to fundamental changes in the market, such as the diminishing capability of the rapidly changing population of marginal homebuyers in California, Arizona, Nevada, and Florida to pay backtheir huge loans.

Austrian Economics is subtle and sophisticated, especially in its depiction of malinvestmentand the subsequent economic downturns, which is vastly more sophisticated than the muddled thinking on the subject of, say, Keynesian Nobel Laureate Paul Krugman.

Yet Woods tends to paint an overly rosy picture of the infallibility of the free market when he blames the boom-bust cycle entirely on the Federal Reserve. This needlessly detracts from his credibility.

To point out the central bank’s culpability in business cycles, Woods asks rhetorically:

“But when a great many businesses, all at once, suffer losses or have to close, that should surprise us. … So why should businessmen, even those well established and who have passed the market test year after year, suddenly all make the same kind of error?”

Why? Because, among other reasons, businessmen are human beings, subject, like all of us, to extraordinary popular delusions and the madness of crowds.

This doesn’t mean that the Federal Reserve is necessarily better at preventing booms and busts than the more free market alternatives advocated by the Austrians. It just means that the Austrians shouldn’toverpromise on what free markets can deliver.

Having spent 18 years in the corporate world, I’ve seen (and helped make) plenty of mistakes.

Consider, for example, a small boom-bust circuit that I was involved in: the now almost-forgotten Initial Public Offering Bubble t hat reached a climax in March 1983. The start-up marketing research company where I went to work in 1982 decided to go public early the nextspring at $16 per share. If we met our performance projections, that seemed like a reasonable price. I put in $2,000 to buys shares at the offering price.

A few days before our initial public offering (IPO), however, our investment bankers got wind of a growing mania for any and all IPOs that had anything even vaguely to do with technology. Therefore, the bosses raised our offering price to $23.

When the bell rang on the first day, to our astonishment, the trading price instantly shot up and stayed at $43 per share.

I had made $1,740 on my $2,000 investment in one day. Woo-hoo!

Soon, though, that IPO Bubble was kaput. Over the next couple of years, during which the firm largely lived up to our revenue and profit forecasts, our stock drifted back down to that $16-23 range that management had always figured was appropriate.

And yet, as bad as that loss on our stock was for investors who bought in at the peak of the March 1983 IPO bubble, we did much better by them than most of the other IPOs in that bubbly month. Within a few years, many of our vintage of IPOs had gone broke and been delisted by NASDAQ. The Stingy Investor blog recalls:

“In the 1977-1983 bubble, fully 61% of all IPOs were issued near the climax in 1983. Two years later a Forbesstudy found that between 1975 and 1985, IPOs on average gained a paltry 3% annually vs. 14.8% for the S&P 500.”

Now, you could blame the silliness of the 1983 IPO Bubble on the Fed. After all, there was a lot of money suddenly sloshing around in thestock market because in August 1982, when the Dow Jones Average had dropped as low as 776, Paul Volcker’s Fed had decided that it had finally broken the back of the inflation and could afford to ease up on interest rates.

And, yet, Volcker was right to loosen credit. The nasty recession of 1981-82 had done its job, and the country was ready for prosperity (even if its IPOs couldn’t live up to euphoric expectations).

There are two relevant questions about that boom and bust:

  • Q. Why was there a lot of money available for investing in March 1983?
  1. The Austrians, with their focus on the Fed, can answer that.
  2. Well, markets can make mistakes.
  • Q. Why did too much money go to IPOs that month?

We can ask similar questions for the vastly more catastrophic Housing Bubble:

  • Q. Why was there so much liquidity?
  1. Woods’ answer—Greenspan’s policy of kicking the can down the road instead of wringing the excesses out of the system after the Tech Bubble burst in 2000—makes sense. (You could also point to other problems, such as our huge trade deficits with China, which they reinvested heavily in Americanpaper.)
  2. Here, both government and private actors are to blame. In his chapter “How Government Created the Housing Bubble,” Woods summarizes well how political correctness biased the government toward insisting on more lending to minorities.
  • Q. Why did so much of that money flow into ridiculous mortgages? Surely, it could have gone into something a little less stupid?

Yet it’s worth remembering that political correctness infected the corporate world as well. The particular problem wasn’t greed, which ye shall always have with you, but a lack of counterbalancing fear.

Hispanic immigration and high birthrates were driving up the population in states like California. Wall Street assumed this would automatically boost home prices … after all, everybody’s the same on the inside, right? Few bothered to ask unpopular questions about how these new homebuyers in the Sand States could make enough to pay the mortgages back, or could find Greater Fools to buy into their bad school districts.

And thus the financial world felt confident enough to build insanely huge inverted pyramids of leverage on the backs of manual laborers and speculators.

Bottom line: Woods’ Meltdown is an important contribution to understanding the mortgage mess and the Diversity Depression. But we’ve only begun to unravel it.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Was the mortgage meltdown the fault of Republicans or Democrats? Was it caused by the ideology of deregulation or of regulation?

Questions like that are fun to debate because they follow the usualfault lines that divide the country into fairly equal and thus intensely rivalrous halves.

But let’s think about the Housing Bubble from a more generalstandpoint for a moment. Is it terribly likely that a disaster that long gestated and then ran amok in plain sight for over three years (from 2004 into early 2007) would turn out to be overwhelmingly the fault of a single party or ideology?

Why wouldn’t the opposition have sounded the alarm? Don’t the Republicans and Democrats, as well as the free marketers and the leftists, all have well-oiled publicity machines for pointing out the shortcomings of their enemies?

Isn’t it more plausible that a vast, slow-motion catastrophe would bethe result of a noncontroversial bipartisan consensus?

In particular, the more everyone agrees that dissent on a particular topic is unspeakably evil, if not unthinkably unimaginable, the more likely the country is to stumble over exactly that blind spot.

When everybody tells you, “Pay no attention to that man behind the curtain”, you really, truly need to start paying attention.

In recent decades, “diversity” has become one of America’s sacred mantras, propagandized relentlessly in the schools and the press. Expressing skepticism about the diverse within internal businesscommunications has become, in effect, a civil offense, punishable in anti-discrimination lawsuits.

Not surprisingly, self-interested manipulators learned to play the race card to justify their machinations.

Thus, the universally-endorsed societal necessity of lending more money to minority homebuyers was used to justify both regulation (such as the Community Reinvestment Act) and deregulation (such as the hands-off approach to subprime bucket shops). Any practice positioned as helping minorities achieve their fair share of the American Dream had the wind at its back.

Consider, for example, three huge Southern California originators ofdubious debt—Ameriquest, New Century, and Countrywide—all of which collapsed in recent years when Wall Street and the big banks finally wised up to the mortgage-backed securities they peddled.

Yet, on the retail side, these were not new-fangled scams. As Elvis Costello pointed out, there’s no such thing as an original sin. They operated old-fashioned boiler rooms employing high-pressure salesmen to talk people who had no business being homeowners into taking out huge high-interest loans.

Laissez-faire lending is like a zero down payment mortgage: there’s no margin for error. Fraud and even forgery always loom as temptations. E. Scott Reckard and Mike Hudson reported in 2005 for the Los Angeles Times on Ameriquest, then the biggest subprime originator:

“Borrowers were told what their income had to be to qualify, these ex-workers said, and they were often coached to invent fictitious side jobs, such as home-based computer consulting, to hit the mark. Nearly one out of every six Ameriquest mortgages sold to Wall Street investors in 2004 was a stated-income loan, according to a Times analysis of 90,000 Ameriquest mortgages listed in filings with the Securities and Exchange Commission.”[Workers Say Lender Ran 'Boiler Rooms', February 4, 2005]

We’ve been down this path of fishy finance before. That’s why moststates have usury and other laws on the books to prevent lenders from targeting marginal borrowers. Whether these laws are kept up to date and whether they are enforced are different questions, however.

It doesn’t matter whether you call them anti-predatory lending laws or pro-prudent lending laws. The point is that loans that are unlikely to be paid off hurt everybody. Wise public policy attempts to balance off Type I errors of excessive credulity versus Type II errors of excessive skepticism.

So, surely, the rise and fall of the subprime peddlers demonstrates the iniquity of the rightwing ideology of deregulation? We needed moreregulation, not less!

Wrong! Please notice that minority lending regulations primarily pushed in what turned out to be the wrong direction: too much gullibility. When it came to mortgage lending to minorities, as regulated by theCommunity Reinvestment Act and other anti-discrimination laws, excessive skepticism was made illegal. Lenders and investors were only allowed to err in one direction.

Not surprisingly, excessive credulity came to dominate the system.

By no means were all the subprime peddlers sincere believers in thedogmas of multiculturalism. Instead, they knew they could wield political correctness like a club to scare off regulators.

Thus, to avoid inconvenient investigations, the owners of subprimemortgage originators tended to present themselves to politicians and the press as financial statesmen, moral leaders in the war on bigotry against minority borrowers.

Sue Kirchhoff reported in USA Today on April 17, 2007 in Subprime lenders’ big gifts helped lawmakers:

“The nation’s top subprime lenders, including New Century Financial (NEWC), which has filed for Chapter 11, have lavished generous donations on homeownership programs sponsored by black or Hispanic members of Congress. The paid sponsorships give lenders an entree to lawmakers and their constituents. Along with New Century, backers include Countrywide Financial (CFC), which settled a New York fair-lending investigation in 2006 by agreeing to compensate black and Latino borrowers for improper loans and set up a $3 millionconsumer-education program. Another is Ameriquest Mortgage, which in 2006 agreed to a $295 million settlement with state attorneys general who charged it with improper lending practices.”

Similarly, Susan Schmidt and Maurice Tamman of the Wall Street Journal reported on January 5, 2009 in Housing Push for Hispanics Spawns Wave of Foreclosures:

“The Congressional Hispanic Caucus created Hogar in 2003 to work with industry and community groups to increase mortgage lending to Latinos. At that time, the national Latino homeownership rate was 47%, compared with 68% for the overall population. Hogar called the figure ‘alarming,’ and said a concerted effort was required to ensure that ‘by the end of the decade Latinos will share equally in the American Dream of homeownership.’

Hogar’s backers included many companies that ran into trouble in mortgage markets: Fannie Mae and Freddie Mac, both now under federal control; Countrywide Financial Corp., sold last year to Bank of America Corp.; Washington Mutual Inc., taken over by the government and sold to J.P. Morgan Chase & Co.; and New Century Financial Corp. and Ameriquest Mortgage Corp., both now defunct.

Hogar’s ties to the subprime industry were substantial.”

Angelo Mozilo of Countrywide, for instance, was a regular keynote speaker at minority conferences, where Tan Man regularly “called for the elimination of the down-payment requirements for low-income and minority borrowers.” [Mortgage Banking, January 2005]

Another SoCal subprime legend was the late billionaire and ambassador Roland Arnall, a leader of the Great and the Good as the co-founder of the Simon Wiesenthal Center and the Museum of Tolerance. He was also the owner of Ameriquest, which went out of business in 2007 after agreeing in 2006 to a $325 million settlement with 49 states over its abusive practices.

Arnall was a close personal friend of politicians of both parties. He gave the first $250,000 to Democrat Gray Davis’s successful 1998California gubernatorial campaign. Gov. Davis reciprocated by officiating at Arnall’s second wedding. Those investments paid off in 2001 when Ameriquest’s friends in Sacramento failed to put teeth in a predatory lending bill.

In 2003, Arnall gave Gov. Davis $230,000, but donated to the man who unseated him, Arnold Schwarzenegger, $1.4 million. Arnall became the top donor nationally in the 2004 election cycle, leaningheavily toward the GOP after decades of favoring Democrats. Yet, according to his obituary in the Los Angeles Times, Arnall “continued to donate to certain Democrats, including many members of the Latino Caucus in the state Legislature.”

Arnall put a number of black civil rights leaders on the payroll, whohelped him get confirmed as the U.S. ambassador to the Netherlands in 2006. ABC’s Nightline reported:

“I think no one has said, for example, that Roland Arnall personally supervised loans in a way that shows that he is not an individual of good character,” the Leadership Conference on Civil Rights’ Wade Hendersen told “Nightline.”

While Hendersen said he is “profoundly disappointed that some of these practices that have now come to light would be associated with Ameriquest,” he said that “at the end of the day, I’ll stand by the fact that I think Roland Arnall is a man of integrity.”

The Leadership Conference on Civil Rights has received hundreds of thousands in donations from Ameriquest.

Similarly, Deval Patrick, now the Democratic governor ofMassachusetts, spoke up for Arnall’s nomination. Patrick joined the Ameriquest holding company’s board of directors in 2004 after suing them for discrimination in the 1990s. As Matthew Richer pointed out in VDARE.com last year:

“Indeed, the curious thing about Deval Patrick is his habit of suing an organization for discrimination, then parlaying the relationship into a coveted position with the sameorganization later on …”

It’s common for minority activists to start out by charging predatorylending, only to eventually announce in triumph that the lender has agreed to make even more loans to minorities.

If you stop and think about it, it’s obvious that more lending tominorities makes it mathematically inevitable that there will be even more imprudent loans to marginal borrowers and more foreclosures upon minority homebuyers.

But nobody stops and thinks because we’ve been told repeatedly thatminorities don’t get enough loans.

By the way, who keeps telling us that? Well, it generally turns out to be people like Angelo Mozilo and Deval Patrick.

Funny how that works…

Or, in the case of the Minority Mortgage Meltdown, doesn’t work,bringing down the entire world economy.

America needs to get real about race–to acknowledge the man behindthe curtain—before something even worse happens.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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“He who writes history determines the future”.

So said former Senator Phil Gramm [R-TX] at an American Enterprise Institute panel discussion on IsDeregulation a Cause of the Financial Crisis?Acondensed version Gramm’s speech was published in the Wall Street Journal on Friday, February 21, 2009 with the subtitle Loose money and politicized mortgages are the real villains.

As Gramm suggests, whatever emerges as the conventional wisdom explaining the causes of the current Crash is likely to determine government policy for a generation.

