Financial Innovation Takes the Homework Out of Banking
I got a mortgage back in October and found myself a bit taken aback by how little was involved in it. I gave some information about my income, about the size of the loan I wanted, and about my credit rating. Then in went a formula and out came approval. If someone was asking me for a big loan in the middle of a recession, I would want to know more. Like what’s the guy’s employment situation? Are there decent odds he might get laid off and have his income drop to $0? I think I could have mounted a strong case that layoffs at CAP were very unlikely (too much voluntary attrition of people going to work in government post-election) but nobody asked.
Now say what you will about this, but the lack of detailed inquiry into the situation definitely made it easier for me to get the loan. And not even because a detailed inquiry would have wound up with me getting declined. It just spared me some hassle. But like Ryan Avent I have to wonder if this is really a good thing:
A lot of recent financial innovation has been defended on grounds that it improved the flow of credit or made credit easier to obtain. But increasingly it seems that it did this by allowing everyone to stop doing their homework. Magical de-risking processes made the need to do homework before investing unnecessary. Magical hedging formulas did the same thing, and saved lenders the trouble of caring when a borrower got in trouble. The financial system became like a fancy new car — full of top-of-the-line safety features, traction control, ABS, and so on. And like drivers who seem so effortlessly in control and completely safe that they forget how deadly two tons of steel traveling at 80 miles per hour can be, market participants were lulled into forgetting how dangerous finance can be.
This seems to me to be related to some of the issues about the scale of financial institutions. To a certain extent, bigger size makes you a better lender because you’re more able to manage risk. If someone offers Google to flip a coin, with Google getting $2 million if it comes up heads and Google losing $1 million if it comes up tails, Google will take the bet—the odds are great and they’ve got a ton of cash. But offer me the bet and I’ll have to turn it down. I can’t afford to lose $1 million even on good odds.
But the flipside of this is that when institutions get really big they can’t really be doing much homework. An old-school local bank can expect the people supervising loan applications to have specific knowledge about situations. And perhaps more importantly, the head of a small institution can directly monitor what his subordinates are doing. And while he perhaps can’t have detailed information about everything that’s going on, he can have general knowledge of the local economic situation.
But when I got my mortgage from Bank of America, it’s not like there was some plausible worry that Ken Lewis was going to knock on the guy’s door unexpectedly and make sure that everything was being done right. You can’t really have a homework-based system at a giant institution. Things need to be handled through bureaucratic processes and rules and formulae.
In the real world, of course, anything’s going to fall on a spectrum between homework-based risk-assessment and formula-based risk assessment. Innovation, in large part, looks to have been a process by which an institution could claim to be able to viably shift further toward the formula-based side of the spectrum. That, in turn, could justify larger firm size since less monitoring was now necessary. And larger firm size leads to larger executive pay packages. It also leads to a larger amount of safe leverage if you assume you’re not increasing the amount of risk by doing less homework and that also means larger pay packages. And the lure of bigger salaries seems to have been enough to tempt management into papering over problems with the underlying theory.
Then underlying how you evaluate this trend from a policy perspective depends to some extent on underlying economic theory. According to a prevailing brand of neoliberal rationalism, if firms were all trending in one direction then the fact that the trend was happening was sufficient proof that it’s a good idea. After all, if it wasn’t a good idea then the market would price the badness of the idea into the firms’ share prices and that would have caused the trend to turn around. That’s a nutty way of looking at the world, but that seems to have been the prevailing view of policymakers for most of the past 20 years.
41 Responses to “Financial Innovation Takes the Homework Out of Banking”
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April 23rd, 2009 at 5:02 pm
Then in went a formula and out came approval. If someone was asking me for a big loan in the middle of a recession, I would want to know more.
Of course, approval isn’t the end of the process. Matthew doesn’t seem to realize that a mortgage is a secured loan. The bank’s main interest here is as much the value of the real estate you are buying as in your ability to pay. Thus, the bank also requires an independent appraisal of the value of the property, title insurance, escrow of taxes, homeowner’s insurance, etc.
