Obsessive Housing Disorder, Government Efforts to Increase Home Ownership.

In the City Journal, Steven Malanga has the best history of the government's destructive attempts to promote home ownership I've read, starting with Herbert Hoover in 1922 and continuing through the current efforts to keep home prices from dropping to market-clearing prices.

He covers a lot that I hadn't known much about from the 1920s through the 1960s.

When Malanga moves to the 1980s and 1990s, he moves onto more familiar ground:

The next stop on the road to 2008 was a fateful campaign to lower lending criteria, which, the housing advocates argued, were racist and had to change. The campaign began in 1986, when the Association of Community Organizations for Reform Now (Acorn) threatened to oppose an acquisition by a southern bank, Louisiana Bancshares, until it agreed to new "flexible credit and underwriting standards" for minority borrowers—for example, counting public assistance and food stamps as income. The next year, Acorn led a coalition of advocacy groups calling for industry-wide changes in lending standards. Among the demanded reforms were the easing of minimum down-payment requirements and of the requirement that borrowers have enough cash at a closing to cover two to three months of mortgage payments (research had shown that lack of money in hand was a big reason some mortgages failed quickly).

The advocates also attacked Fannie Mae, the giant quasi-government agency that bought loans from banks in order to allow them to make new loans. Its underwriters were "strictly by-the-book interpreters" of lending standards and turned down purchases of unconventional loans, charged Acorn. The pressure eventually paid off. In 1992, Congress passed legislation requiring Fannie Mae and the similar Freddie Mac to devote 30 percent of their loan purchases to mortgages for low- and moderate-income borrowers.

The campaign gained further traction with the election of Bill Clinton, whose housing secretary, Henry Cisneros, declared that he would expand homeownership among lower- and lower-middle-income renters. His strategy: pushing for no-down-payment loans; expanding the size of mortgages that the government would insure against losses; and using the CRA and other lending laws to direct more private money into low-income programs. Shortly after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to begin buying loans under new, looser guidelines. Freddie Mac, for instance, started approving low-income buyers with bad credit histories or none at all, so long as they were current on rent and utilities payments. Freddie Mac also said that it would begin counting income from seasonal jobs and public assistance toward its income minimum, despite the FHA disaster of the sixties.

To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren't covered by the CRA—into the effort. Freddie Mac began an "alternative qualifying" program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn't exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.

Pressuring nonbank lenders to make more loans to poor minorities didn't stop with Sears. If it didn't happen, Clinton officials warned, they'd seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA "among the most egregious redliners." 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.

The article doesn't mention Barack Obama's direct involvement as one of the chief lawyers in the crusade in Chicago to lower lending standards in the 1990s. Yet in 2001, Obama was also one of the leaders in Illinois in attacking predatory lending, by increasing disclosures, outlawing some deceptive practices, and prohibiting certain kinds of fees for state-chartered lenders.

Of the seven court opinions on Westlaw from the 1990s in which Barack Obama was a lawyer, the first was a racial redistricting case and the second was a slander-employee termination case, both from 1994. In three additional opinions, Obama represented ACORN suing the state government to implement the motor-voter statute.

The last two opinions were in a big 1994 class action, Buycks-Roberson v. Citibank Federal Sav. Bank, designed to get Citibank to lower its lending standards in minority neighborhoods because they were alleged to be discriminatory. Although ACORN was not mentioned by name in the case, the target, Citibank, was one of ACORN's main ones in that era, when ACORD was pushing for easier lending standards for minorities in Chicago and elsewhere. And the 1998 settlement provided that Citibank must pay for lending counseling of the kind that ACORN was doing in Chicago and other cities at the time. Barack's firm (who had two other lawyers on the case along with Barack) shared in the $950,000 in plaintiffs' attorneys' fees that Citibank had to pay.

After several years of ACORN's efforts (and the influence of the Buycks-Roberson class action), "in 1999, 4,958 foreclosures were started by subprime lenders in Chicagoland; up from 131 in 1993 . . . In Springfield, the number of foreclosures rose dramatically from three in 1993 to 150 in 1999." Chicago Tribune, April 17, 2001.

Related Posts (on one page):

  1. Remembering the Attitude of the Times: Fannie Mae, 1993.
  2. Obsessive Housing Disorder, Government Efforts to Increase Home Ownership.

Remembering the Attitude of the Times: Fannie Mae, 1993.

