What goes around comes aroundAndrew L. Liput Esq.government-induced lending criteria, mortgage market collapse
How government-induced lending criteria helped create
the mortgage market collapse
To hear Congress and our presidential candidates tell the story,
the recent collapse of the mortgage industry—which has fueled
the largest number of property foreclosures since the Great
Depression—was entirely the result of banks' and Mortgage
Brokers' greed. In fact, it was the politicians themselves who
created the mess. These politicians are now looking to enact
punitive measures against brokers and banks to satisfy the public
need for a scapegoat.
When Bill Clinton was in the White House in the 1990s, special
interest groups and democratic congressional leaders criticized the
mortgage industry for red-lining urban areas and bypassing minority
applicants. These leaders claimed that minority applicants were
unfairly being denied the opportunity for homeownership. As a
result, underwriting standards and criteria were relaxed. This was
done after the first raw data from the Home Mortgage Disclosure Act
(HMDA) reported that minorities in the mortgage market were
underrepresented.
In fact, as Dr. Stan Liebowitz, economics professor at the McCombs School of Business at
the University of Texas at Austin, has pointed out recently,
"no sooner had the ink dried" on the initial HMDA reports when the
Federal Reserve Bank of Boston
issued new guidelines for mortgage lenders. These guidelines were
designed to eliminate what the Federal Reserve Bank of Boston
called "arbitrary and outdated criteria that effectively
disqualifies urban and lower income minority applicants." One of
the problems of taking raw data and using it to create policy is
that raw data often fails to define the whole picture. Prudent
governing sometimes requires patience and clarification of
important information. A closer analysis of HMDA results showed
that many lower income and minority applicants were shut out of the
mortgage market because they were economically unqualified to
shoulder the financial burden of a home mortgage payment. This was
largely due to income and credit problems. Instead of designing
economic policies to correct the cause, such as creating more
opportunities for higher income, credit counseling and education,
the government did what it does best—it created a dramatic,
quick fix. It encouraged the marketing and processing of sub-prime
loans.
Relaxed underwriting standards meant that credit history,
income, assets, savings history and the overall ability to repay
would either be removed from the equation or have its significance
reduced in decision-making. Relaxed standards also meant products
which avoided the fundamental criteria of good lending practices
would be permitted in the process. Lenders were thusly encouraged
to offer products and underwrite loans in a manner that would be
unbiased—not as to color, ethnicity or national origin, but
irrespective of financial soundness and the ability to repay. Thus,
the industry found itself in the undesirable position of being
pressured to grant loans to people who did not have to demonstrate
the ability to repay. In addition, any demonstrative failure to
make minority and urban loans threatened regulatory retaliation, as
reported under HMDA.
Now that the regulators created the mess, how did they respond?
They pointed fingers at the industry, demonizing the Mortgage
Brokers and lenders who did everything they could to meet the
expectations and directives to make homeownership available to
everyone under existing guidelines. The sub-prime loan, once the
preferred solution to perceived economic disparity, is now a term
of derision and outrage. How far we've come!
Out on the stump, the hypocrisy is evident. Sen. Hillary
Clinton's husband was president during the relaxation of lending
criteria, when it was a good thing. Now that it has become a bad
thing, Clinton accuses the industry of predatory lending and greed
for having used relaxed lending criteria. Clinton is not alone in
her new found concern for borrowers. All the remaining candidates,
including Gov. Mitch Romney, Sen. Barack Obama and Sen. John McCain
have suggested drastic federal intervention in the mortgage market
as a method to protect the victims—victims these senators had
a hand in harming. Bankruptcy assistance, judicial restructuring of
mortgage terms, frozen rates and billions in federal government
foreclosure bailout monies have been suggested to protect
homebuyers.
I have a better idea. Leave the market alone and let capitalism
work. Each side had reason to want the relaxed guidelines. Wall
Street, lenders and originators wanted the business, borrowers
wanted the homes and investment properties, and the federal
government wanted to satisfy special interest groups. Each side has
suffered as a result. People need mortgages, lenders and
originators need business, and the government wants the economy to
rebound. Slowly, products are coming back, the inefficient lenders
are going out, inexperienced and fraudulent brokers are unemployed,
and borrowers who were drunk on the real estate boom are sobering
to the realities of responsible credit and debt decisions. The
market will come back, but a restructured mortgage market
overloaded with new, dramatic and punitive government regulations
and requirements will resemble the type of knee-jerk reaction that
got us here in the first place.
Andrew L. Liput Esq. is president of The Liput Group and owner of
New Jersey-based Repurchase Resolution
Specialists Inc. He may be reached at (888) 424-3728, through
his companys Web site www.repurchasespecialists.com
or e-mail
[email protected].