On the larger point, though, it’s alway interesting to me to see the cognitive dissonance among the left wing on these type of issues. When it comes to banks, smaller is better, because “when institutions get really big they can’t really be doing much homework,” and instead “things need to be handled through bureaucratic processes and rules and formulae”. And this is bad in some way or another. Meanwhile, they continue to assert that we ought to be increasing the size of the very biggest institution we have – the US federal government – as if none of what they say about big banks applies to the government. What I can’t understand is, why can’t people on the left see that the issues with Bank of America being too big are highly magnified with the federal government. They think that we shouldn’t have many smaller competing health insurers – we ought to have one gigantic health insurer, the US government, but they somehow thing that management there wouldn’t be tempted into “papering over problems with the underlying theory” of how the health care is run.
I’m happy to agree with Matthew that in many respects smaller is better. But he ought to consider all of this with respect to his underlying assumptions about the size of government, where, for some reason, he ignores everything he writes about size.
April 23rd, 2009 at 5:12 pm
Matt-
I understand your thinking, but what I don’t think you realize is that the type of judgments and research which you think might make sense for mortgage underwriting have been severely inhibited by the financial regulators. ECOA (equal credit opportunity act) and concerns about so called red-lining have made the regulators virtually eliminate all credit criteria that can’t be coded into a machine. The main push behind this effort has been due to regulators worry that non-algorithmic decision making is just a mask for rejecting minority and underpriviledged applicants. This is especially applicable to any policy which attempts to be forward thinking. For instance, if an underwriter were to put in a policy discouraging loans to folks in the struggling construction industry, the general counsel would immediately reply “show me the precise data that says that there is a historical statistical correlation between construction employment and loan default rates, or else we are going to be accused of implementing a policy of ‘disparately impacting’ hispanics.” One of the consequences of nervousness regarding “disparate impact” has been the increased use of statistical score models in consumer underwriting. In terms of how business is done, this reduces reliance on a semi-skilled workforce that leverages relationship, intuition, and local environmental factors and opens up new opportunities for technical folks good at mining data, recognizing data relationships, and creating logistic regression models and so forth. And yes, this does encourage centralization of consumer banking and the development of a highly paid and (maybe) skilled technical manager set in underwriting.
The main downfall of this approach which relies on historical data patterns is that it is easy to lose sight of what is really happening to consumer balance sheets and that recent past results may be anomolous. So in the past situation where consumers could roll over debt due to rising home prices and the increased availability of home equity loans, the banks’ models were “tricked” by borrower profiles who were repaying their loans but yet were in unsustainable consumption and borrowing patterns. And because the top underwriting brass are absorbed in their models and far from the realities of the borrowers’ “real” situations–not being able to put the full picture together while sitting across the table from borrowers daily–a realistic picture that might have stimulated a more conservative underwriting approach did not force itself on credit committees until the loans (thus the data) started going bad.
And by the way, you can see clear proof of the regulatory impact of ECOA laws demonstrated by their non-applicability in small business lending. Relationship and judgmental underwriting remain prevalent in small business lending, even for comparable loan sizes being made to consumers.
The last point I’ll make is that the stupid money behind securitization business ruined everything anyway. Try adhering to rigorous underwriting processes and reasonable pricing/underwriting criteria at a bank while finance company next door has agreements to have all of its poorly priced and researched loans purchased the next day no questions asked. The banks are then faced with the decision to either put in an application process and pricing structure which no consumer will actually vie for (thus losing all market share) or following the leader. This is why tough handed regulation is needed to keep the industry in check because all can be led astray too easily. The follow the leader psychology is the source of every financial panic.