And for Gramm, not just a former Senator but also a one-time Texas A&M economics professor, debating the causes of the Crash is not an academic question: it’s both political and personal. His place in history depends on the outcome.

Nevertheless, Gramm still couldn’t muster the courage tostate his case plainly—for reasons that VDARE.COM readers, but few others, will readily grasp.

Sen. Gramm, who was more or less the economic brains of the Republican Congressional delegation back in the late 1990s, is, of course, not an unbiased observer of this dispute. He coauthored the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, which some are blaming for the current collapse. (Here’s apaleolibertarian critique of it from the Mises Institute.) The act repealed the part of the Glass-Steagall Act of 1933 that had legally separated investment banks from regular banks.

(Personally, I don’t yet have a strong opinion on Gramm’s law, other than that the financial system didn’t seem to be broken in 1999, so why fix it? I rather liked the old Glass-Steagall structure where bankers were supposed to be boring and federally insured, while investment bankers were buccaneers, and never the twain shall meet. As an investor, you could pick your poison: low returns or high risk. Back then, you at least had a clue which business a financial institution thought it was in.)

At AEI and in the WSJ, Gramm returned fire against his critics. He pointed out that, while we don’t understand the Crash fully yet, we at least all know perfectly well how the disaster started:

“And while there is great debate about what caused it and what the cures are, there is no debate about the fact that the crisis, at least at its beginning … was a crisis in the mortgage industry in general and subprime lending in particular.”

I found both the spoken AEI and text WSJ versions ofGramm’s argument striking, although not always for reasons Gramm intended.

Like me, he attributes a significant share of the blame to apanoply of federal anti-discrimination policies that push for more mortgage lending to minority and lower incomeborrowers. See my The Minority Mortgage Meltdown (contd.): How The Community Reinvestment Act Fits Inand The Minority Mortgage Meltdown (cont.): Charting The CRA Crackup.

Unlike me, however, he can never bring himself in either his 1,500-word WSJ op-ed or his 5,300-word AEI speech to mention the M Word: “minorities”.

Gramm places culpability on both Alan Greenspan’s lowinterest rates early in the decade and “politicized mortgages”—a concept more than familiar by now to VDARE.com readers. He said at AEI:

“Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans.”

Yet Gramm’s description of the Community Reinvestment Act is bizarrely stilted:

“But over time it came to be used as a vehicle to pressure banks to make loans to people with moderate-to-low income.”

Well, yes … but talking only about income rather obscuresthe essential point about the CRA. After all, its supportersalways described it as crucial to prevent racist redlining.

If you aren’t a regular reader of VDARE.com, you’d need a secret decoder ring to understand what Gramm means by “politicized mortgages”. The closest he manages to come to explaining what he’s talking about in his Wall Street Journal op-ed is his euphemistic reference to Fannie Mae and Freddie Mac’s 35 percent quota that “targeted geographic areas deemed to be underserved”.

You know and I know that underserved is Diversity Speak for black and Hispanic neighborhoods. Yet Gramm still can’t come out and say it in public. (In his oral presentation at AEI, he had used the somewhat morerevealing term inner cities and depressed areas. But he didn’t dare be even that clear in the WSJ, or maybe the editors wouldn’t let him)

Moreover, that raises a fundamental question: How can Respectable Republicans like Gramm ever hope to persuade the public when they are terrified of saying what they mean for fear of being branded a “racist”?

I guess Gramm would prefer to go down in history as the man who blew up the world than to be accused by the SPLC of uttering hatefacts.

For example, it would strengthen Gramm’s case to point out that Crash was kicked off not just by a subprime lending crisis, but one concentrated in merely four states:<st1:state
w:st=”on”>California, <st1:state
w:st=”on”>Arizona,<st1:state
w:st=”on”>Nevada, and <st1:state
w:st=”on”>Florida. In August 2008, these accounted for 50 percent of all foreclosures and the vast majority of defaulted dollars.

But if Gramm were to mention that, it would also raise the unmentionable specter of Demographic Change.

There was overlending going on all over the world—yet the collapse started in a few rapidly Hispanicizing states inthe U.S. Why?

You have to look at both sides of the equation: lending and repayment. In California and Company, not only was too much money being lent relative to past rates (which was happening in lots of other places, too), but, also, the earning capacity of the new homebuyers to pay back their loans was declining—as Americans moved out and LatinAmericans moved in.

That double whammy in the Sand States of increasing lending and decreasing human capital is what blew the gasket on the world economy.

Of course, we also needed a third element—politicalcorrectness—to keep investors from noticing what washappening.

And that, judging from Gramm’s timidity, appears to be as strong as ever.

Gramm does make the subtle but important point that the huge federal push for more lending to minorities gavetoxic loan peddlers, such as Angelo Mozilo’s CountrywideFinancial, “regulatory cover”:

“But more than just nudging them onmandating, we gave them an excuse, and we gave them a shield against regulation. It was not just that CRA and federal housing policy pressured lenders to make risky loans—butthat they gave lenders the excuse and the regulatory cover.…”

Countrywide, which originated 20 percent of the new mortgages in the country in 2006 before collapsing and being bought by Bank of America last year, is often cited as the ultimate refutation of the theory that the Community Reinvestment Act contributed to the Housing Bubble. [11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis By Sara Robinson, Campaign for America's Future, October 2, 2008.] Countrywide, the poster child of the Bubble, wasn’t covered under the CRA because it wasn’t a bank. It merely originated, securitized, and serviced mortgages.

But why wasn’t Countrywide ever brought under a law that was frequently amended?

Because, as Gramm suggests, Mozilo constantly pledged his devotion to massive minority lending. (And, don’t forget, he handed out below-market mortgages to power players like Sen. Chris Dodd). Gramm complains:

“When Countrywide came to Washington and was the first lender to sign an agreement with HUD [in 1994]— … a Declaration Of Fair Lending Principles And Practices—and then set about to eliminate standards in lending and become the largest mortgage lender in the world and the first major casualty of the financial crisis, what regulator after that press conference was going to feel comfortable in moving against Countrywide? Now, Countrywide became HUD’s poster child for what a good home lender was like.”

For example, during a prestigious Harvard address in 2003, Mozilo announced Countrywide’s “commitment to fund a total of $600 billion in home loans for previously underserved Americans in this decade”.

After that seemingly magnanimous gesture, he went on in his speech to lobby Washington to eliminate requirements for down payments, to speed approval (i.e., to not check up on the bogus incomes claimed by mortgage applicants), and to thwart various states’ attempts to rein in predatory lending. (Countrywide’s high-pressure sales techniques were often straight out of David Mamet’s Glengarry Glen Ross.)

One of the recurrent paradoxes you run into when researching the history of the Housing Bubble is that complaints by liberal politicians such as Barney Frank and liberal pressure groups such as the Greenlining Institute about predatory lending are frequently resolved by the lender promising to hand out even more hopeless loans to minorities. (The secret is that the community organizers often wind up with a small cut of the action.)

Mozilo always wrapped himself and his ludicrous loans in the sacred mantle of diversity, just as George W. Bush did. Mozilo orated at the Harvard conference:

“As President Bush said last October: ‘Two thirds of all Americans own their homes, yetwe have a problem here in<st1:country-region
w:st=”on”>America because fewer than half of the Hispanics and half of the AfricanAmericans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good ofour Country, for the sake of a more hopeful future. We’ve got to work to knock down the barriers…’

“And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for whiteAmerican households. … My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse.”

Thanks a lot, Angelo and George!

<st1:place
w:st=”on”>Mission Accomplished! (To coin a phrase.)

Although we are constantly told that “deregulation”caused the Crash, the precise place where the global economy blew a tire and skidded into the ditch was one of its most regulated sectors: American mortgage lending to lower income and minority homebuyers.

The problem was neither with regulation or deregulation in the abstract. The problem was that, in the real world, the federal government was energetically regulating the mortgage industry in exactly the wrong direction.

The government was still fighting the last war—againstinsufficient lending to minorities—during the years 1999 to2006 when mortgages to Hispanics for home purchasesincreased by 691 percent.

The federal government had erected vast regulatory apparatuses to make sure enough money was being lent to minorities—but nothing to measure whether they were paying enough back.

In addition, the Bush Administration’s deregulatory efforts in the mortgage industry, such as its attack on down payment requirements, were similarly aimed at getting more mortgage dollars into the hands of minorities.

For example, Bush’s Housing and Urban Development (HUD) department proposed in a 2004 press release that:

” ‘Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands ofAmerican families, particularly minorities,’ said HUD’s Acting Secretary Alphonso Jackson. ‘President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal.’”

This is not to say we should have no financial regulation. Indeed, Gramm outlined some simple and sensible regulations in his speech, such as a minimum down payment on home purchases of five percent.

What we need is not more or less regulation, per se, butbetter regulation.

And it can only be arrived at through open, frank, and courageous discussion of reality.

But that, as Gramm’s occluded op-ed shows, remains in short supply.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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[See also The Minority Mortgage Meltdown (contd.): How The Community Reinvestment Act Fits In ]

You’ve heard over and over about how the 1977 Community Reinvestment Act (CRA) could not bear any blame for the mortgage meltdown that began in 2007 because the time lag was too vast. As the New York Times editorialized on October 15, 2008: “First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years?”

That seems like a good question. Three decades is a long time.

Last Thursday, though, I found an eye-opening graph of cumulative Community Reinvestment Act promises by banks from 1977 through 2005. According to the September 2005 report CRA Commitments by the National Community Reinvestment Coalition (NCRC), which bills itself as “the nation’s economic justice trade association of 600 community associations:”

As the chart below shows, $4.2 trillion in CRA dollars was committed from 1992 through 2005. In contrast, $8.8 billion was negotiated from 1977 through 1991.

When measured in terabucks, the Community Reinvestment Act was negligible until the 1990s. And it was still small potatoes until theClinton “reforms” of 1995 and the rise of well-organized pressure groups of the kind affiliated with the NCRC.

But the biggest flood of CRA assurances came during the presidency of George W. Bush, who repeatedly called in 2002-2004 for 5.5 million more minority homeowners by 2010. Cumulative bank pledges(typically doled out over ten years) grew from $1.85 trillion in 2002 to $4.20 trillion in 2004.

Indeed, total CRA commitments increased by $1.63 trillion in 2004 alone, the first year of the Housing Bubble.

For the benefit of overseas readers for whom the words “billion” and “trillion” mean different things than they do for American readers, letme spell that last bit out as if I was writing it on a check. In 2004 alone, banks publicly promised to lend over the next decade to CRA-qualified minority and lower income neighborhoods the sum of$1,630,000,000,000.00.

That’s a big number.

And those kind of numbers put a lot of upward pressure on home prices as they got incorporated into expectations. Not surprisingly, the subsequent mortgage defaults that plunged the world into economic crisis are disproportionately concentrated in CRA-covered minority and lower income communities.

Using the NCRC’s data, I created this more readable graph to showCRA agreements by year from 1977-2004:

The CRA gives community organizers leverage over banks primarily when they request federal regulatory approval to merge. As the NCRC explains:

1998 was a year of mega-mergers that included the Bank of America and Nations Bank merger as well asCitigroup’s acquisition of Travelers; CRA pledges totaled$812 billion dollars as a result. … CRA pledges shot upagain in 2003 and particularly in 2004. The year 2004experienced watershed mega-mergers as Bank of<st1:place
w:st=”on”>America acquired Fleet, JP Morgan Chase acquired Bank One, and Citizens gobbled up Charter One.

Landmark CRA commitments during these years included:

  • The $430 billion pledged in 1997 by Travelers (now part of zombie bank Citigroup—indeed, total pledges by various fragments of Citigroup add up to just under one trillion dollars).
  • The $375 billion anted up when buying Dime Bank in 2001 by Washington Mutual (which, after a bank run last fall, was bought up cheap by the now ailing JPMorgan Chase);
  • And the $800 billion promised by JPMorgan Chase upon its acquisition of Bank One in 2004.

Some of the $4.2 trillion in the NCRC’s tabulation is no doubt double-counted. For example, WaMu shows up three times in the list of CRA commitments:

  • In 1997, when it outbid Home Savings in a CRA pledgeathon to acquire Great Western by offering $75 billion in inner city lending over ten years (versus Home Savings cheapskate $70 billion CRA offer).
  • In 1998 when it pledged $120 billion when buying Home.
  • And in 2001 when it proclaimed $375 billion when buying Dime.

So WaMu accounts for $570 billion in the NCRC’s list of pledges, but if you prorate the various amounts, it’s really more as if WaMu promised, say, $418.5 billion over 14 years.

Nevertheless, despite the NCRC’s double-counting, much is left out of its $4.2 trillion figure too. For example, CRA commitments have continued since NCRC’s 2005 report. In 2008, Bank of America, another walking undead Red Ink Giant, pledged $1.5 trillion in CRA lending to get federal approval for its purchase of Countrywide Financial.

Nor is Countrywide’s 2003 pledge of $600 billion counted by NCRC.

In case you are wondering, the $4.2 trillion number does not include the trillions targeted by Fannie Mae and Freddie Mac to buy up minority and lower income mortgages on the secondary market.

Please keep in mind, as I explained two weeks ago in VDARE.com, that the CRA didn’t hold a gun to the head of Kerry Killinger of WaMu or Ken Lewis of Bank of America and force them to lend hundreds of billions to likely deadbeats.

No, the CRA has contributed to the mortgage disaster through a more subtle “selection effect”.

Assume there are two distinct kinds of bankers:

  • Optimists who think lending more money to CRA-approvedfolks will turn out to be profitable.
  • Pessimists who don’t.

Of course, there are always a lot of people in the middle without strong opinions who will go with the flow toward whichever camp seems to be gaining in money, power, and popularity.

If you were a Pessimist who didn’t believe that the government’s favored borrowers were likely to pay their mortgages, the CRA couldn’t make you lend to them. But if you didn’t play ball with the CRA, you couldn’t buy other banks, which is the easiest way for a bank to get big.

