What The Washington Post Neglected to Reveal About the Nation’s Housing Crisis
Since the housing debacle began, The Washington Post has persistently claimed that homeownership gains in previous years had resulted primarily from extending credit to people who could not afford it, including low-income minorities and immigrants, and that government policies promoting homeownership impelled the housing crisis. These misleading accusations completely ignore how massive borrowing in the private financial sector, poorly rated mortgage-backed securities, and the proliferation of faultily-crafted Wall Street financial innovations practically ruined the nation’s economy.
These unsubstantiated claims are hampering a concerted national effort to resolve the crisis as well as impeding the prompt formulation of national policies that can effectively address the housing and credit needs of all Americans. This is the story of how the Post has not only generated and perpetuated such unproven views but also woefully failed to expose the lethal role that a new breed of nonprime loans played in precipitating the massive loss of homes, wealth, and jobs for millions of Americans.
The Prospects of Homeownership Prior to the Subprime Crisis
In 2006, the New York Times Real Estate Magazine reported that baby boomers were expected to sell about 34 million homes over the next two decades. The New York Times significantly wondered then who would buy these homes since native-born Americans alone would not be growing in sufficient numbers. It predicted that the buyers of these baby boomer homes could well turn out to be first- and second-generation immigrants, who would be hitting the market just when they are needed the most. With thousands of immigrants buying homes at the lower end of the market and possessing strong upward mobility in housing, they were expected then, and are expected now, to provide a base of demand that eventually pushes everyone else up.
Thus, long before the onslaught of toxic mortgage loans wreaked havoc on communities across the country, immigrants and minority groups had been expected to stimulate America’s housing renewal. For nearly two decades, for example, the rate of homeownership of Hispanics, who make up the bulk of the nation’s immigrants, had grown impressively. During the 1990s, the percentage of Hispanics owning a home rose from 42% to 48%. This was the fastest rate of increase for any population segment in the country.
In 2007, the highest rate of homeownership among Latinos was recorded at nearly 50 percent. Much of this homeownership growth came from immigrant households who spurred the demand for “starter” homes. Only 9.3% of Latinos who had recently arrived owned homes in 1990, but the number surged to 58% by 2008. In recent years, over 60% of Hispanic immigrants who are naturalized citizens have owned their homes. Moreover, the biggest gains in Hispanic homeownership have occurred in immigrant gateway states with large Mexican populations, like Texas, California and New Mexico.
Indeed, immigrants and minorities have long been playing an integral role in forging a resilient middle class that has generated and sustained America’s economic prosperity. Hispanics in particular had experienced substantial growth in population, employment and income levels, and were emerging as one of the predominant generations of homebuyers who were ready to replace an aging and downsizing baby boomer population. Today, their labor productivity, work ethic, population profile, high levels of entrepreneurship, and burgeoning purchasing power have the potential of reinvigorating the housing sector and accelerating America’s economic growth.
Is it any wonder then that as far back as a decade ago the lending industry and Wall Street financiers assertively sought to make more mortgage loans to immigrants? On the positive side, a study in 2007 by the Federal Reserve found that immigrants and married individuals, many of whom are Hispanic, performed better on their loans than predicted by their conventional or traditional credit scores.1 In addition, many immigrants had high thin-file FICO scores, meaning that they had a history of using credit sparingly, and had practically never failed to repay a debt. Thus, at the beginning of the subprime debacle, as mortgages were aggressively being bundled in order to get triple-A ratings, Wall Street found that loans to immigrants actually improved the quality of the pool of loans and increased the percentage that could be rated triple-A.2
On the negative side, however, immigrants had also become easy targets for dubious lenders who specialized in making inappropriate and costly nontraditional, exotic mortgage loans. Although many immigrants actually qualified on the basis of their high FICO scores for conventional prime loans, they and other vulnerable borrowers -- especially those with limited English skills -- were often lured into high risk loans, including low- or no documentation loans or loans with highly deceitful teaser rates. Such interest rates later reset to significantly higher rates, which few borrowers could repay based on the unsuitable characteristics of these loans and the way in which these loans were shoddily made. How else could anyone explain why "In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000"?3
The Washington Post Slowly Steps In
In March 2007, The Washington Post reported that the wave of “subprime” loans that was causing many families to lose their homes had hit immigrants first.4 A few months later, a Post editorial conveyed the misconception that a “subprime” mortgage was a loan that was strictly made to “a not terribly creditworthy” person “to buy a house” that “he or she really can't afford."5 Concerned that this misleading assertion would adversely affect the government’s ability to respond effectively to the impending catastrophe, I wrote a letter to the Post in which I indicated that many of these improper nontraditional subprime loans had been made without due regard to a person's ability to pay. More importantly, I added that the Post had failed to point out that many of these “subprime loans” had been made to borrowers, including minorities and immigrants, who could have qualified for less expensive conventional loans. In 2007, Alan Greenspan, former Chairman of the Federal Reserve, noted that about 80 percent of the rise in mortgage debt from 1990 to 2006 had been due to refinancings.6 Greenspan’s declaration in effect contradicted the conventional wisdom fostered by the Post that the making of “subprime” loans “to buy” houses that less than creditworthy borrowers could not afford had caused the housing crisis.