April 23rd, 2009 at 5:12 pm
Just as an anecdote that is much more recent: I am currently starting the home purchase process, and have been working with Wells Fargo for financing. Getting “pre-approval” only required the steps that Matt discussed (statement of income, assets, offer amount and a credit check). However, actually getting the loan will require me to provide copies of previous two years tax filings, previous two years w-2s, previous two pay stubs, previous two months bank statements, previous two retirement account statements and an appraisal of the property performed by the bank. The only thing I think they’re really missing are the results of a physical to make sure I’ll remain healthy for the next 30 years.
Seems that things have changed a fair bit since last October.
April 23rd, 2009 at 5:19 pm
I think two key things are missing.
First, big OR small back, that extra bit of work MattY is asking for is very personalized, requires very skilled workers and is expensive. In how many cases would that information give banks information that would change the terms of the loan or not give a loan? Is preventing a few defaulted loans worth the huge increase in labor costs.
The other benefit of mostly automated systems is that they remove chances for racial or other types of bias and make the rules of the game clear to everyone (it not always fair). Allowing someone to judge the chances someone will lose their job before paying off a loan is extraordinarily risky.
That all said, even if the limited income/savingings/credit score information companies were making terrible decisions and additional info probably wouldn’t have helped decrease the problems either.
April 23rd, 2009 at 5:24 pm
Totally agree with DD. You can further stratify risk and say that one borrower will be x% more risky than another, but if the entire financial market’s macro view is to expect anticipate an unsustainably rosy forecast of the american consumer’s ability to service debt, the system will underprice both of the loans above.
April 23rd, 2009 at 5:27 pm
@Michael – that’s the way it used to be, before the intro of NoDoc and other exotic loans.
There also was an issue last year with many of the large lenders not actually following up on the verification of loan application materials, despite underwriting requirements. This activity is contracted out, and some lenders decided to cut costs and not bother.
April 23rd, 2009 at 5:30 pm
Nice try, Al. Health care is to banking as apples are to oranges.
April 23rd, 2009 at 5:34 pm
I don’t see much evidence that smaller banks are necessarily better at due diligence than bigger banks. Indeed, Matt seems to have forgotten the Savings and Loan Crisis ever happened (which is perhaps understandable, seeing as how he was in grade school at the time).
Anyway, Matt also seems to be unaware that what he is calling the formula-based approach extends down to what he is calling the homework-based approach. In other words, of course regulators can and do demand a certain amount of due diligence go into the asset assessments which are then incorporated into the overall risk assetment.
So, the real problem was not the idea of risk regulation, the real problem is our risk regulations were too lax, and underenforced. And that applies to banks of all sizes.
April 23rd, 2009 at 5:35 pm
you make an assumption that doing all of that hoework allows bankers to make better educated decisions about what is a less or more risky loan. I don’t have any facts, but I am not sure that such is the case. Especially in such a volatile and risky market, I would expect that loans are equally risky. ie. it might seem that being a good swimmer might decrease your risk of drowning, but if you are on a ship in the middle of the ocean, and it goes down, probably not significantly. Again, if your house loses value, which I think is mostly based on location, or if you get laid off, again more likely based on location (local economy) rather than occupation, you are more likely to default (I suspect in detroit not just autoworkers default, but many business owners, etc… as well). Otherwise, with a good credit history, not so likely. After all, like the boat, if your zip code loses a lot of value, a larger percentage will default, no matter what the occupations of the owners, but if you are afflicted by medical turmoil, divorce, no amount of homework is predictive.
I am not a banker, nor their friend, but if more homework is not more predictive, then it is just discriminatory.
April 23rd, 2009 at 5:36 pm
The banks are right not to spend time evaluating an individual’s job prospects. It would be incredibly expensive to even try and the data from even an expensive effort would be almost useless (no employer would ever give out information about the job prospects of a particular employee, and it makes no sense to have bankers trying to calculate whether or not companies are going to be reducing their labor force overall).
This is a case where using models is the right approach. It’s just important to make sure the models take into account the possibility of a severe downturn in a local economy.