And the CEOs of big banks get paid more:

” ‘There continues to be a high correlation between CEO compensation and bank asset size, and no correlationwith three-year [earnings-per-share] growth and shareholder returns,’ Citigroup banking analyst Ruchi Madan wrote in a May 6, 2005 report on bank executive pay.”[Are reforms working? Experts say link between pay, performance is lacking, By Len Boselovic, PittsburghPost-Gazette, May 15, 2005]

See how it works?

Not surprisingly, over the years the CRA’s chokehold on mergers changed the culture of banking. The most powerful and highest paid executives publicly saluted the CRA, while the CEOs who thought it waspolitically correct nonsense were relegated to the sidelines in the great game of mergers and acquisitions.

The optimists who agreed with Presidents Clinton, Bush, and Obama that “underserved” minorities would somehow come up with the scratch to pay off their mortgages were allowed to build empires, while the pessimists were not. Those in the middle camp went with the flow and started believing the CRA propaganda.

  1. Whom do we want to win: the Optimists or the Pessimists?

A. Neither! We want a financial system in which the realists succeed and wind up in positions of power. Whether the realists will turn out to be this moment’s Optimists or the Pessimists is not something we should decide ahead of time.

But, that’s exactly what the Community Reinvestment Act does. It puts the government’s thumb heavily on the scale on the side of the Optimists, with, as we’ve seen, catastrophic results.

It’s time to repeal the CRA.

And it’s long past time to recognize the reality of human differences.

In 2006, commenting on Iraq, I wrote:

“Not for the first time, our public class’s refusal to think rationally about race and ethnic differences had resulted in bad—in this case, catastrophic—public policy.”

But even I didn’t realize our public class’s dogma was about to bring down the entire world economy.

The bottom line: in the words of science fiction writer Philip K. Dick:

“Reality is that which, when you stop believing in it,doesn’t go away.”

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The mortgage fiasco devastating America’s big banks has many causes, but perhaps the least understood is the complex impact of the 1977 Community Reinvestment Act (CRA). There has been some hoopla over the CRA in recent months, but nobody seems to have noticed the subtle way the CRA actually exacerbated the disaster.

I’ll demonstrate using the meteoric rise and fall of Washington Mutual, Inc. (WaMu). Under CEO Kerry Killinger’s direction, WaMu went from being an obscure <st1:place
w:st=”on”>Seattle outfit to the sixth biggest bank in<st1:country-region
w:st=”on”>America.

So WaMu wasn’t quite the biggest bank—but it may well have been the silliest. When a mariachi singer in California claimed a six-figure income on his mortgage application, for example, WaMu accepted a picture of him in his mariachi outfit as the sole documentation of his income.

The bank’s slogan was “The Power of Yes”. You know, as in “Yes,We Can”.

Then, during last year’s 1930s-style bank run, the government seized WaMu last September 25 and sold its remnants to JP Morgan Chase for less than $2 billion. The Federal Reserve later outright gave $25 billion to the purchaser, in part for taking this stinker off thegovernment’s hands.

Back in the summer of 2008, I pointed out that affirmative action likely had something to do with the horrific default rates on subprime mortgages. That became a modestly popular argument during the recent election campaign. Republicans would attempt to counter Democrats’ claim that the mortgage meltdown was caused by “greed” by pointing toward the Community Reinvestment Act.

After being strengthened under the elder Bush (n.b.!) and Clinton Administrations, the CRB was exploited by “community organizers”, like President Barack Obama’s old ally ACORN, to shake down banks wanting government permission to buy others banks. In return for not protesting the merger, the racial activists would demand promises ofmore loans to minorities with doubtful credit.

The National Community Reinvestment Coalition boasted about the early 1990s change in the CRA from toothless to lucrative:

“Lenders and community organizations have negotiated $1.09 trillion in CRA dollars from 1992 to 2000. [My emphasis!] In contrast, $8.8 billion was negotiated from 1977 through 1991.”

I recently came upon this old Washington Mutual press release on Eric Falkenstein’s Falkenblog dating back to WaMu’s $5.2 billion purchase of <st1:place
w:st=”on”>New York City’s Dime Bank:

“SEATTLE, Dec 21, 2001 … In connection with its merger with Dime [Bank], Washington Mutual recently established a ten-year, $375 billion community commitment which targets funding to low- and moderate-income borrowers, and minority borrowers … One of the largest community commitments of its kind, the ten-year pledge will be implemented with the assistance andsupport of a variety of non-profit community partners.”

On WaMu’s still-existent website, the bank explains that $375 billion pledge:

“These funds will provide loans and other financial support to communities consisting predominantly of people of color, to residents of low- to moderate-income (LMI) census tracts, and to people whose income is below 80 percent of median income. We will strive to create products and programs that increase our market share in low income and diverse communities, with a long-term goal of making our market share in these communities more closely mirror our market share overall. Using our Year 2000 production as a baseline, we have set our goal to double the number of loans made to borrowers of color by the end of the first year of this commitment. Thereafter, we will increase the number of loans made in these communities as quickly as possible.”

Not surprisingly, WaMu won the 2003 CRA Community Impact Award.

We now know that subprime foreclosures are centered among exactly the kind of people targeted in WaMu’s CRA agreement with racial activists. During the Housing Bubble of 2004-2007, minorities accounted for twice as many subprime dollars borrowed per capita than did whites. And the new report by the Boston Fed shows that, at least in Massachusetts, minorities defaulted on subprime loans at twice the white rate. All this suggests that minorities accounted for approaching two-thirds of subprime mortgage dollars lost.

For the GOP, the Community Reinvestment Act (CRA) was a more convenient example of government interference in the mortgage markets than, say, George W. Bush’s 2002-2004 holy war on down payments in his effort to boost minority home ownership. That’s because the CRA was passed by a Democratic Congress and signed by a Democratic President.

Of course, the GOP’s claims about the CRA’s centrality in the mortgage meltdown were obviously partisan. And more skepticism about the importance of the CRA seemed plausible, along these lines:

“How could the government hold a gun to the financial institutions’ heads and force them to make hundreds of billions in stupid loans? Sure, giving out $375 million in stupid loans to get the government off your back, that would make sense. $3.75 billion, maybe. $37.5 billion, conceivably. But $375 billion, no way. Nobody wouldpromise to give away $375 billion to dubious borrowersunless they thought it was a great idea. They’d leave theindustry before they’d promise to hand out $375 billion to people whom they doubted would pay it back.”

In general, the government and its associated racket-runners can extort mid-level amounts of affirmative action booty. But when the demands get too great, businesses exit in one way or another. (Often with bad effects on general welfare, of course).

Obviously, it’s a massive exaggeration to say the government and the ACORN clones forced WaMu to lend to likely deadbeats. Nobody promises to loan out $375 billion to low and moderate income and minority borrowers unless they actually want to lend out to low andmoderate income and minority borrowers something approaching$375 billion.

Moreover, Washington Mutual sure didn’t act reluctant. They were positively exuberant about pouring money into the hands of minorities with weak histories of paying off debts. The relatively small number of big financial institutions that did a major fraction of subprime lending really seem to have drunk the same Kool-Aid as ACORN, Congress,Clinton, and Bush. They actually thought they were going to get rich off no-money-down, $400,000 loans to high school dropouts.

And they did, for a few years. CEO Killinger “earned” $88 million from 2001-2007.

WaMu’s strategy was lending to deadbeats—the more minority the better. For years, WaMu ran a series of TV commercials where one cool black guy in a blue WaMu shirt, an actor who looked like a cross between Barack Obama and Don Cheadle, would humiliate dozens of old white bankers in suits.

Most advertisers would have put one token minority banker in the crowd of pompous empty suits. But WaMu didn’t bother. They wanted to get their message across.

So it would seem that WaMu didn’t need the CRA to blows billions.

And yet … there’s a more subtle point that I, and seemingly everybody else, missed in thinking about the impact of the CRA’s veto over bank acquisitions: the selection effect on who gets to get big.

Before I explain that, let’s back up and think about the big bank-bad bank paradox more generally.

We naturally assume that big banks are safer storehouses for our money than flimsy little banks. It’s the basic probability theory of gambler’s ruin—the more money an institution has, the less likely the chance of running out of money. That’s why a casino would still win even if it gave gamblers a fair shake (e.g., no zeros on the roulette wheel): the gamblers would be more likely to run out of money before the casino did.

For this reason, banks have traditionally employed the wiles of architects to make them look as reassuringly massive as possible. When I moved to Chicago in 1982, for instance, I always enjoyed visiting my cousin at work because I had to pass through perhaps the most imposing interior space in the city: the stupendous second floor lobby of the Continental Illinois bank building on La Salle, next to the Board of Trade.

And yet, big banks aren’t always as trustworthy as they might look. An aggressive strategy had made Continental Illinois the largest commercial and industrial lender in America—until it went broke in May 1984, requiring the biggest FDIC bailout of depositors in American history…up to that point, of course.

Today, the old Continental Illinois building at <st1:address
w:st=”on”>231 S. La Salle St. is owned by Bank of America, one of the new four Red Ink Supergiants of American banking along with Citigroup, JP Morgan Chase, and Wells Fargo. Nonetheless, B of A—and perhaps some of its colossal colleagues—may follow Continental Illinois into nonexistence if the federal government ever tires of bailouts. The problem, of course,is countless (at present, literally)bad mortgages made during the late Housing Bubble.

Why do big banks tend to be bad banks?

First, one obvious reason is the “too big to fail” theory that the feds applied to Continental Illinois. The government bailed out bondholders and kept the shell of Continental Illinois limping along for a decade untilBank of America bought it. So, managements and creditors assume there is safety in size, even though the law of diminishing marginal returns says the opposite: the more loans you make, the more likely you’ll make bad ones because you’ll be less selective.

Second, there’s a natural tendency during economic good times for the most recklessly optimistic managements to grow fastest. They borrow the most money and buy the most competitors. (At least until the bad times roll around again, when the skeptics can pick up thewreckage for a song.)

In many industries, however, skill puts a restraint on growth through confidence and luck. For example, Ford Motor Co. became the biggest car company in the world in the first quarter of the 20th Century notbecause Henry Ford was the biggest risk-taker, but because he was the best car-maker (e.g., he invented the moving assembly line). Similarly, Intel is the top chip maker largely because it’s good at making CPU chips.

In finance, in contrast, sheer boldness appears to play a relatively larger role.

Third, the high CEO compensation of recent decades has encouraged a get-rich-quick attitude.

Say a 45-year-old gets appointed CEO of a small bank, with a salary of $1 million per year. He could carefully steward his stockholders’ investments, and continue to make roughly $1 million per year until he enters a comfortable but not lavish retirement in 20 years.

Or, he could try to grow the bank fast via risky bets. If he couldincrease the size radically, he would show the Board that CEOs of banks that big usually get paid $10 million per year. Even if the bank blows up two years later, he’d still have earned $20 million in those two years, as much as he’d earn in 20 years of prudent management of his bank at its current size.

So why not gamble? What’s the worst that could happen to his net worth?

Finally, the executives of big banks are, by necessity, farther removed from what’s happening on the street. In 2006, WaMu moved into the 42-story WaMu Center skyscraper in downtown Seattle—a long way from Southern California, where Killinger’s minions were making so many fraudulent loans.

Knowing all the biases favoring risky business, you might expect the government to prudently lean against the tendency of ambitious mortgage lenders to hand out too much money to bad credit risks. Yet, in the name of increasing minority and low-income home ownership, the government did exactly the opposite: since the early 1990s, it has relentlessly pushed for more risky mortgage lending—with the catastrophic results we see all around us.

How did the Community Reinvestment Act worsen imprudent lending to minorities?

It’s not a popular question even to ask. “I want to give you my verdict on CRA: NOT guilty”, said FDIC Chairman Sheila Bair:

“And ‘Let me ask you. Where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere.’ The facts are simple, Bair said. The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lendingpractices.” (FDIC’s Bair Sets to Shatter CRA “Myth”, by Kelly Curran, HousingWire.com, w:st=”on”>December 5, 2008.)

Okay–but how does a bank get more market share and revenue growth?

One major way: by buying other banks. And to do that, you have to pass through the CRA gauntlet. If you aren’t willing to lend to people the government wanted you to lend to, then you were out of luck at mergers and acquisitions game.

So, the CRA implicitly selected for Kool-Aid Drinkers, such as WaMu’s Killinger. They’re the ones whom the government allows to build empires. (Unfortunately, their houses turned out to be built on sand.)

I missed understanding the impact of the CRA because I kept asking myself: “How could the CRA force a banker who thinks lending more to minorities is a bad idea to lend more to minorities?” I kept trying to imagine the CRA’s effect on the already crazy-stupid WaMu, and how that couldn’t have been all that significant.

But I should have been thinking about the other side of the coin: all the sane-smart banks that didn’t get to get big like WaMu did because the government rigged the acquisition process so that crazy-stupid bankswere more likely to get merger approval. WaMu got permission from the government to make 29 acquisitions from 1990 onward. A smart-sane bank wouldn’t.

That WaMu sincerely believed that it was going to make a fortune handing big mortgages to mariachi singers, illegal immigrants, and Department of Motor Vehicle clerks etc. etc. seems clear. After all, WaMu not only originated about one out of every eight mortgages in the U.S., but it also held on to a fair number of them instead of securitizing them and dumping them on Wall Street.

WaMu explained its minority-oriented strategy over and over again. Robert O’Connor wrote in Mortgage Banking, October 2003:

“Craig Davis, president of Washington Mutual’s HomeLoans & Insurance Services Group, says that the high rate of homeownership in the <st1:place
w:st=”on”>United States–currently about 68 percent–can mask very low rates among immigrants and minorities. He argues that encouraging ownership among these groups is both good for <st1:state
w:st=”on”>Washington Mutual and good for the country. ‘Affordable housing and lending is front and center in terms of our strategy,’ Davis says.