In the course of Steven Malanga's history of government policy promoting home ownership, he describes the milieu in the early to mid-1990s. Here is a nice example I found from the May 28, 1993 Washington Times:

Low-income homebuyers, especially blacks, Latinos and other minorities, are being wooed in an unusual ad campaign started this week in the Washington and Baltimore areas.

Called "Opening Doors to a Home of Your Own," the multimedia advertising blitz runs through the July Fourth weekend and is the work of the Federal National Mortgage Association (Fannie Mae).

The first organization listed as offering services in the brochure is the ACORN Housing Association.

Many of 45 area mortgage lenders and 35 local nonprofit counseling agencies are offering bilingual support for what the company anticipates could be as many as 100,000 calls from low-income potential home buyers in the region.

Specifically targeted are home buyers earning less than $59,200, the median family income in the Washington area. Half of the area's 4 million people make less than that amount, and there are more white families in that category than minorities.

But because proportionately more of the 1.5 million black, Latino and other minorities are in even lower income brackets, Fannie Mae sees the program as "positive outreach" into a community "too long ignored by mortgage lenders."

"We're not fooling ourselves," James A. Johnson, Fannie Mae chairman and chief executive officer, said at a press conference last week to announce the program. Speaking at the firm's Washington headquarters, the former Walter Mondale staff assistant cautioned, "The program can't be all things to all people.

"I believe there is discrimination in the housing industry," he told reporters, and that minorities are denied home mortgage loans "simply because of who they are."

"Any time we see it," Mr. Johnson said, "we're going to do everything we can to end it."

One lender taking up the offer to participate was American Home Funding of Richmond, which placed 22,000 mortgage loans last year totaling $2.4 billion. It has 600 employees.

Paul Reid, president and chief executive officer of American Home, said, "We can't say enough" about the new program. American Home sold mortgages totaling $40 million last year to minority and low-income homebuyers, Mr. Reid said, "and we're convinced that programs like this are the way of the future in real estate."

In fact, he said American Home recently began recruiting at historically black colleges and other universities to hire new minority staffers to join 300 loan officers throughout the area, including a bilingual staff at its Annandale branch. . . .

Under laws enacted last year, lenders convicted of discriminating against blacks, Latinos, women and others will lose access to the secondary mortgage market, [Laura Duenes of Citibank] observed. "Until now, we've never seen mortgage lenders, their staffs, or Realtors, brokers or anyone else dealing in real estate who discriminates against minorities suffer any penalty.

"Now they will," Ms. Duenes said, "and it's about time."

Part of the rush to embrace minorities and low-income people "is directly a result of that legislation," observed Chris Lewis, director of bank and housing policy at the Consumer Federation of America (CFA).

Congress acted last year to codify federal obligations to Fannie Mae and the Federal Home Mortgage Corp. (Freddie Mac), both of which were chartered by Congress but now operate independently. In so doing, he said, "The legislation forced the secondary market to either help minorities or lose its federal backing."

CFA, an advocacy umbrella group of 240 organizations representing nearly 50 million persons, closely monitors the housing market, Mr. Lewis said. . . .

The sixth-largest corporation in America, Fannie Mae last year financed 3 million home loans valued at more than $250 billion.

"The question," Mr. Lewis said, "is why are taxpayers subsidizing giant corporations that discriminate against American taxpayers?"

CFA strongly supported Congressional mandates requiring that by 1994 mortgage lenders target at least 30 percent of their business to minorities and poorer home buyers.

The legislation "could work a revolution of sorts" in the way poorer people and minorities are treated by the real estate world, he said.

Lenders now must track mortgage business by a borrower's race, ethnicity, geographic location and other variables. By August, the Department of Housing and Urban Development will report to the nation on the performance of all mortgage lenders.

"That's when the mortgage community will have to face a new reality," he said. Banks not reaching the 30 percent requirement could find themselves losing federal backing in the secondary market in 1994, "a possibility that has the mortgage-financing world on the brink of something we've really not seen before in this country." . . .

Not surprisingly, when the crisis hit, Citibank was perhaps the most insolvent of the mega-commercial banks. And American Home, the organization so thrilled with the new program went out of business in the first big week of the credit crisis, on August 2, 2007. Fannie Mae had to be nationalized last year.

Related Posts (on one page):

  1. Remembering the Attitude of the Times: Fannie Mae, 1993.
  2. Obsessive Housing Disorder, Government Efforts to Increase Home Ownership.