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The devil you don’t admit to knowing February 28, 2009

Posted by vsap in Blogroll, Financial Crisis, Uncategorized, US Politics.
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Thomas Sowell may be known by few or many but his February 24, 2009 column is a must read for those who think the “greedy” in the private mortgage lending business put the housing market in the toilet. Let’s look at an excerpt from Sowell’s column:

“The Community Reinvestment Act of 1977 directed federal regulatory agencies to “encourage” banks and other lending institutions “to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.”

That sounds pretty innocent and, in fact, it had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who are in the business of making loans.

The real potential of that premise became apparent in the 1990s, when the Department of Housing and Urban Development (HUD) imposed a requirement that mortgage lenders demonstrate with hard data that they were meeting their responsibilities under the Community Reinvestment Act.

What HUD wanted were numbers showing that mortgage loans were being made to low-income and moderate-income people on a scale that HUD expected, even if this required “innovative or flexible” mortgage eligibility standards.

In other words, quotas were imposed— and if some people didn’t meet the standards, then the standards need to be changed.

Both HUD and the Department of Justice began bringing lawsuits against mortgage bakers when a higher percentage of minority applicants than white applicants were turned down for mortgage loans.

A substantial majority of both black and white mortgage loan applicants had their loans approved but a statistical difference was enough to get a bank sued.

It should also be noted that the same statistical sources from which data on blacks and whites were obtained usually contained data on Asian Americans as well. But those data on Asian Americans were almost never mentioned.

Whites were turned down for mortgage loans more often than Asian Americans. But saying that would undermine the reasoning on which the whole moral melodrama and political crusades were based.

Lawsuits were only part of the pressures put on lenders by government officials. Banks and other lenders are overseen by regulatory agencies and must go to those agencies for approval of many business decisions that other businesses make without needing anyone else’s approval.

Government regulators refused to approve such decisions when a lender was under investigation for not producing satisfactory statistics on loans to low-income people or minorities.

Under growing pressures from both the Clinton administration and later the George W. Bush administration, banks began to lower their lending standards.

Mortgage loans with no down payment, no income verification and other “creative” financial arrangements abounded. Although this was done under pressures begun in the name of the poor and minorities, people who were neither could also get these mortgage loans.

With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster.

Those who warned of the dangers had their warnings dismissed. Now, apparently, we need more politicians intervening in more industries, if you believe the politicians and the media.”

Sowell has nailed it. Democrat administrations, Carter and Clinton, were instrumental in creating the current housing “crisis”. Later, of course, the Bush administration marched to the drumbeat, no doubt to get and keep Democrat support for the war in Iraq and the War On Terror. It doesn’t hold Bush harmless at all. It supports Sowell’s assertion that the government created the housing crisis, not the greedy lenders looking to take advantage of uneducated buyers during a boom time. Not all eras between 1977 and 2008 were “booms”. So, this “bust” is government manipulation of a private sector market, not private enterprise duping the innocent “victims” as if they were payday loan sharks.

The old saying goes: “The devil you know is better than the devil you don’t.” In this case, the devil you don’t admit knowing (government intervention in private markets) does more damage than the devil you know.

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Comments»

1. Mike - March 1, 2009

Just passing by.Btw, you website have great content!

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Making Money $150 An Hour


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