“… Porter says that Washington Mutual takes the CRA very seriously. But he adds the bank regards the CRA as a floor rather than a ceiling. He says the company, and its employees, want to surpass the regulatory standard for institutions to meet the credit needs of their communities. Porter points out, for instance, that the bank’s $375-billion, 10-year lending commitment was not necessarily dictated by the CRA. ‘It was good from the company’s perspective,’ he says. ‘It was good from the community perspective, and it actually gives us a higher bar that we want to achieve.’ …

“Despite the strength of its portfolio operation,Washington Mutual is also committed to the secondary market. Early this year, it entered into a five-year strategic alliance with Fannie Mae Fannie Mae: to encourage home-buying among a number of groups, including immigrants, minorities, first-time buyers first-time buyer first-time buyer and people with low and moderate incomes. The goal is to generate $85 billion in mortgage lending.”

And here’s a 2003 WaMu press release that sounds like Dave Barry wrote it:

“Helping to build strong, vibrant communities whereverWashington Mutual does business is integral to the company’s long-term strategy. The Community and External Affairs Division oversees all community investment and development activities to ensure thatWashington Mutual fulfills its community goals in the most strategic way possible.”

Why was WaMu, with its derisible strategy, able to buy out so many big lenders? To understand it, think about it the other way around: why didn’t more prudent financial institutions outbid WaMu for acquisitions?

Say there are two banks, WaMu and Scrooge-Potter BanCorp. The latter is owned by Ebenezer Scrooge of Charles Dickens’ A Christmas Carol and Mister Potter of Frank Capra’s It’s a Wonderful Life. While WaMu is beloved for lending to anybody with a pulse, Scrooge-Potter BanCorp is widely loathed for taking a dim view of lending money to likely deadbeats.

They both would like to buy George Bailey’s Bailey Building and Loan Association. ACORN and the National Community Reinvestment Coalition announce they will protest vociferously against regulatory approval of the merger unless the winner pledges to make $50 billion in minority and low income loans.

Fearing a debacle of defaults, Scrooge-Potter BanCorp issues a two-word press release: “Bah, humbug”. And it drops out of the bidding.

WaMu announces: “Well, heck, we’ll promise to lend $55 billion.”

In fact, because Scrooge-Potter realized its quest was hopeless, WaMu got <st1:place
w:st=”on”>Bailey Building and Loan for less than it would have paid if the government wasn’t biased in favor of imprudent bankers. This gives WaMu more money to pursue more targets.

Lather, rinse, and repeat. The CRA means that WaMu gets big while Scrooge-Potter stays small.

Consider the indirect effects on Scrooge-Potter BanCorp. Who would want to go to work for a bank that can’t make acquisitions because it won’t play nice with the government on CRA? Scrooge-Potter can’t buy anybody, it can only be bought. So, how’s your job security at Scrooge-Potter looking? Wouldn’t it make more sense to go work for WaMu instead?

The CRA drives the climate of opinion in the entire mortgage industry. If you wanted to be able to buy other banks, you had to play ball.

Practically everybody did. Out of the thousands of banks with federal CRA Performance Evaluations, 496 got the highest rating of Outstanding, while only five dared to be in “Substantial Noncompliance”.

The biggest noncomplier: First Bank of Beverly Hills. It had the kind of business strategy that you’d expect from a bank with that name: take in deposits from rich people and make loans to big real estate developers outside <st1:city
w:st=”on”>Los Angeles. Sensing the popping of the Housing Bubble coming, it was pulling it its horns when the government evaluated it. The feds didn’t like that. (You can read the government’s report and see if you can find anything shameful abouthow FBBH did business. I can’t.)

Over time, the madness infects the entire culture of finance, as thegovernment labels the prudent bankers automatic losers in the great game of acquisitions.

WaMu’s 2001 purchase of Dime Bank may have been its crowning excess. But in the history of the downfall of the American economy, it wasn’t as important as WaMu’s 1990s move into California. WaMu and California went together like a match and dynamite.

In 1997, WaMu was the second biggest thrift. When the biggest thrift, Home Savings of America (owned by H.F. Ahmanson and Co. of Irvine, CA), attempted a hostile takeover of its Southern California rival, thenumber three thrift, Great Western, WaMu entered as a white knight. This set off a CRA bidding war. The two competed to see who couldpromise the most lending to the politically favored.

The Seattle Times headline on <st1:date
year=”1997″ day=”10″ month=”4″ w:st=”on”>April 10, 1997 read “Wamu Loan Plan Trumps Rival—$75 Billion Inner-City Proposal Eclipses Ahmanson Bid.” Reporter Don Lee wrote:

“In the largest inner-city loan program ever proposed by a U.S. banking institution, Washington Mutual said today it will lend $75 billion to mostly lower-income and minority borrowers over 10 years if itsuccessfully acquires Great Western Financial. Washington Mutual said the majority of those mortgages, consumer and small-business loans would be made in <st1:place
w:st=”on”>California. The proposal eclipses a $70billion community reinvestment commitment made three weeks ago by Home Savings of America.”

After winning Great Western, Washington Mutual then bid for Home Savings itself in 1998, upping its Community Reinvestment ante to $120 billion. Leftist thinktank PolicyLink reported:

“In the wake of its takeover of H.F. Ahmanson’s Home Savings of America, Washington Mutual signed a $120 billion CRA agreement with the California Reinvestment Committee (CRC), the Greenlining Institute, the Washington Reinvestment Alliance, and other community groups.”[CommunityReinvestment Act—Tool in Action, no date]

Grabbing Home Savings made WaMu the nation’s number one lender of adjustable-rate mortgages. Even more ominous, WaMu was now heavily concentrated in California, a state where the combination ofnice weather, environmental restrictions on housing development, and a huge influx of immigrants combined to make home prices absurdly volatile in the next decade.

Then, when WaMu bought Dime Bank in 2001, it made a bindingpromise to lend for Community Reinvestment Act credit $375 billion. Sure, why not?

The only problem is that $375 billion here, $375 billion there, pretty soon you are talking about real money.

The question is, how can Barack Obama, a former community organizer and a charter member of the socialist, interventionist, Big Government Left, get us out of this mess?

Answer—he can’t. He can only get us in deeper.

[Steve Sailer (email him) is movie critic for The American Conservative.

His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The ongoing financial crash was caused by overleveraging at all levels of society, from Wall Street to Main Street to the slums. The initial cause, however, was the popping of the subprime mortgage bubble.

At their bubblicious peak, American homes were theoretically worth $24 trillion. The amount of wealth that has evaporated in the popping of the American real estate bubble so far appears to be in the $5 trillion range, to pick a very round number. The blogger Dr. Housing Bubble recently estimated the loss to be $4.68 trillion using Case-Shiller data. Another source estimates $6 trillion. And we haven’t necessarily hit bottom yet. So the wealth loss already amounts to a quarter to a third of US GDP—greatly magnified, and spread around the world, by the simultaneous metastasizing of poorly-understood financial derivatives.

I’ve long argued that the massive ideological and demographic trends in our society toward “diversity”played an underappreciated role in the disaster. Now we’re now getting very close to finding the smoking gun that proves my Diversity Recession theory.

Many readers have expressed doubts that minorities could possibly play a large enough role in the mortgage market to matter. Actually, they do. In fact, we can now see that, more than anything else, the Housing Bubble was a Hispanic Housing Bubble. Mortgage dollars flowing to Hispanics for home purchases increasing almost eightfold from 1999 to 2006!

As I’ve argued, the Bush Administration wanted to turn Hispanics into Republican voters by making them homeowners through easy credit. George W. Bush and Karl Rove don’t deserve all the blame, however. Their lax mortgage policies were largely a continuation of trends to boost minority and low income mortgage access that werewell under way in the Clinton Administration—as I pointed out in my June Takimag.com article on The Diversity Recession.” These lax mortgage policies also had the secondary effect of encouraging residential real estate speculation—“flipping”—by minorities and non-minorities alike.

The federal government doesn’t make it easy for citizens to find information on mortgage defaults and foreclosures by race. But it does collect a huge amount of information by race on mortgages handed out, in order to encourage lending to minorities by threatening lawsuits against financial institutions accused of discriminating against them.

A very helpful reader named “Tino” sent me a link to the federal Home Mortgage Disclosure Act website: The HMDA National Aggregate Report,

I’ve chosen to look at conventional home purchase mortgages originated in 2006, the peak of the Bubble, the year of the worst “toxic waste” mortgages.

Unfortunately, I couldn’t figure out how to break out subprime dollars, which is where most of the unexpected defaults occurred. But looking at total dollars loaned on the purchase of homes, prime and subprime aggregated together, is revealing enough.

I looked at total mortgage dollars originated for home purchases in 2006. It appears the minority share of overall mortgage dollars was slightly larger (35%) than their share of the population (about 33% in 2006). This is due to higher average mortgage sizes for minorities ($188,000) than for whites ($183,000).

This may seem counterintuitive—until you stop and think about it. Minorities tend to be concentrated in metropolitan areas with expensive land prices. Rural areas with very cheap land are almost all white.

Further, America’s largest and most expensive state,California, the epicenter of the housing bubble and thus the global financial earthquake due to subprime defaults, is now majority minority (with non-Hispanic whites making up only 43 percent of the financially tarnished Golden State’s population in 2005).

For home purchase mortgages originated in 2006, Asians averaged $255,000, Hispanics $183,000, non-Hispanic whites $183,000, and blacks $153,000.

Compared to 1999 (the first year in the federal database), which was before the Housing Bubble, it’s striking to note how much more mortgage money has flowed to Hispanics. The growth in mortgage dollars for home purchases by Hispanics grew 691 percent from 1999 to 2006! Hispanics originated only $21 billion in purchase mortgages in 1999 v. $163 billion in 2006.

Not surprisingly, four heavily Hispanic states—California, Florida, Arizona, and Nevada—account for 50 percent of the mortgage defaults in America in 2007, and, due to California’s ridiculous home prices, no doubt an even larger share of defaulted dollars.

Blacks also received far more mortgage dollars in that seven-year stretch from 1999 to 2006, up 397 percent from $17 billion to $84 billion. Both Hispanics and blacks participated heavily in the subprime market, with two to three times higher percentages of their mortgages being subprime than among whites. So much of this breakneck expansion in borrowing among Hispanics and blacks must have been due to subprimes, which is where the financial collapse started.

Despite rapid immigration, Asians were up only 218 percent in total new mortgage dollars from 1999 to 2006, from $24 billion to 77 billion. We know they mostly stuck to prime mortgages, at about the same rate as whites.

Total minority purchase mortgages taken out in 2006 were $360 billion, compared to $678 billion for non-Hispanic whites. So, minorities were slightly over-represented in purchase mortgage dollars relative to their share of the population.

Unfortunately, changes in reporting methodology from 1999 to 2006 make comparison difficult for non-Hispanic whites. (They weren’t broken out separately from “Whites” in 1999, so the 1999 figures may or may notinclude some Hispanics. In contrast, non-Hispanic whites are identified separately in 2006.)

It’s not all that important a methodological problem, though, because Hispanic borrowing wasn’t huge in 1999. So, my estimate for non-Hispanic whites is that mortgage dollars flowing to them increased about 100 percent over those seven years.

The picture in refinancing of existing mortgages in 2006 is quite similar, with minorities getting 33 percent of homerefinancing dollars originated in 2006. Interestingly, theaverage minority refinancing was bigger ($218,000) than the average non-Hispanic white refinancing ($188,000).Refinancing dollars flowing to Hispanics increased more than seven-fold, while whites were up somewhat more than double.

So the ethnic change wasn’t quite as extreme as in home purchase mortgages, but they weren’t very different. The total value of refinancing and purchase mortgages were fairly similar in size in 2006. So minorities accounted for about 34 percent of purchase and refinancing of mortgages in 2006.

I couldn’t find usable numbers in the database on subprime dollars alone, although a more assiduous researcher may well be able to tease out the facts. But if minorities in 2006 accounted for 35% of all mortgages (see above), they would have accounted for a higher share of subprime dollars mortgages. Defaults so far have been concentrated in subprime adjustable ratemortgages. They accounted for 6% of mortgages and 39% of defaults.

Therefore, it’s likely that it will turn out that the majorityof unexpected default dollars, above normal trend lines, in2007 were from defaults by minorities.

The conventional wisdom that emerged from the crisis of the Great Depression dominated American ideology until almost 1980. Similarly, the reigning ideas that congeal in the next few weeks about the causes of this crash will determine the course of politics for decades to come. Right now, the elite consensus (as in the 1930s) is that the free market failed. The truth, to which we blinded ourselves in an orgy of political correctness, is that the<st1:country-region
w:st=”on”>America of 2008 doesn’t have the human capital to justify the valuations of wealth it thought it had.

[Steve Sailer (email him) is movie critic for The American Conservative. His websitewww.iSteve.blogspot.com features his daily blog. His new book, <st1:place
w:st="on">AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Whose fault is it?

Last week, the mainstream conservative punditry finally picked up an idea I had first put forward in August 2007 (and developed with more detail last June): that an underestimated factor in the financial crisis set off by the mortgage meltdown is our reigning ideology of multiculturalism and diversity.

In other words, this is a minority mortgage meltdown—and it may trigger a Diversity Recession.

Unfortunately, not having studied the question as long as I had, some of the conservative talking heads tended to put forward naïve, self-serving, or unpersuasive versions of this theory—such as that the banking crash wasn’t the fault of greed in the financial industry, it was the result of the Democrats in Congress passing the anti-redlining Community Reinvestment Act in 1977.

The reality is that blame is very widely shared: among Democrats and Republicans, businesspeople and politicians, Congress and the Executive Branch, borrowers and lenders, and whites, blacks and Hispanics.

There’s one man, however, who has so far escaped any blame. Few have realized something that turns out to have been staring us in the face all along: that the mortgage mess was, in sizable measure, an outgrowth of the primary political goal of the Bush Administration.