April 23rd, 2009 at 5:52 pm
I don’t think innovation has much to do with how Matt got his mortgage. Bankers never looked into the small details of an applicant’s employment circumstances beyond verifying that they are working where they say they are, starting the date they’ve told them, and make the salary they are claiming (for a while they weren’t asking any of that, and of course that’s a big part of what happened un the meltdown). But predicting with any reasonably accuracy who will be laid off is pretty well impossible and any such ham-handed attempt would result in whole classes of people unable to get a mortgage, which would in turn create a tsunami of political backlash.
April 23rd, 2009 at 5:58 pm
Strangely, I think that Al has a pretty solid critique here… not because I agree with him about government, but because Matt’s argument here is pretty lazy and he isn’t thinking through the implications.
The size of the financial institutions had very little to do with these errors in judgment. Large and small institutions alike went over the same waterfall. The problems were to some extent ideological (popular, lazy quasi-libertarian assumptions about the efficiency of markets and the awfulness of regulation). They also showed the herd behavior seen in any bubble, in which conventional wisdom shifts from fear of losing money to fear of missing out on your share of the amazing wealth-generating phenomenon that knows no limits.
In another sense, the problems reflect the negative externalities of profit-driven enterprise. Investors reward you for earning more than your competitors, not for hedging against risks that may never materialize. And a few years ago, the way to earn money was to latch onto the real estate market and offload your risk onto someone else.
This is where size DOES come in. When smaller banks failed, the FDIC was prepared to clean up the mess. But Lehman Brothers was performing without a net. And the sheer magnitude of AIG made anything they touched turn to AAA according to the bond raters. They were given the deferential treatment one accords an institution that is so big it can cover any possible loss. Like a government. But they collect no taxes and print no money. And as we learned, they could in fact fail.
April 23rd, 2009 at 5:59 pm
By the way, the more I think about Matt’s argument in this post, the stranger it seems to me. I mean, you go to either a big bank or a small bank for a mortgage, and you will work with some loan officer. That loan officer will have a supervisor at either bank. Beyond that supervisor, pretty much no one in either bank is going to be checking that loan officer’s “homework”.
OK, so now in a small bank, maybe there are only 10 more levels up before you get to the top officer, and maybe in the big bank it is 20 more levels. But what difference does that make? Those guys still aren’t checking the homework, so the number of them wouldn’t seem to matter much.
Anyway, a strange thought on Matt’s part in my view.
April 23rd, 2009 at 6:31 pm
Better yet…
As the housing market was falling shouldn’t they be asking if the place you were looking at was really worth the amount you needed to buy it?
April 23rd, 2009 at 6:59 pm
This is a strange argument mainly for the reason matt r brings out in the second comment. Even aside from the question of whether knowing whose employers are likely to be doing layoffs, would we want loan managers doing investigations to that level. That is far more intrusive than the kinds of things liberals are trying to prevent insurance agencies from considering.
It also misses the more serious problem that led to the easy loans. I got a mortgage a bit before Matt. What struck me about the process was not just how confident they were that I was a good risk, despite heavy debt (and I am) but that they while I was going out of my way to make the forms give as honest an account of my situation, they were pushing for me to give a more positive account. And when I signed the mortgage I was told that they had already sold it to someone else. That is, the loan agent had already made what profit his company was going to get long before it became clear whether I was going to pay the loan back.
That seems to go beyond a question of them not doing an invasive search because it is expensive.
April 23rd, 2009 at 7:49 pm
There a lesson in this that applies to federalism that I wonder if MattY would concur with.
April 23rd, 2009 at 8:46 pm
> I understand your thinking, but what I don’t think you
> realize is that the type of judgments and research which you
> think might make sense for mortgage underwriting have been
> severely inhibited by the financial regulators. ECOA (equal
> credit opportunity act) and concerns about so called
> red-lining have made the regulators virtually eliminate all
> credit criteria that can’t be coded into a machine.
