Posted by Jim Lindgren:
Obsessive Housing Disorder, Government Efforts to Increase Home Ownership.
http://volokh.com/archives/archive_2009_05_17-2009_05_23.shtml#1242797168
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 [1]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.
References
1. http://www.city-journal.org/2009/19_2_homeownership.html
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