Chronology of Events
Although I had been submitting letters to the Post since 2006, the Post finally published one of them in February 2008.
Predators Behind the Housing Slump
The Washington Post
Saturday, February 2, 2008; Editorial Page
The Post asserted that the housing slump is due primarily to lax lending standards that prevailed until recently ["Down Arrows," editorial, Jan. 23].
Highly unregulated and predatory loan practices may be more to blame than the sheer loosening of lending standards.
Indeed, many "subprime" loans were inappropriately extended to borrowers, including immigrants and minorities, who had income and credit scores that qualified them for prime loans. Fannie Mae and Freddie Mac surveys have shown, for example, that as many as one-third to one-half of Hispanic borrowers who got subprime loans qualified for prime loans.
What is needed is innovative underwriting that enables lenders to accurately assess the creditworthiness and financial capacity of all borrowers. Such systems take into account multiple wage earners and documented income from more than one job, and they add weight to on-time payments of rent, phone bills, utilities and other "alternative" credit indicators.
A few months before the Presidential election, the Post published “The Bubble,” a series of articles on the subprime crisis. The articles insinuated that the crisis had resulted largely because subprime loans had been made to low-income families and immigrants (most of whom are Hispanic) with “less-than-stellar” credit.7
In fact, nearly a majority of Hispanics who got nontraditional subprime loans could have qualified for safe, lower-cost conventional loans that would have considerably enhanced their likelihood of achieving sustainable homeownership. The Post, however, failed to report that unprincipled subprime lenders had long been targeting uninformed customers who could qualify for less expensive “prime” loans but were not told about it.
The Post’s articles did identify “other” causes of the housing crisis, including plunging interest rates, exotic new Wall Street securities, inferior loan products, inadequate regulation, and substantial increases in mortgage debt. Since then, however, Post editorials have glaringly failed to acknowledge any of these contributing factors, but instead have emphasized that borrowers with weak credit or government policies are to blame for causing the housing crisis.
In reality, the root causes of the housing crisis began with the explosive growth of risky Alt-A and other nonconventional mortgage loans, including interest-only and payment option adjustable interest rate loans that were made using loose or minimal underwriting standards and contained risky product features such as “teaser” rates that later exploded into significantly higher rates when they reset. Incredibly, payment option adjustable-rate mortgages gave borrowers “the right” to choose whatever rate they wanted at the start, which often did not include all the interest, much less principal, so that additional interest was accumulating even as the borrower was paying the mortgage. Just as ominous, the “not quite subprime” Alt-A loans required little or no documentation of borrowers’ income or assets since they were in theory supposed to be made only to borrowers with good credit scores. According to Credit Suisse, loans with low to no documentation rose from 30 percent in 2001 to 60 percent in 2006.8 In addition, 2/28 mortgages, whose rates shot higher after two years, made up 31 percent of subprime mortgages in 1999, but made up almost 69 percent in 2006.9
Many borrowers were also often advised that they were getting a short-term break that helped them qualify on the front end with the hopes that either rising incomes would help them pay the higher rate payments later, or rising home values would enable them to refinance into a traditional fixed rate mortgage. A large number of these borrowers were subsequently surprised when their payments doubled or tripled as interest rates adjusted or as their mortgage balances expanded because they had not paid down any principal. Once this happened and home values plummeted, such borrowers saw their mortgage balance rise, even after years of payment, and ultimately ran the risk of foreclosure.
In addition, dubious lenders often chose not to offer the lowest cost and “lowest risk” available loan product that was directly related to the borrower’s credit rating because doing so often required full documentation, and thus more work. Instead, they opted to offer only the products that required less documentation and work while simultaneously offering equal and often better compensation. Indeed, some brokers and loan officers frequently did not bother to tell borrowers that providing income and job verification would lower the loan’s costs considerably. Instead, many lenders routinely used “piggy-back” second liens to originate mortgages up to, and sometimes beyond, the full value of the home, and they even ignored built-in payment increases when evaluating a borrower’s ability to repay a loan.
Some loan officers and brokers were even instructed never to tell customers that a teaser rate meant their interest rate would increase, and they were never to disclose the actual principal amount of the loan since doing this would enable customers to see the huge fees they were being charged.10 The net result was that a great number of minority borrowers, including Hispanics, wound up unnecessarily paying higher-cost loans that put them in danger of losing their homes.
To crack down on unsound and irresponsible lending, Federal Reserve Board Chairman Ben Bernanke ultimately announced in 2008 the approval of new rules that prohibit predatory lending practices. Bernanke stressed that unfair or deceptive acts and practices by lenders had resulted in the extension of many costly loans that were inappropriate for, or misled, thousands of borrowers.