That man’s name is Karl Rove.

And the primary political goal of President George W. Bush’s political strategist: to bring Hispanics into the Republican Party.

As you’ll recall, Rove’s best-known tactic to appeal to Latino voters was repeatedly pushing “comprehensive immigration reform” (i.e., an amnesty for illegal immigrants).

Rove, though, had other arrows in his quiver. One was a plan to turn Hispanics into Republicans by providing them with loose credit so they could become homeowners.

(Rove’s belief that there’s a connection between being able to afford a home and voting Republican is not totally irrational. As I’ve documented, since 2004 states with higher degrees of affordablefamily formation do vote Republican more than states where people can less afford to buy houses. That’s why the Republican “Red States” tend to be inland, where land for housing is abundant and cheap, while Democratic “Blue States” tend to be expensive because oceans or Great Lakes restrict suburban expansion.)

As part of this plan, George W. Bush made several speeches rallying enthusiasm for his w:st=”on”>October 15, 2002 White House Conference on Increasing Minority Homeownership. For instance, there was his classic Bushian effort on June 18, 2002:

“The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in <st1:country-region
w:st=”on”>America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. … So I’ve set this goal for thecountry. We want 5.5 million more homeowners by 2010—million more minority homeowners by 2010. (Applause.) … “

The five and a half million marginal minority homeowners that Bush bunglingly called for is a big number. At a mortgage of, say, $127,000 each, that would add up to, let me check my calculator, oh…

$700 billion—the size of the current bailout. Well, whaddaya know …

Bush rattled on:

“I’m going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.) …

“And so what are the barriers that we can deal with here in <st1:place
w:st=”on”>Washington?”

Well, there’s one obvious barrier to minority homeownership: many American minorities don’t earn enough money to be able to afford their own home.

You might think, therefore, that the way to help minorities make higher wages would be to alleviate competition for their jobs by cracking down on legal and illegal immigration. Especially because illegal immigration is, well, illegal. And that’s what the Chief Executive getspaid to do—enforce laws.

Nevertheless, Bush and Rove apparently hoped that amnestying illegal immigrants would win over Hispanic citizens, so they did almost nothing about illegal immigration (other than trying to legalize it, of course) until an outraged public forced their hands in the last couple of years.

Bush and Rove didn’t have a plan for helping minorities earn more. Instead, they had a plan for helping minorities borrow more.

Bush went on in his June 18th speech:

“Well, probably the single barrier to first-time homeownership is high down payments. “

Uh-oh.

Traditional standards requiring “high down payments” existed for, as we see now, very good reasons. Being able to pony up 20 percent, oreven just 10 percent, was cold, hard evidence of borrowers’ credit-worthiness. It showed you hadn’t spent every penny you ever earned. And a big down payment meant you instantly had substantial skin in the game. That you had paid out tens of thousands of dollars meant you were likely to do whatever it took to avoid losing your house by failing to pay off the loan.

To Bush and Rove, however, old-fashioned down payments were just keeping minorities from their fair share of the American Dream. Bush burbled on:

“People take a look at the down payment, they say that’s too high, I’m not buying. They may have the desire to buy, but they don’t havethe wherewithal to handle the down payment. We can deal with that. And so I’ve asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)

We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000families a year—40,000 families a year—will be able to realize the dream we want them to be able to realize, and that’s owning their own home. (Applause.)”

If you do the arithmetic, you’ll see that Bush’s silly little AmericanDream slush fund for subsidizing 40,000 families per year would take, not the eight years Bush promised to add 5,500,000 minority households to the ranks of homeowners, but 137.5 years. But, obviously, subsidizing all 5.5 million new minority homeowners out of the taxpayers’ money would be so insanely expensive that white voters would rebel.

No, it had to be done on the sly, through the magic of fractional reserve banking, which, as the Federal Reserve notes, “permits the banking system to ‘create’ money.” By taking more risks, by handing out more mortgages to likely deadbeats, the financial system could simply “create” the cost of 5.5 million homes for minorities.

CNN reported after Bush’s June 17 speech at the St. Paul African Methodist Episcopal Church in Atlanta:

“Fannie Mae, Freddie Mac and the federal Home Loan Banks—the government-sponsoredcorporations that handle home mortgages—will increase their commitment to minority markets by more than $440 billion, Bush said.”

(Thomas Allen wrote a must-read article on Fannie Mae’s push for more—and more dubious—lending to immigrants way back in 2004.)

In December 2003, when signing the American Dream Downpayment Act, Bush bragged:

“Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there’s more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way.”

What was truly significant about Bush’s 2002 speeches (including the doozy he delivered on October 15, 2002 at his White House conference, which you should read for the schadenfreude alone) was not the legislation he endorsed—but the unsubtle message he was sending to lenders and, most importantly, to his own employees, the federal regulators.

Bush made clear at his October 15, 2002 conference that he opposed not merely discriminating against borrowers who might turn out to be bad credit risks—he wanted more money to go to documented bad credit risks. He brayed:

“Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs isdesigned to help deserving families who have bad credit histories to qualify for homeownership loans.”

Let’s put Bush’s influence in perspective. I’m not saying that financial institutions would intentionally make hundreds of billions of dollars worth of bad loans just on the President’s say-so. But what I am saying is that federal employees, such as financial regulators, do listen closely to what the Chief Executive says about what he wants done regarding those iffy loans.

Let’s review: As long as the federal government ends up bailing out lenders, financial regulation is a necessity.

Lenders like to lend. That’s what they do. That, typically, is for what they get paid bonuses.

Overly exuberant lending, unfortunately, leads to financial crises. And taxpayers and savers always seem to wind up paying to resolve them, either through formal programs like the Federal Deposit Insurance Corporation, or through ad hoc bailouts (of which we’ve seen so many in 2008).

Thus, since the government is on the hook for excessive lending, the government regulates lending.

The job of these federal regulators is to “take away the punchbowl just as the party gets going,” as former Fed Chairman William McChesney Martin said long ago.

In his many speeches on minority housing, however, President Bush was telling his underlings to keep their hands off the punchbowl. Heck,maybe the regulators should add another bottle of Everclear just to be hospitable.

And if private lenders started worrying that giving mortgages to dubious credit risks could backfire on them, Bush’s speeches could be read as hinting that his Administration would try to help them out, to the tune of, say, $700 billion.

Bush summed up:

“And part of the cornerstone of America is the ability for somebody, regardless of where they’re from, regardless of where they were born, to say, this is my home; I own this home, it is my piece of property, it is my part of the American experience. “

My emphases. In other words, under the Bush Administration, the American Dream isn’t just for Americans. For instance, at his White House Conference on Increasing Minority Homeownership, Bush orated:

“I appreciate so very much the home owners who are with us today, the Arias family, newly arrived from Peru. They live in Baltimore. Thanks to the Association of Real Estate Brokers, the help of some good folks in<st1:place
w:st=”on”>Baltimore, they figured out how to purchase their own home. Imagine to be coming to our country without a home, with a simple dream. And now they’re on stage hereat this conference being one of the new home owners in the greatest land on the face of the Earth. I appreciate the Arias family coming. (Applause.) “

This orchestrated push for more minority homeownership wasn’tsome random caprice of the President. It was part of the master plan of his political Svengali, Karl Rove. As Rove told every reporter who would listen in 2000 and 2001, Bush was supposed to be the new William McKinley, whose 1896 campaign manager Mark Hanna had figured out how to build a Republican coalition combining the business interests with (some) new immigrants to make the Republicans dominant until the Great Depression.

In 1999, the Washington Post reported on the McKinley Mania launched by Rove in Republicans Admire Bill … McKinley, That Is:

“Marshall Wittmann of the conservative Heritage Foundation explains: ’1896 was the year that McKinley and Hanna tried to redefine the Republican Party. Instead of rehashing Reconstruction and the Civil War, McKinley offered an appealing image to newimmigrants, rising entrepreneurs and working folks.

“’The theory of the Bush campaign,’ Wittmann continues, ‘with the slogan of’compassionate conservatism,’ is to similarly expand the base of the Republican Party, specifically by appealing to minorities and more centrist voters.’”

In 2001, for example, Rove told reporter Ralph Z. Hallow of the Washington Times:

“If you’re a Mexican-American … if Mel Martinez comes to town and talks about his life story and this administration’s policies to encourage homeownership, and you hear Bush talking a tax cut, education and leaving no child behind, and he’s seen with Fox, andthe first place he goes when in Europe is Spain—you say, ‘Hey, Bush gets it. Our community is important to this guy.’”

Before the 2004 election, Rove boasted:

[T]here are more people owning homes—particularly in the Hispanic and African-American communities—than ever before. This is a result of wise policies instituted at just the right time.”

At the height of the housing bubble, on Mayday 2007, the day of planned pro-amnesty marches, Rove’s protégé, Ken Mehlman, the campaign manager (under Rove’s guidance) of Bush-Cheney 2004,wrote of how the GOP was wooing Hispanics:

“There are several steps we can take to ensure that <st1:place
w:st=”on”>America’s fastest-growing and most conservative voter bloc joins the GOP. …Home ownership has always been an important element of the American Dream, and Hispanic-Americans have made enormous progress thanks to the hard work of many families and the innovative policies ofthe president. Hispanic home ownership is at an all-time high with 50 percent of Hispanics owning their homes.”

And these increases in minority homeownership due to government initiatives going back decades were true … temporarily.

But now minority homeownership rates appear to be falling as foreclosures hit Hispanics and blacks harder thanwhites and Asians. [Foreclosure Activity Increases 12 Percent In August, RealtyTrac.comSept. 12, 2008]

Foreclosures appear to be one of the few things in<st1:country-region
w:st=”on”>America not tracked directly by race. But the circumstantial evidence that blacks and Hispanics account for a disproportionate share is agreed upon by all who have looked into the question closely.

This map from RealtyTrac shows that the foreclosure disaster is largely regional. There are high rates of foreclosure in states such as Georgia and New Jersey, but the two main default dumps are the Midwestern Rustbelt and the heavily Hispanic Sunbelt.

The first regional meltdown is centered in Detroit, where the auto industry is perpetually dwindling. It’s hitting black neighborhoods particularly hard.

There’s a certain sense of tragic inevitability to this. In 2006, the New York Times did a sad story on the foreclosure on a single mother of four who had bought a house in the slums of Cleveland paying only three percent down:

“Over the years, Ms. Roberts’s monthly expenses rose because of repairs to adilapidated porch and the birth of two grandchildren, but the $880 a month she takes home after taxes from her job as a home health aide did not. Ms. Roberts, 35, also receives $1,100 in Social Security benefits because two of her younger children have learning disabilities. ” [For Minorities, Signs of Trouble in Foreclosures, By Vikas Bajaj And Ron Nixon, <st1:date
year="2006" day="22" month="2" w:st="on">February 22, 2006.]

I guess that <st1:place
w:st=”on”>America losing money on 35-year-oldgrandmothers who earn $880 per month is what you might call the Slavery Tax, and we’re just going to have to keep paying it.

Yet the Rust Belt default catastrophe is dwarfed by what’s happened in California, along with its neighbors Arizona and Nevada, and inFlorida. And this is much more of a self-inflicted wound, occurring in seemingly prosperous places where immigrants have flooded in.

The highest foreclosure rate is in <st1:place
w:st=”on”>Nevada. (“Talk about ‘moral hazard!‘” I can imagine Nevada residents scoffing, “You want your money? Then come get it from me Las Vegas Style. If you’re not man enough, Mr. Banker, to dangle me by my ankles off a hotel balcony, then tough luck.”)

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The weird thing about the tumbling of the latest financial house of cards is that the cornerstone, such as it was, was confidence in the increasing ability of the bottom half of society to pay backunprecedentedly large debts.

Underlying these vast pyramids of debt was, all too often, a promise by a single mother who works at the DMV or a drywaller from Chiapas to (following a brief teaser period) make mortgage payments of, say,$3750 per month for the next several decades.

In recent times, investors have typically gotten rich in our society by betting on the rich to get richer. And most of the time, that’s what happens: the rich get richer. Every so often, however, we have a meltdown because, during the bubble, investors temporarily overestimated the rate at which the rich will get richer—e.g., Silicon Valley in 2000, the Texas oil patch in 1982, commercial real estatedevelopers around 1990, and so forth.

But, most of the time, you can get richer betting on the rich to get richer.

For example, Southern California is full of people who used to be movie, TV, or pop music stars but aren’t anymore. Yet, with the exception of addicts who blew all their money on drugs, you almostnever hear of ex-stars having to undergo the humiliation of having to get real, boring, non-glamorous jobs to pay the rent. Among ex-stars who stay off drugs, you find a lot of them during the longer and longer periods “between projects” coaching their kids’ soccer teams, taking yoga classes, noodling on screenplays they never finish, walking their dogs, and just generally enjoying pleasant lives without bosses or jobs.

A big reason for them not running out of rent money: back when they were making lots of money, they didn’t rent, they bought—and in very expensive neighborhoods.

One of the things everybody does when he becomes a star is to buy ahouse in <st1:city
w:st=”on”>Beverly Hills. And then when you aren’t a star anymore and finally run out of money, rather than get a job, you sell your Beverly Hills house, which has appreciated dramatically, to somebody who is currently a star, and you buy a cheaper house in Santa Monica and live off the difference while you pretend you still have a career in the industry.

Then, after a decade or two of going out to lunch at nice restaurants you are running out of money again. So you sell your Santa Monicahouse to a newly rich person for a lot more than you paid for it and buy a cheaper house in Encino. Lather, rinse, and repeat.

This strategy works because the rich have been getting richer.

What’s totally strange about the mortgage meltdown, however, is that the bet, at its base, was on the more marginal members of society to be able to pay off their inflated debts—a bet on the pretty-close-to-poor to get pretty-close-to-rich.

And that made no sense at all.

The homeownership rate had been stuck at about 64% since the late 1960s. The Clinton and Bush administrations pushed hard to get it up to 68-69%.