Whenever I see this kind of argument I think of Talman Home Saving of Chicago. They made a nice living on the south side loaning to everyone who came in the door: white, black, old, young, this neighborhood, that neighborhood. Most notably Talman would write mortgages for small, low-cost houses in inner-city neighborhoods. My first mortgage was for $25,000 on a $31,000 house; even the so-called “neighborhood banks” wouldn’t touch a mortgage on a house that small. Talman did: _after_ they examined not only my statements and tax returns but my actual paystubs and passbooks and called my supervisor and timekeeper to verify I was actually working. And met with me in person 3 times. No discrimination: just good solid documentable business process. (Sadly they were forceably merged into a bank due to the McCain S&L crisis which led to their demise).
The “we can’t due it due to anti-discrimination laws” claim is very similar to the “we must do (or not do) this or that due to Sarbannes-Oxley”. The real roadblock is not the SarbOx law, but the Big 3 accounting firms’ /interpretations/ of the law and how their clients /must/ behave to get a clean bill. Oddly, those interpretations just happened to have been written to benefit certain very powerful constituencies in large corporations at the expense of those constituencies’ enemies. Same thing here: some very powerful people don’t want successful community lending in diverse city neighborhoods, so they use their /interpretation/ of diversity regulations as an excuse to destroy any that appears.
Cranky
April 23rd, 2009 at 8:50 pm
> The size of the financial institutions had very
> little to do with these errors in judgment. Large
> and small institutions alike went over the same waterfall.
Uh, no. Small family-owned and midsized regional banks are not failing at any greater rate than usual and are not in the insolvent-without-bailout state of the big and super-big banks. I suspect their profitability might even be going up (on a legitimate basis), although since most are privately held we don’t know that for sure. Banks (and even large financial institutions such as Edward Jones) that stuck to their knitting didn’t “go over the cliff”. Hurting due to the economy maybe, but no cliff-diving for those who didn’t have Wall Street stars in their eyes.
Cranky
April 23rd, 2009 at 8:57 pm
I don’t have time right now to educate Matthew about mortgage lending, but let’s just say that his view is simplistic in the extreme. Also, the major erosion in underwrting standards over the past 30 years has been the result of the GSE’s and their hired criminals in Congress. Hell, even the difference between what was required for a 5% down, supposedly AAA Fannie or Freddie mortgage in 1995 was very different than was the case in, say, 1986. This process didn’t start in the past decade, and it wasn’t the mortgage originators who were the major players in constantly looking to ease underwriting standards.
April 23rd, 2009 at 8:57 pm
Now say what you will about this, but the lack of detailed inquiry into the situation definitely made it easier for me to get the loan.
Because you have a good credit rating. If that weren’t the case, the opposite would be true: there would’ve been no local banker who knows you’re good for it and that problem you had a couple of years ago was a one time thing. The change from how mortgage banking used to be done years ago both helps and hurts people. I’d argue though, that on the whole, keeping the decision largely dependent on the FICO score is an improvement: it’s best to be objective. Otherwise it’s too easy to let in other items that shouldn’t be considered.
April 23rd, 2009 at 9:11 pm
Back when my wife and I were buying our first condo on a FHA loan, they wanted a written explanation for why my wife’s employment history showed A DAY between paying jobs.
Ah, the good old days, when my mortgage rate went up a point in a day, before lock in, because the Reagan Administration had pissed off Tokyo, and they expressed their displeasure in the t-bill market.
April 23rd, 2009 at 9:18 pm
Small family-owned and midsized regional banks are not failing at any greater rate than usual and are not in the insolvent-without-bailout state of the big and super-big banks.
I’m not exactly sure how these categories are being defined, but the rate of FDIC bank failures is way, way up:
http://www.fdic.gov/bank/individual/failed/banklist.html
And their watch list of additional distressed banks keeps growing. As of the last update at the end of 2008, it was up to 252, as opposed to 90 at the end of 2007 (and around 50 is normal).
And unfortunately, it is good bet things are going to get worse rather than better for a while. As the commercial and development side of the real estate market tanks on a lagging basis, it is going to drag down more small banks (who often get heavily involved in local commercial and development lending).