What in the world made anybody think that the second quartile upfrom the bottom was developing more earning capacity?

They’d sent their wives out to work a couple of decades before. What could they do now to pay bigger mortgage payments in the future?

The second quartile folks weren’t getting better educated, weren’t getting more unionized, weren’t facing less competition from China, weren’t facing less competition from immigrants, weren’t getting married at higher rates so they could better pool their earning capacity.

So what trend suggested they were now developing more capacity topay back huge debts than before?

Let me try to vaguely quantify how weird this is. The LA Timesregularly reports on real estate dealings of celebrities. We regularly read that somebody whom you sort-of remember from some sit-com in 1978 has sold his home for $2 million. Bigger stars frequently sell homes in the $5 to $10 million dollar range. The real superstars’ showpiece mansion estates go for maybe $12 to $25 million.

So, let’s say that big stars’ homes in the Hollywood Hills go for a median of $11 or 12 million. In the spring of 2006, the median sales price of all homes (houses and condos) in the Los Angeles region, an urban area of about 5 million people that includes vast tracts of Nowheresville in South Central and the San Fernando Valley, was $580,000. (It’s now just under $400,000). So the ratio of home prices for stars to nobodies was about 20 to 1.

Now, 20 to 1 sounds like a big difference. But most measures of ability to pay would favor stars over nobodies by much more than 20 to 1.

Consider net worth outside of home equity. I would guess that most people who take out a $10 million mortgage might have, say, $10 million in stocks, bonds, CDs, art, vintage cars, and other assets, for a 1 to 1 ratio. What was the net worth of the median buyer of a $580,000 home with almost zero down payment in LA in 2006? $58,000? Maybe not that much when you subtract the car loans and outstanding credit card debt.

If the median net worth was $58,000, that’s a ten to 1 ratio between mortgage and net worth (heck, there were buyers in 2006 and 2007 who had a net worth consisting of a monthly bus pass and some lottery tickets, so their ratio was close to infinite) vs. 1 to 1 for the rich folks.

Obviously, I just made most of these numbers up. But I know that I at least got the sign right. So how did people not notice that financialinstitution s were making huge bets on something that just wasn’t happening—the lower middle of society getting much better offeconomically?

(And don’t tell me about how much cheaper DVD players have gotten. I’m not talking about standard of living, I’m talking about ability to pay debt obligations.)

That level of stupidity requires a bipartisan consensus on what you aren’t allowed to talk about in public.

Are you some kind of Communist who is saying that<st1:place
w:st=”on”>America“s free enterprise system can’t generate enough high-paying jobs to pay for all this debt?

Are you some kind of racist who is saying that <st1:place
w:st=”on”>America’s increasingly diverse population won’t pay back their debts?

Oh, wait—it just didn’t.

And they just haven’t.

[Steve Sailer (email him) is founder of the Human Biodiversity Institute and movie critic for The American Conservative. His website

www.iSteve.blogspot.com features his daily blog.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Why did the housing market turn into America’s economic cancer—growing out of control before recently killing economic growth?

It’s is a difficult question to answer—but not because there is a shortage of reasons. Instead, all the causes are interconnected——just as all the players in the game, from the top of society to the bottom, egged each other on.

The housing disaster is not an isolated incident. Instead, it is intimately interwoven with most of the destructive trends in our society: non-traditional mass immigration, growing economic inequality,multiculturalism, globalization, and the decline of community and traditional standards of behavior.

The economic logic of the Bush Decade turned out to be wholly circular and thus is now collapsing in on itself.

Yet that makes it difficult for the analyst to find a starting point.

Trying to think about the mortgage meltdown is reminiscent of the infinitely recursive children’s song Yon Yonson, which was memorably featured in Kurt Vonnegut’s Slaughterhouse-Five:

“My name is Yon Yonson / I live in Wisconsin / I work in alumber mill there / The people I meet / When I walk down the street / They ask me my name and I say: / My name is Yon Yonson / I live in Wisconsin…”

Similarly, in trying to explain this decade’s socioeconomic logic, you end up with thought processes like this:

Q. Why did we need so many illegal immigrants?

A. To build all those McMansions out in the distant exurbs.

Q. Yes, but why did so many Americans want to move to the exurbs?

A. To escape all the illegal aliens flooding their neighborhoods and schools.

Q. Okay, so then why did we need so many illegal aliens?

A. To build all those McMansions out in the distant exurbs.

Everything just spins around and around, like those chrome wheel rims, those insanely expensive hubcaps that were the signature useless extravagance of this decade. Neely Tucker wrote in the Washington Post in 2005:

“Today rims are a $3.1 billion industry that stands at the revolving heart of two American obsessions: automobiles and finding ever more expensive ways to buy things you already have and don’t need.”

Some economist should calculate what proportion of all the money spent on blinged-out rims came out of home equity loans taken out on houses bubbling up in nominal value.

Similarly, it’s hard for most people to grasp the interrelatedness of multiculturalism and greed in fostering the housing bubble. “Diversity”gave the big guys an excuse for doing what they had always wanted to do: debauch credit standards and take the money and run, leaving the mess to be cleaned up by taxpayers (through direct bailouts) and savers (through Fed-created inflation eating away their capital).

To find a starting place in understanding how America’s interested elites conspired across lines of race, party, and class to defraud savers and taxpayers, let’s just pick one name in the news: Richard F. Syron, the CEO of Freddie Mac, a “Government Sponsored Enterprise”that guarantees almost $2 trillion in mortgages.

Freddie Mac and its “rival” Fannie Mae are able to borrow at lower interest rates than other publicly-traded private firms because it has always been hinted that, if they messed up, the U.S. taxpayers would bail them out on the grounds that they were “too big to fail.”

The privilege of borrowing at below market interest rates while lending at market interest rates is a license to print money (until the inevitablecatastrophe, of course). In return for this license, naturally, politicians ask Freddie and Fannie to pay off their supporters with loans they couldn’t get on their merits.

Because Congress controls the Fannie and Freddie, the GSEs in turn have long controlled Congress, easily fending off the handful of politicians prudent enough to point out that they were on the treadmill to destruction. Fannie and Freddie spend a fortune on lobbying, as well as on foundations that hand out grants, typically to charities and pressure groups with ties to the Left.

Freddie Mac is one of those fortunate kind of entities where the taxpayers are “implicitly” on the hook for losses, but the bosses get paid like private moguls rather than like civil servants. (Heads I win, tails you lose.) Mr. Syron, the former president of the Boston FederalReserve bank, has pocketed $38 million since taking over Freddie Mac a half decade ago.

Last Monday, August 6, 2008, Charles Duhigg of the New York Timesreported At Freddie Mac, Chief Discarded Warning Signs:

“The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others. That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.”

Later last week, Freddie Mac announced a quarterly loss of $821 million—triple Wall Street’s expectation. (The next day, Freddie’s larger “rival” Fannie Mae announced a $2.3 billion quarterly loss.)

Syron struck back against his critics in the pages of the Boston Globe, saying he was just following orders:

“Syron yesterday defended his loan decisions, arguing that Freddie needed to take additional risk to meet its government mandate to provide affordable housing. Although a private company, Freddie Mac was created by Congress to expand mortgage credit and home ownership. ‘If you’re going to take aid to low-income families seriously, then you’re going to make riskier loans,’ Syron said in an interview yesterday. ‘We have goals to meet.’ ” [Syron's side of the story, By Robert Gavin, August 6, 2008]

Indeed, the quotas for Freddie’s mortgages reserved for underserved areas,” (which are officially defined as “low-income census tracts or in low- or middle-income census tracts with high minority populations”), have been raised from 21 percent during the Clinton Administration to 39 percent during the Bush Administration.

Syron prides himself that he was more dedicated to “affordable housing” than to prudence with the taxpayers’ money. When he arrived in 2003, Syron put an end to Freddie’s habit of cooking the books in order to be more cautious than Congress wanted:

“In addition, Freddie’s commitment to affordable housing had declined to the point it employed gimmicks to meetcongressional goals. For example, said Syron, Freddiewould essentially rent loans to meet affordable housinggoals, buying them from lenders to carry on the books atyear end, then selling them back. Syron ended thatpractice and re-emphasized the housing mission.”

What could possibly go wrong with lending money to people who wouldn’t qualify for credit without the government leaning on the lenders? I mean, besides all the trillions in stimulation making “affordable housing” unaffordable without trick mortgagesconcocted around the assumption that home prices can only go up?

But don’t blame Syron for the bubble!

“Syron added the cause of Freddie’s problems isn’t thoseloans, but a deep and extended housing downturn, spreading into the broad mortgage market. US home prices are falling for the first time since the Great Depression, and the economy is weakening, affecting even creditworthy borrowers.”

Right … of course, housing prices wouldn’t be falling so fast now, especially in the “affordable” tier, if the whole house of cards hadn’t been built up so wildly on Syron’s watch.

The circular insanity of it all was obvious even to a commenter on the Calculated Risk blog who calls himself Currently Smoking Cannabis:

“But to meet affordable housing goals, Freddie had to engage in activities that helped push house prices higher, and thus more unaffordable? And the more their numbersindicated that Freddie was dedicated to affordablehousing, the more housing was allowed to balloonartificially?

“Am I way off the mark or is this as crazy as it sounds? …. Gives you something to tell the people you are doing for their benefit, while achieving the exact opposite.”

Why was Syron chosen to be CEO of Freddie Mac, anyway? Well, one reason was that he was a hero to the Great and the Good in the early 1990s for unmasking a terrible societal scourge: lending discrimination.

The Globe’s Gavin credulously recounts:

“Syron encouraged the Boston Fed’s research department to wade into important, but contentious public policy issues. Perhaps best known was its study of lending discrimination, [Mortgage lending in Boston: Interpreting HMDA data (Working Paper 92-7|PDF)]which found race, not lending risks, driving loandecisions.”

This study was hugely popular and influential with all the right people:

Joseph P. Kennedy II, then a Massachusetts congressman, said the study helped change lending practices and expand credit to minority and poor neighborhoods.”

Unfortunately, it was based on economic illiteracy. As Gary Becker’s Ph.D. thesis (based on a suggestion by his adviser, Milton Friedman) pointed out, if firms were irrational ly discriminating against minorities, itwould be profitable for nondiscriminators to enter the market and cash in.

In reality, as Peter Brimelow and Leslie Spencer wrote in Forbes on January 4, 1993, whites and minorities had the same default rate back then—demonstrating that

[t]he market, in short, worked. The mortgage lenders somehow weeded out the extra credit risks among minorities, down to the, point where white and minority defaults were at an equal, apparently acceptable, rate.”

Today, of course, minorities have higher default rates than whites—due in large part to the quotas whose justification traces back to the stupid study Syron sponsored.

Now, even Syron has noticed what he hath wrought, saying, according to a March 12, 2008 Bloomberg News article entitled Rules Let Too Many Poor People Buy Houses, Syron Says:

“It’s ‘perverse’ that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, havebeen encouraged ‘to put people into homes that they endup losing.”

Syron, however, is apparently in no danger of losing his $38 million compensation.

Funny how that works.

[Steve Sailer (email him) is founder of the Human Biodiversity Institute and movie critic for The American Conservative. His website

www.iSteve.blogspot.com features his daily blog.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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The American economy is sinking under the weight of trillions in dubious home loans, as exemplified by this month’s failure of Pasadena-based mortgage lender IndyMac and the Treasury Department’s plan for a taxpayer bailout of the privately-owned but “government sponsored” Fannie Mae and Freddie Mac. Savers are increasingly finding the value of their assets inflated away as theFederal Reserve Board devalues the dollar to spread around the suffering from bad loans.

Traditionally, markets work by balancing greed and fear. Why was greed allowed to outrun fear so badly this time?

One clue comes from looking at the places with the sharpest decline in home prices, such as California, South Florida, Arizona, and Nevada. For example, the median price of homes sold in California last month was $328,000, down 31.5 percent from a ridiculous $484,000 in June2007. Almost 42 percent of all homes sold in California were in foreclosure.

Why did the housing bubble get out of control in many heavily Hispanic regions?

Because many important people wanted it to.

A widely overlooked reason behind this economic disaster is that the politicians, real estate interests, and financiers told the public that they weren’t speculating wildly on the insane hope of home prices rising forever. No, they were actually helping minorities share in the American Dream!

A percipient April 13, 2007 article in the nonprofit San Diego Voice by Kelly Bennett, Foreclosure Wave Said to Hit Latinos Hard, reported:

“This decade, a national push to increase homeownership among Latinos coincided with one of the longest, most dramatic periods of appreciation for home values. Latino mortgage and real estate professionals put forth aggressive outreach campaigns in the community, while lenders reached out to huge, untapped sections of the market by loosening qualifying standards. …

“Because a widened lending gate allowed many more Latinos and other minorities into the housing market than had entered previously, lawmakers and special interest groups championed the lenders’ efforts to extend homeownership to those groups.”

It’s important to understand that practically every politician who comes up through the ranks from state and local government owes favors to real estate interests. (Consider how now-convicted slumlord Tony Rezko sponsored Barack Obama’s career.)

Why? Because developers are more interested in local and state politics than anybody else is. (C’mon, admit it, local politics seem kind of boring.) They’re interested because they have financial interests in land use decisions.

Politicians control developers, so developers control politicians.

Thus, politicians, developers, and financial institutions have developed a vast interlocking system of doing subtle favors for each other by leaning on the lending process. It all works smoothly for years at a time with nobody on the outside the wiser … until there’s a downturn. Suddenly, the public is left holding the bag, paying off both directly and through enduring stagflation.

Diversity served as the perfect politically correct excuse for rampant irresponsibility. It gave insiders a rationale for putting their thumb on the scales of the vast lending market in the sacred name of anti-discrimination. Who dared be so racist as to argue that blacks and Hispanics should get fewer loans per capita because they were less likely to pay them back? That’s “the soft bigotry of low expectations.”