April 23rd, 2009 at 11:25 pm
The financial problems are centered in the big moneycenter banks, but it is because they wanted to write more CDOs and MBSs and collect the transaction fees.
So they encouraged more and looser mortgages (the more sub-prime the mortgage, the higher the yield).
So they wanted the bad mortgages-they paid better. And housing pices have never declined.
April 24th, 2009 at 12:53 am
Matt! You gotta take that bet. 2 to 1! Stakes are immaterial. Lock 2 to 1 shots don’t grow on trees. You gotta fire. You gotta fire it all.
April 24th, 2009 at 3:38 am
Dear Matt R.
Thanks, excellent post.
This is similar to the Ricci case: the concept of “disparate impact” triumphs over common sense.
April 24th, 2009 at 9:14 am
Your example sounds like a mild case to me. I trust you brought proof of your income (a pay stub or something). How many mortgages were granted to people who made claims about their income based on nothing ? I don’t know, but I suspect that no one does.
I’m not convinced by your speculation about size. It is certainly true that it is harder to monitor people who work for large firms. In particular it is hard to watch the watchers who watch the watchers who… watch the workers.
However, huge banks have managed fine for over a century often out competing smaller banks. The solutin appears to be to pay higher salaries in large firms. It is a fact that, given worker characteristics, salaries are larger in larger firms. This makes sense if the aim is to keep people just scared enough to do their homework. Failure is less likely to be detected in a large firm, but losing the job is more costly, so people do their homework. Often the efficiencies of scale are enough to make up for the cost.
I think the failure of risk management is a very recent phenomenon and is due to securitization, not just bank consolidation interstate banking etc. The key point is that mortgage initiators often passed the risk on to investors by securitizing mortgages. Now it should be obvious that this creates a moral hazard problem — if the initiator doesn’t bear the risk, why would the initiator do the homework.
The market should have priced this paying more for mortgage backed securities the more risk was kept by mortgage initiators. The market did no such thing. Investors relied on credit ratings and the ratings agencies just assumed that mortgage default risk depended only on a few variables definitely not incuding whether the initiator had done the homework or the results of its investigations if any. This information is recorded on “the loan tapes.” the people who did the actual ratings were not allowed to look at the loan tapes. No one has looked at the loan tapes. They are there. Long and boring (to say the least) but unread, because the information is too horrible to contemplate.
The point is that things could have been checked. If hte ratings agencies had refused to rate without looking at the relevant data, or if investors had decided to investigate instead of just trusting the ratings, then the whole house of cards wouldn’t have been built. The reason mortgage initiators didn’t do their homework is that they could sell bad mortgages for the price of good mortgages so they didn’t need to know which were bad and positively didn’t want to know that any were bad.
April 24th, 2009 at 10:35 am
Cranky-
I don’t disagree with what you are saying. My point wasn’t to say that ECOA laws provide roadblocks to solid underwriting. These laws in no way discourage rigorous verification of income and assets. What they do discourage is intuitive or speculative assessments of risk based on other characteristics, like Matt Y’s example of judging the future viability of an industry a borrower is employed in.
In no way can the recent troubles of the financial sector be based on anti-discrimination laws. As Robert Waldman, it’s about the moral hazard, incentive missalignment, information assymetry associated with having no-skin-in-the-game underwriters selling loans to idiotic investors, who in turn were advised by ratings agencies and investment bankers who themselves profit from volumes rather than quality.
April 24th, 2009 at 11:22 am
There’s a selection effect going on. The government didn’t hold a gun to banks heads and make them lend money to minorities that they figured would be deadbeats. Instead, the government’s chokepoint was mergers and acquisitions. If you wanted to buy up other banks, that was when you were vulnerable to community reinvestment coalitions. So, if you were ambitious and wanted to grow your bank like Kerry Killinger of Washington Mutual, you made huge promises of loans to “underserved” lower income and minority communities, such as WaMu’s promise of $350 billion in Community Reinvestment Act lending, or Ken Lewis of Bank of America’s promise of $1.5 trillion.
In total, about $6 trillion in CRA lending was pledged from 1995 onward. These pledges weren’t made by executives thinking they’d lose money on them. But the only way you could get to be the CEO of a huge bank doing a lot of mortgage business was by drinking the government’s Kool-Aid on how lower income and minority borrowers had been irrationally discriminated against and there was a lot of profit to be made in lending to underserved communities.
If you were a banker who thought it was too risky to loan more to lower income and minority mortgage borrowers, well, you couldn’t play ball with the big boys like Kerry Killinger. You couldn’t buy up other banks because of the CRA. So you stayed small, or you stayed in business loans, or both.
So, we ended up selecting a dominant financial class who believed in the profit making potential of lending vast amounts to people who wouldn’t have qualified under traditional credit standards.
April 24th, 2009 at 11:26 am
By the way, Matt, which ethnicity did you put down on your loan application? Hispanic or non-Hispanic? The government keeps track of this very closely in the giant Home Mortgage Disclosure Act database.
http://www.ffiec.gov/hmda/
Banks, if they want to merge, must prove they are loaning out enough money to minorities, so I’m sure they would have appreciated you putting down Hispanic.
April 24th, 2009 at 11:31 am
Cranky — “Uh, no. Small family-owned and midsized regional banks are not failing at any greater rate than usual and are not in the insolvent-without-bailout state of the big and super-big banks.”
As DTM’s link indicates, this simply isn’t true in any rigorous sense.
When you say “family-owned”, however, you may be onto something. My hunch is that the real divide is not between small and large banks, but between privately-held firms and publicly-traded firms. The former having much less incentive to abandon a moderately-profitable, low-risk business model during a bubble.
But I really don’t have time to research the subject.
April 24th, 2009 at 11:48 am
And I hate to interrupt this week’s edition of Steve Sailer’s Suburban Fables, but there are no federal regulations, CRA or otherwise, that encourage any banks anywhere in America to make loans to individuals with a poor credit history or debt-to-income ratio.
Regulations against redlining forbid lenders from discriminating against individuals who would otherwise qualify for a loan, but lived in neighborhoods that were not considered to be sound investments. This was one of the least significant barriers that were broken down in the run-up to the housing bubble. All those exurban McMansions bought by white, black, and brown people who couldn’t afford them? Completely unaffected by the CRA.
WaMu made the horrible loans they made because they were making a bloody fortune off of them in the derivatives market and had no incentive to care what happened after that. Matt R at #27 gets this exactly right.
Everyone with an agenda can find the scapegoat of their choice in this mess, but anyone who tells you that minority lending incentives were anything more than a cherry on top of this crisis has absolutely no idea what they’re talking about.
April 24th, 2009 at 12:33 pm
Waaaaaay too optimistic.
“Financial innovation” didn’t enable banks to “not do their homework” investigating where to invest their capital (ie., establishing who is a good mortgage risk)– it enabled them to knowingly make bad loans, repackage it, and faudulently peddle it to other investors on the *premise* that they (as the packagers) already did their homework for these new investors by having the ratings agencies rate them AAA without actually “doing their homework” by making sure a high percentage really were good mortgage risks.
The banks just didn’t peddle fast enough. This was deliberate fraud, and it should be dealt with as such.
What gives, Democratic shill, with your candidate? He’s not inherently stupid, so is he corrupt? Merely biding his time?
The citizenry needs to know for reasons that are, I’m sure, very obvious to you.
April 24th, 2009 at 1:16 pm
This is quite possibly the most deeply ignorant post I’ve ever read on this blog.