In a June 22 article in Taki’s Magazine, The Diversity Recession, I recounted a few of the countless examples of politicians from Jimmy Carter to George W. Bush pushing for more lending to “underserved”minorities. The Bush Administration, for instance, raised the quota for Fannie Mae and Freddie Mac to 39 percent for “underserved”regions.

Perhaps worse than quotas, though, was the attack on traditional lending standards in the name of expanding minority homeownership. We’ve seen repeatedly over the decades that, bad as they obviously are, racial quotas are often less debilitating than eliminating testsaltogether due to their “disparate impact.” At least with a quota you select the best people from each race (although, by definition, not the best overall). When you junk the standards altogether, however, you end up taking at random from all races.

For example, in January 1981 the outgoing Carter Administration threw out the federal civil service exam, the exquisitely validated PACE,because blacks and Hispanics didn’t perform as well on it on average. Since then, federal employees have been hired mostly on the basis of resumes and interviews, which explains a lot about the decline in the competence of the federal government.

Likewise, the mortgage industry once had traditional tests of creditworthiness, such as being able to afford a substantial down payment. Being able to put cash on the barrelhead provided tangible evidence that you weren’t just making up the numbers you were putting down on your loan application.

But the politicians encouraged lenders to speculate on dubious borrowers, all in the name of racial equality. For example, MSNBC stated in a March 27, 2004 report subtitled President wants to add new minority home ownersthat Bush was putting the Presidential imprimatur on the no-money-down mortgages that so exacerbated the bubble:

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

Similarly, undocumented workersand undocumented mortgages(colloquially known as liar loans) tend to go together.

The mortgage brokers were notoriously abusive, putting innumerate clients into teaser mortgages that reset the monthly payment sharplyupward after two years. What’s seldom mentioned, though, is that Hispanics generally turned to Hispanic mortgage brokers. Bennett observed:

“Among minorities, the pull toward using an agent or a loan broker from the same minority group is strong… ‘People tend to go with a loan broker or officer that they know,’ said Gabe del Rio, director of homeownership for Community HousingWorks, a nonprofit housingorganization in San Diego. ‘Everybody’s got a cousin or a friend who’s in the business. And, especially in ethnic communities, there’s a propensity to stay with someone you know.’

“But sometimes, the broker the borrowers know is also the broker who takes advantage of them, abusing the trust of their client by tacking on fees or inadequately explaining the terms of the contract they’re signing.”

Spanish-language radio stations are now hurting badly b ecause so much of their advertising came from Spanish-speaking mortgage brokers and real estate agents.

An article in today’s San Diego Union-Tribune, Busted neighborhoods: Foreclosures ravage parts of county where many used risky loans, by Lori Weisberg and Emmet Pierce confirms Bennett’s findings from 15 months ago:

“’Any place where there’s a high density of lower-income and less-educated Hispanics and African-Americans you’ll see a larger decline in values because many of these families were put into subprime loans they didn’t understand and shouldn’t have qualified for, more so than in other ZIP codes,’ said Clifford Arellano, a real estate broker whose office is in Barrio Logan.

Not surprisingly, illegal immigration has played a big role in bubble and bust:

“A large share of those who took out risky loans were recent immigrants who spoke little English, said Gabe del Rio, vice president of lending and homeownership at Community HousingWorks, a nonprofit developer of affordable housing. Many who have come to his agency for counseling say they didn’t understand the terms of their loans.

The homeowners who have been meeting their obligations are suffering collateral damage:

“Residents forced to vacate their homes leave a void in the neighborhood, said Enrique Gandarilla, executive director of the City Heights Business Association… ‘It’s only getting worse. A lot of loans were made to people who never should have gotten them. The impact on the community is terrible. You have vandalism. You have deterioration in values. You see homes that now are targeted by graffiti.’”

The article sums up what will be the verdict of history on America in this decade:

“Typically, a severe housing slump is preceded by a recession and job losses, but that is not the case this time around, [John Karevoll of DataQuick] said. ‘So now all us number crunchers are scratching our heads. This wasn’t caused by a recession, but by stupidity.’”

But it’s not just the fault of stupid borrowers, although a national policy of importing more of them by not enforcing the immigrationlaws clearly worsened the problem.

Stupidity extended all the way up the hierarchy—and that was intentional.

Political correctness makes people stupid, so diversity provided the ideal cover story for financial crime of the century.

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Now that the triumphalism rampant within the GOP after last November’s election has died down, and Republicans realize that their current ascendancy is not a historical inevitability but a tenuous margin that needs careful cultivating, it’s time to review the fundamental factors making some states red (Republican) and others blue (Democratic).

The key reason why some states vote Republican, I’ve found, can be summed up in the three-word phrase:

Affordable Family Formation.

In parts of the country where it is economical to buy a house with a yard in a neighborhood with a decent public school, you’ll generally find more Republicans.

You’ll find less in regions where it’s expensive.

It’s a stereotype that a mortgage, marriage, and babies tend to make people more conservative.

But it’s a true stereotype.

The arrow of causality points in both directions. Some family-oriented people move to family-friendly states, but the cost of forming a family also affects how many families are formed overall.

That’s why it’s in the GOP’s self-interest to pursue policies that keep demand for housing down (such as limiting immigration) and the quality of public schooling up (such as, well, limiting immigration).

The culture wars between Red States and Blue States (i.eConservative and Liberal, in the perverse contemporary parlance) are driven in large part by objective differences in how family-friendly they are, financially speaking.

Places that are terribly costly in which to raise children, such asManhattan and San Francisco, unsurprisingly possess less family-friendly cultures than more reasonably priced locales, such as Nashvilleand Provo.

According to Google, nobody in the history of the Web has ever uttered the phrase “Affordable Family Formation.”

So I utter it now:

Affordable Family Formation.

Those three words work both as a hard-headed summary of what drives voting, and as an appealing campaign theme.

The GOP could say to voters:

“We’re on the side of making it affordable for you, and your children and grandchildren, to form families. The Democrats are on the side of dying alone.”

Of course, Republicans could hardly say that with a straight face as long as their President refuses to repudiate his Open Borders plan. That would allow anyone in the world with a minimum wage job offer from an American employer to move here.

Four interlocking reasons form a chain of causality explaining why Affordable Family Formation paints the electoral map red.

I call them the Four Gaps: the Dirt Gap, the Mortgage Gap, the Marriage Gap, and the Baby Gap.

I wrote about each of them in VDARE.com and The American Conservative following the election.

But, unfortunately, I discovered them in reverse order of fundamentality.

This time, however, we’ll start from the ground up:

1. The Dirt Gap: Blue State metropolises, such as Boston, Chicago, and Los Angeles, tend to be on oceans or Great Lakes. Their suburban expansion is permanently limited to their landward sides. In contrast,Red State metropolises, such as Dallas, Atlanta, and Phoenix, are mostly inland. Thus they tend to be surrounded almost completely by dirt—allowing their suburbs to spread out over virtually 360 degrees. The supply of suburban land available for development is dramatically larger in Red State cities.

2. The Mortgage Gap: The Dirt Gap directly drives the Mortgage Gap. As the Law of Supply and Demand dictates, the limited availability of suburban dirt in most Blue States means housing costs more.

Of course, Blue State cities are also more likely to use environmental and other restrictions on housing to restrict supply artificially. Portland, an inland metropolis, is famous for outlawing development of adjoining land, thereby inflating housing prices and shrinking fertility, as reported in Timothy Egan’s March 24, 2005 New York Times article on Portland, “Vibrant Cities Find One Thing Missing: Children.”

According to the data gathered by the nonprofit organization ACCRA, which measures cost of living so corporations can fairly adjust the salaries of employees they relocate, Bush carried the 20 states with the cheapest housing costs, while Kerry won the 9 states with the most expensive.

(For statheads, the amount of variation “accounted for” by the correlation between housing cheapness and Bush’s share of the vote was quite large: the r-squared = 46 percent of the total variation in the data.)

The states with the cheapest housing are Mississippi (where Bush won an extraordinary 85 percent of the white vote), Arkansas (homestateof Bill Clinton but now solidly Republican) and the GOP’s anchor state of Texas.

The most expensive housing is now found in—guess!—California!!!

California was once the bastion of Phillips-coalition Republicanism, but, although GOP Presidential candidates carried California nine out of ten times from 1952 through 1988, they haven’t come close since.

Next are Hawaii and the District of Columbia (where Bush won only nine percent).

The Mortgage Gap has been growing. Bush was victorious in the 26 states with the least home price inflation since 1980. Kerry triumphed in the 14 states with the most (according to the invaluable Laboratory of the States website).

Home prices rose fastest in Kerry’s Massachusetts (515 percent) and second slowest in Bush’s Texas (89 percent). The correlation between low housing inflation and Bush’s share was strong: r-squared = 52 percent.

Despite the explanatory power of the Dirt Gap and the Mortgage Gap, these concepts have not been widely discussed.

The problem limiting their popularity may be that they are too objective, too morally neutral.

What people want to hear instead are explanations for why they, personally, are ethically and culturally better than their enemies.

3. The Marriage Gap: As I first reported in VDARE.COM last December, the single best correlation with Bush’s share of the vote by state that anybody has yet found is: the average years married by white women between age 18 and 44: an astonishing r-squared = 83 percent.

(This has to be one of the highest r-squareds for a single unexpected factor ever seen in political science.)

Bush carried the top 25 states ranked on “years married.”

For example, white women in Utah, where Bush had his best showing with 71 percent of the total vote, led the nation by being married an average of 17.0 years during those 27 years from age 18 through 44.

In contrast, in Washington D.C., where Bush only took 9 percent, the average white woman is married only 7.4 years.

In Massachusetts, where Bush won merely 37 percent, her years married average just 12.2.

Democratic pollster Stanley Greenberg confirmed the partisan power of the Marriage Gap in January, reporting:

“The marriage gap is one of the most important cleavages in electoral politics… The marriage gap is a defining dynamic in today’s politics, eclipsing the gender gap, with marital status a significant predictor of the vote, independent of the effects of age, race, income, education or gender.”

According to Greenberg, the exit poll showed Bush carried merely 44% of the single white females but 61% of the married white women—a 17 point difference.

Among white men, Bush won 53% of the singles and 66% of the married—a 13 point difference.

Although there are profound cultural differences among states, the Marriage Gap among whites is driven to a striking extent by the Mortgage Gap.

The cost-of-housing index correlates with “years married” with an r-squared = 53 percent. Similarly, the housing inflation rate since 1980 and “years married” correlate at r-squared = 48 percent.

A five-year long study of 162 white, black, and Hispanic single mothers in Philadelphia has put a human face on the relationship between the Mortgage Gap and the Marriage Gap.

Sociologists Kathryn Edin and Maria Kefalas, authors of Promises I Can Keep: Why Poor Women Put Motherhood Before Marriage, wrote an essay in the Washington Post (May 1, 2005) entitled “Unmarried Because They Value Marriage.”

“What we discovered was surprising: Instead of a rejection of marriage, we found a deep respect for it among many young mothers, who told us that getting married was their ultimate life ambition. While they acknowledge that putting children before marriage is not the ideal way of doing things, they’re not about to risk going through life childless while waiting for Mr. Right. … Marriage, we heard time and again, ought to be reserved for those couples who’ve acquired the symbols of working-class respectability—a mortgage on a modest rowhouse, a reliable car, a savings account and enough money left over to host a ‘decent’ wedding.”

Women in higher social classes are more likely to avoid the disasters of giving birth out of wedlock.

But they often postpone marriage and/or children until they can afford the down payment on a house in a neighborhood with good public schools.

And that leads to:

4. The Baby Gap: Bush carried 25 of the top 26 states in white total fertility (number of babies per white woman), while Kerry was victorious in the bottom 16. In Utah, for instance, white women average 2.45 babies. In the District of Columbia, white women average only 1.11 babies.

The correlation between white total fertility and Bush’s share produced an impressive r-squared = 74 percent.

While the Marriage Gap appeared to be somewhat more important than the Baby Gap, together they proved extraordinarily powerful in explaining Bush’s performance—their combined r-squared = 88 percent.

(Ethan Herdrick’s Mapinator website graphically illustrates the strong correlations between Bush’s performance and the Mortgage Gap, Marriage Gap, and Baby Gap.)

The voting patterns of both blacks and Hispanics are also somewhat affected by these factors. But both groups are shifted toward the Democrats.

This points out a little-understood problem with the much-publicized GOP Establishment hopes of Republicanizing Hispanics while simultaneously keeping the immigration floodgates open.

The contradiction is that immigration increases the population density, which raises land prices, which both makes non-Hispanic whites more Democratic and discourages those Hispanics who successfully assimilate to the norms of local non-Hispanic whites from becoming as Republican.

Formerly Republican California supplies the classic example of both processes at work.

Non-Hispanic whites became sharply less Republican as their marriage and fertility rates plummeted.

Back in 1990, California still had a higher white fertility rate than Texas. But during the Nineties the birthrate for California white women dropped 14 percent and their years married plummeted to the third lowest in America, behind only ultra-liberal DC and Massachusetts.

In Texas, however, which has much more available dirt and only about half as many immigrants as a percentage of the total population, white fertility rose 4 percent.

Texas, which voted Democratic in four out of five Presidential elections from 1960 through 1976, is now the mainstay of the GOP.

Meanwhile, those California Hispanics who succeed in assimilating fully now find themselves in a state where most role models vote for Democrats for President.

So, Hispanics in California have stayed well to the left of Hispanics inTexas—where the white elite is fervently Republican.

The same thing has happened to Asian-Americans, who tend to cluster in crowded Blue States.

Although the Democrats captured only 30 percent of their vote in 1992, they’ve won near landslides in recent elections.

Demographic analyst Arthur Hu suggests that voting patterns show that Asian Americans traditionally vote slightly more conservatively than their neighbors do—exactly as optimistic Republicans assume.

The problem for the GOP, however, is that Asians tend to have highly liberal white neighbors.