April 24th, 2009 at 1:37 pm
Clinton regulated the financial institutions into giving more mortgage money to minorities, while Bush deregulated the financial institutions to encourage them to give more mortgage money to minorities, without pesky nuisances like down payments and proof of income. Bush used his stated goal of narrowing the racial gap in home ownership rates by adding 5.5 million minority homeowners by 2010 to justify implementing the whole Angelo Mozilo of Countrywide boiler room operator wish book.
http://www.vdare.com/Sailer/080928_rove.htm
April 24th, 2009 at 5:33 pm
To those sceptical of steve sailer’s theory I want to ask. With all the obsessive attention america gives to anything related to race, from high school exams to firefighter test to believing obama’s skintone making him fit for president, are we really to believe that the financial institutions stood there completely immune to the machinations of race hustlers?
Seriously, we are supposed to believe THAT?
April 24th, 2009 at 5:36 pm
And again, Steve, moving past all of your rhetoric and pull-quotes, there are still no federal regulations, CRA or otherwise, that require any banks anywhere in America to make loans to individuals of any race with a poor credit history or debt-to-income ratio. Because no such regulations exist.
To be fair, your post really does get at the heart of the faulty mindset on both the Left and the Right, which always assumed that any policy which increased home ownership was a good policy. And you do push back slightly against the myth that the CRA was solely responsible for the crisis. But then you proceed to weave an elaborate tale in which political speeches by Bush and Karl Rove that encouraged minority lending were largely responsible for the crisis.
The key thing is that the banks and financial institutions were making massive amounts of money by reducing lending standards, because of the derivatives market. Fannie and Freddie, by pushing regulators to relax standards, were simply trying to catch up with their competitors.
In the end, you’re just telling your readers the story they want to hear.
April 24th, 2009 at 5:42 pm
“are we really to believe that the financial institutions stood there completely immune to the machinations of race hustlers?”
No, we should understand that any action by federal regulators to promote minority lending was the equivalent of telling a child with his hand in the cookie jar that he should really try his best to eat all the cookies and not skip the oatmeal ones which he doesn’t like quite as much.
April 24th, 2009 at 6:45 pm
LaFollette Progressive
I take it from your post that you still believe the “banks discriminated unfairly against qualified minority borrowers” line which was debunked by Peter Brimelow, with the elegance of a mathematical proof, by showing that the default rate for white and minority lenders was equal in the early nineties.
I also understand that your answer to my first question is, no.
April 25th, 2009 at 6:33 pm
“And you do push back slightly against the myth that the CRA was solely responsible for the crisis. But then you proceed to weave an elaborate tale in which political speeches by Bush and Karl Rove that encouraged minority lending were largely responsible for the crisis.”
I see, so you read the first paragraph because it appealed to your preconceived idea, and then dismissed the rest because it was distasteful to your beliefs.
Sure, the financial products scamsters and their perverse short-term profit incentives allowed the bubble to get out-of-control big. But the relaxation of loan standards based in part on minority lending requirements is what made all these “assets” so toxic in the first place.
April 26th, 2009 at 12:22 pm
Matt, if I may ask, what was your downpayment as a percentage of the purchase price? Warren Buffett’s letter to investors from last year said that one of his subs had been in business of loans to purchasers of manufactured housing (mobile homes). Mobile homes, it seems, underwent a bubble of their own in the late 80s-early 90s, with lower down payments, ARMs etc. The borrowers generally had low credit scores. His lending sub continued to insist on sizeable downpayments (how it was able to compete with lenders offering smaller or no downpayments, he doesn’t say). When the crash came, his borrowers continued to pay, even when the value of their loans exceeded the value of their homes. They would not walk away from the money they had sunk in the home.
So, if you made a sizeable downpayment, that may give the bank comfort that you will not walk away. Also, of course, certeris paribus, a person who can pull together a sizeable downpayment is a better risk than a person who cannot.
April 27th, 2009 at 10:56 pm
[...] and chugging Wall-flu, the Walgreens generic Theraflu, like mad the past several days. I missed this from Matthew Yglesias: But like Ryan Avent I have to wonder if this is really a good thing: A lot of [...]