In 2000, 45% of all Asian-born immigrants lived in three heavily Democratic metropolitan areas: San Francisco, Los Angeles, and New York City.

Because of the dual effects on the voting of both whites and immigrants, the spread of immigrants into the middle of the country puts once-solid Republican states into play.

Not only Arizona, Nevada, and Colorado are threatened, but, farther down the road, some states in the now seemingly Solid South, such asGeorgia and North Carolina, will be up for grabs.

Considering the narrowness of Bush’s victory in the Electoral College, this ought to motivate Republicans to drop their invite-the-world delusion and start promoting Affordable Family Formation for American citizens.

But there’s no sign of it yet.

Why not?

[Steve Sailer [email him], is founder of the Human Biodiversity Institute and movie critic for The American Conservative. His website www.iSteve.com features site-exclusive commentaries.]

 

“Affordable Family Formation”—The Neglected Key To GOP’s Future

By Steve Sailer on May 8, 2005, 9:00 am

Now that the triumphalism rampant within the GOP after lastNovember’s election has died down, and Republicans realize that their current ascendancy is not a historical inevitability but a tenuous margin that needs careful cultivating, it’s time to review the fundamentalfactors making some states red (Republican) and others blue (Democratic).

I’ll add new data, better organization, and catchier phrases.

The key reason why some states vote Republican, I’ve found, can be summed up in the three-word phrase:

Affordable Family Formation.

In parts of the country where it is economical to buy a house with a yard in a neighborhood with a decent public school, you’ll generally find more Republicans.

You’ll find less in regions where it’s expensive.

It’s a stereotype that a mortgage, marriage, and babies tend to make people more conservative.

But it’s a true stereotype.

That’s why it’s in the GOP’s self-interest to pursue policies that keep demand for housing down (such as limiting immigration) and the quality of public schooling up (such as, well, limiting immigration).

The culture wars between Red States and Blue States (i.e Conservative and Liberal, in the perverse contemporary parlance) are driven in large part by objective differences in how family-friendly theyare, financially speaking.

Places that are terribly costly in which to raise children, such as Manhattan and San Francisco, unsurprisingly possess less family-friendly cultures than more reasonably priced locales, such as Nashville and Provo.

According to Google, nobody in the history of the Web has everuttered the phrase “Affordable Family Formation.”

So I utter it now:

Affordable Family Formation.

Those three words work both as a hard-headed summary of what drives voting, and as an appealing campaign theme.

The GOP could say to voters:

“We’re on the side of making it affordable for you, and your children and grandchildren, to form families. TheDemocrats are on the side of dying alone.”

Of course, Republicans could hardly say that with a straight face as long as their President refuses to repudiate his Open Borders plan. That would allow anyone in the world with a minimum wage job offer from an American employer to move here.

Four interlocking reasons form a chain of causality explaining why Affordable Family Formation paints the electoral map red.

I call them the Four Gaps.

I wrote about each of them in VDARE.com and The American Conservative following the election.

But, unfortunately, I discovered them in reverse order of fundamentality.

This time, however, we’ll start from the ground up:

1. The Dirt Gap: Blue State metropolises, such as Boston, Chicago, and Los Angeles, tend to be on oceans or Great Lakes. Their suburban expansion is permanently limited to their landward sides. In contrast, Red State metropolises, such as Dallas, Atlanta, and Phoenix, aremostly inland. Thus they tend to be surrounded almost completely by dirt—allowing their suburbs to spread out over virtually 360 degrees. The supply of suburban land available for development is dramatically larger in Red State cities.

2. The Mortgage Gap: The Dirt Gap directly drives the Mortgage Gap. As the Law of Supply and Demand dictates, the limited availability of suburban dirt in most Blue States means housing costs more.

Of course, Blue State cities are also more likely to use environmental and other restrictions on housing to restrict supply artificially. Portland, an inland metropolis, is famous for outlawing development of adjoining land, thereby inflating housing prices and shrinking fertility, as reported in Timothy Egan’s March 24, 2005 New York Times article on Portland, “Vibrant Cities Find One Thing Missing: Children.”

According to the data gathered by the nonprofit organization ACCRA, which measures cost of living so corporations can fairly adjust thesalaries of employees they relocate, Bush carried the 20 states with the cheapest housing costs, while Kerry won the 9 states with the most expensive.

(For statheads, the amount of variation “accounted for” by the correlation between housing cheapness and Bush’s share of the vote was quite large: the r-squared = 46 percent of the total variation in the data.)

The states with the cheapest housing are Mississippi (where Bush won an extraordinary 85 percent of the white vote), Arkansas (homestate of Bill Clinton but now solidly Republican) and the GOP’s anchor state of Texas.

The most expensive housing is now found in—guess!—California!!!

Once the bastiom of Phillips-coalition Republicanism, but: although GOPPresidential candidates carried California nine out of ten times from 1952 through 1988, they haven’t come close since.

Next are Hawaii and the District of Columbia (where Bush won only nine percent).

The Mortgage Gap has been growing. Bush was victorious in the 26 states with the least home price inflation since 1980. Kerry triumphed in the 14 states with the most (according to the invaluable Laboratory of the States website).

Home prices rose fastest in Kerry’s Massachusetts (515 percent) and second slowest in Bush’s Texas (89 percent). The correlation between low housing inflation and Bush’s share was strong: r-squared = 52 percent.

Recently TaxProfBlog posted two maps to make the point that “Median Income Data Mirrors Red State-Blue State Divide.”

These showed that Democratic states generally have higher incomes than Republican states.

The negative correlation between Bush’s share of the vote and the median income for a four-person family is a moderate r-squared = 18 percent.

That’s interesting. But it’s more revealing to divide each state’s median income by its overall cost-of-living to find its “monetarystandard-of-living.”

The state with the highest standard of living (at least in the things that money can buy), with a cost-of-living adjusted median income that’s 17 percent above the national average, is Blue Minnesota.

That makes sense. Minnesota is full of hard-working, smart, law-abiding folks who wouldn’t mind some monetary compensation for enduring the Gopher State’s winters.

And they reside so far from the Mexican border that they haven’t been inundated—yet— by wage-depressing illegal immigrants.

Perhaps today’s best all-around state is Red Colorado.

The monetary standard-of-living in Colorado is fourth highest—at nine percent above average. Plus the scenery is magnificent and the people well-educated and honest.

In contrast, the lowest monetary standard of living, at 40 percent below the national average, is found in the District of Columbia.

Apparently, DC residents get rewarded in other ways—perhaps by the security of government jobs and the sense of power they enjoy while pushing the rest of us around.

The next worst standard of living is found in Hawaii. Its residents pay high prices and earn low incomes in return for living in paradise.

The third worst monetary standard of living, at 31 percent below the national average, is California.

The climate isn’t as fantastic as Hawaii, but it’s a lot better than Minnesota’s.

Until about a generation ago, California was probably the all-around champ, a state with great weather, low costs, high wages, and goodpublic schools.

But immigration-driven overcrowding has undermined all that.

There turns out to be only a low (but positive) correlation between Bush’s share of the vote and the monetary standard-of-living: r-squared = 3 percent.

In other words, although Red States tend to have lower nominal incomes, they are ever-so-slightly better off in monetary standard-of-living—due to their much lower cost-of-living indices.

Blue States, though, probably enjoy an advantage in cultural amenities for adults—such as fancy restaurants and quaint neighborhoods.

We can also divide median income by cost of housing to get a standard-of-housing index.

With this, we find a moderate to high correlation with Bush’s share of the electorate: r-squared = 28 percent.

The difference in correlation with voting between this standard-of-housing index and the overall standard-of-living index suggests, once again, that it’s housing costs, rather than other costs such asgroceries or health care, that are crucial to voting Republican or Democrat.

Despite the explanatory power of the Dirt Gap and the Mortgage Gap, these concepts have not been widely discussed.

The problem limiting their popularity may be that they are too objective, too morally neutral.

What people want to hear instead are explanations for why they, personally, are ethically and culturally better than their enemies.

3. The Marriage Gap: As I first reported in VDARE.COM last December, the single best correlation with Bush’s share of the vote by state that anybody has yet found is: the average years married by white women between age 18 and 44: an astonishing r-squared = 83percent.

(This has to be one of the highest r-squareds for a single factor ever seen in political science.)

Bush carried the top 25 states ranked on “years married.”

For example, white women in Utah, where Bush had his best showing with 71 percent of the total vote, led the nation by being married an average of 17.0 years during those 27 years from age 18 through 44.

In contrast, in Washington D.C., where Bush only took 9 percent, the average white woman is married only 7.4 years.

In Massachusetts, where Bush won merely 37 percent, her years married average just 12.2.

Democratic pollster Stanley Greenberg confirmed the partisan power of the Marriage Gap in January, reporting:

“The marriage gap is one of the most important cleavages in electoral politics… The marriage gap is a defining dynamic in today’s politics, eclipsing the gender gap, with marital status a significant predictor of the vote,independent of the effects of age, race, income, education or gender.”

According to Greenberg, the exit poll showed Bush carried merely 44% of the single white females but 61% of the married white women—a 17 point difference.

Among white men, Bush won 53% of the singles and 66% of the married—a 13 point difference.

Although there are profound cultural differences among states, the Marriage Gap among whites is driven to a striking extent by theMortgage Gap.

The cost-of-housing index correlates with “years married” with an r-squared = 53 percent. Similarly, the housing inflation rate since 1980 and “years married” correlate at r-squared = 48 percent.

A five-year long study of 162 white, black, and Hispanic single mothers in Philadelphia has put a human face on the relationship between the Mortgage Gap and the Marriage Gap.

Sociologists Kathryn Edin and Maria Kefalas, authors of Promises I Can Keep: Why Poor Women Put Motherhood Before Marriage, wrote an essay in the Washington Post (May 1, 2005) entitled “Unmarried Because They Value Marriage.”

“What we discovered was surprising: Instead of a rejection of marriage, we found a deep respect for it among many young mothers, who told us that getting married was their ultimate life ambition. While they acknowledge that putting children before marriage is not the ideal way of doing things, they’re not about to risk going through life childless while waiting for Mr. Right. …Marriage, we heard time and again, ought to be reservedfor those couples who’ve acquired the symbols ofworking-class respectability—a mortgage on a modestrowhouse, a reliable car, a savings account and enoughmoney left over to host a ‘decent’ wedding.”

Women in higher social classes are more likely to avoid the disasters of giving birth out of wedlock.

But they often postpone marriage and/or children until they can afford the down payment on a house in a neighborhood with good public schools.

And that leads to:

4. The Baby Gap: Bush carried 25 of the top 26 states in white total fertility (number of babies per white woman), while Kerry was victorious in the bottom 16. In Utah, for instance, white women average 2.45 babies. In the District of Columbia, white women average only 1.11 babies.

The correlation between white total fertility and Bush’s share produced an impressive r-squared = 74 percent.

While the Marriage Gap appeared to be somewhat more important than the Baby Gap, together they proved extraordinarily powerful in explaining Bush’s performance—their combined r-squared = 88 percent.

(Ethan Herdrick’s Mapinator website graphically illustrates the strong correlations between Bush’s performance and the Mortgage Gap,Marriage Gap, and Baby Gap.)

The voting patterns of both blacks and Hispanics are also somewhat affected by these factors. But both groups are shifted toward theDemocrats.

This points out a little-understood problem with the much-publicized GOP Establishment hopes of Republicanizing Hispanics while simultaneously keeping the immigration floodgates open.

The contradiction is that immigration increases the population density, which raises land prices, which both makes non-Hispanic whites more Democratic and discourages those Hispanics who successfully assimilate to the norms of local non-Hispanic whites from becoming as Republican.

Formerly Republican California supplies the classic example of both processes at work.

Non-Hispanic whites became sharply less Republican as their marriage and fertility rates plummeted.

Back in 1990, California still had a higher white fertility rate than Texas. But during the Nineties the birthrate for California white womendropped 14 percent and their years married plummeted to the third lowest in America, behind only ultra-liberal DC and Massachusetts.

In Texas, however, which has much more available dirt and only about half as many immigrants as a percentage of the total population, white fertility rose 4 percent.

Texas, which voted Democratic in four out of five Presidential elections from 1960 through 1976, is now the mainstay of the GOP.

Meanwhile, those California Hispanics who succeed in assimilating fully now find themselves in a state where most role models vote forDemocrats for President.

So, Hispanics in California have stayed well to the left of Hispanics in Texas—where the white elite is fervently Republican.

The same thing has happened to Asian-Americans, who tend to cluster in crowded Blue States.

Although the Democrats captured only 30 percent of their vote in 1992, they’ve won near landslides in recent elections.

Demographic analyst Arthur Hu suggests that voting patterns show that Asian Americans traditionally vote slightly more conservatively than their neighbors do—exactly as optimistic Republicans assume.

The problem for the GOP, however, is that Asians tend to have highly liberal white neighbors.

In 2000, 45% of all Asian-born immigrants lived in three heavilyDemocratic metropolitan areas: San Francisco, Los Angeles, and New York City.

Because of the dual effects on the voting of both whites and immigrants, the spread of immigrants into the middle of the country puts once-solid Republican states into play.

Not only Arizona, Nevada, and Colorado are threatened, but, farther down the road, some states in the now seemingly Solid South, such as Georgia and North Carolina, will be up for grabs.

Considering the narrowness of Bush’s victory in the Electoral College, this ought to motivate Republicans to drop their invite-the-world delusion and start promoting Affordable Family Formation for American citizens.

But there’s no sign of it yet.

Why not?

[Steve Sailer [email him] is founder of the Human Biodiversity Institute and movie critic for The American Conservative. His website www.iSteve.blogspot.com features his daily blog.]

(Republished from VDare by permission of author or representative)
 
• Category: Economics • Tags: Housing 
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Steve Sailer
About Steve Sailer

Steve Sailer is a journalist, movie critic for Taki's Magazine, VDARE.com columnist, and founder of the Human Biodiversity discussion group for top scientists and public intellectuals.


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