Unfortunately, the Post “Bubble” series had created the erroneous impression that many borrowers did not deserve help, when in reality many of them, based on their incomes and creditworthiness, qualified for lower-interest loans. In addition, at least one reader of the Post suggested that many of these borrowers could achieve sustainable homeownership if they were provided with safe and subsidized, below-market interest rate loans. The irony, however, is that such homeownership assistance programs have long been available but remain relatively unknown. Had a greater number of first-time immigrant and minority home buyers been provided with loans that contained strong underwriting and safe, stable product features, including financial assistance for first-time homebuyers, and were based strictly on their ability to repay, many of them would not have been lured into getting unsuitable or shady mortgage loans and thousands of foreclosures would have been prevented.
In June 2008, the Post also published an article by Kathleen Day, in which the former Post reporter identified several villains in the mortgage mess, including Wall Street, banks and mortgage lenders, speculators, the White House, Congress, Alan Greenspan, Fannie Mae and Freddie Mac, and the credit-rating agencies. Not once did Day blame borrowers for causing the mortgage debacle. Rather, she pointed out that 61 percent of all subprime borrowers in 2006 could have qualified for less expensive conventional loans. She then challenged those critics who claimed these borrowers knew exactly what they were getting into, to ask themselves this: “Would six of every 10 people knowingly pay more for a product than they had to?”11
In October 2008, Daniel Gross posted a blog on Slate about right-leaning pundits blaming the credit crisis on poor minority homeowners. Gross referred specifically to Post columnist Charles Krauthammer who had just written that "For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."12
According to Krauthammer, if only lenders had not been forced into lending to poor people with weak credit, they would have continued to prosper and the housing disaster would have been averted. If lenders were so easily bullied and President Obama continues today to exhort lenders into making loans to businesses and businesses in order to create jobs, why are more loans still not being made and more jobs not created?
On the day after the Presidential election, the Post published another one of my letters. I emphasized then -- nearly three years ago -- that standardized loan modification plans for troubled borrowers were essential in order to revitalize the housing sector.
Partners in 'Entitlement'
The Washington Post Wednesday, November 5, 2008; A25
Letter writer John Schneider appears convinced that the majority of homeowners who are in danger of losing their homes got in over their heads by taking on mortgages they "knew they couldn't afford" and now want someone to bail them out.
In fact, the Wall Street Journal has reported, more than 60 percent of borrowers who received subprime loans could have qualified for less-expensive conventional loans.
I applaud the millions of consumers who are fortunate and savvy enough to make superb decisions when making major purchases such as a home. But the public needs to know that many greedy brokers and lenders lured responsible borrowers into inappropriate mortgage loans that lacked clarity and contained hidden fees and costs. Until this is understood, the standardized loan modification plans for troubled borrowers that are vitally needed to get the housing sector and the economy moving again will not be implemented.
August 2009 By August 2009, however, a Post editorial was once again claiming that the homeownership gains in recent years primarily reflected the extension of credit to people who could not afford it. The editorial also contended that it would be all right for the national rate of homeownership to recede to 1985 levels “when American society appeared pretty stable.”13 In 1985, however, the rate of Hispanic homeownership was only 41.1% and that of African-Americans was 44.4%. Did the Post not take these facts into account when it coolly accepted this level of stability and progress?
In January, Ezra Klein, a Post writer, reported that there were “no strong candidates for what logicians call a sufficient condition — a single factor that would have caused the “crisis” in the absence of any others. There are, however, a number of plausible necessary conditions — factors without which the crisis would not have occurred.” According to Klein, most analysts found former Fed Chairman Alan Greenspan at fault, especially for “keeping interest rates too low between 2003 and 2005 as the real estate and credit bubbles inflated.”14
Klein underscored that the most cogent explanation he could find came “from New York Times columnist and Nobel laureate Paul Krugman, who noted in one interview: ‘Regulation didn't keep up with the system.’ In this view, the emergence of an unsupervised market in more and more exotic derivatives — credit-default swaps (CDSs), collateralized debt obligations (CDOs), CDSs on CDOs (the esoteric instruments that wrecked AIG) — allowed heedless financial institutions to put the whole financial system at risk.” Klein also emphasized that the mix of financial innovation and inadequate regulation as the recipe for disaster was also the favored explanation of Greenspan's successor, Ben Bernanke, and that other contributing factors included massive misjudgments on the part of credit rating agencies Moody's and Standard and Poor's about the risks of mortgage-backed securities.
Finally, after more than a year of trying to get the Post to focus on causes of the housing crisis that can be proven and documented, I was able to get another letter published. Again, I repudiated the argument that lenders had been forced into making loans to borrowers who did not qualify for traditional mortgages. This time, however, I used a financial expert’s own arguments to stress other causative factors, including the private sector’s lowering of lending standards for commercial, residential and consumer loans, and the underwriting and selling of securitized pools of subprime loans that were poorly and improperly rated.
Misplaced blame for bad loans
The Washington Post
Sunday, February 21, 2010; A18
Once again, a financial expert blames the government for seeking to expand homeownership by encouraging "lending to borrowers who would not otherwise qualify for traditional mortgages."
In his Feb. 12 op-ed, "Why pick on banks?" Stephen A. Schwarzman, chief executive of the Blackstone Group, did not substantiate this accusation. What several lenders actually did was make millions of inappropriate subprime loans that often did not require income documentation, lacked transparency and contained hidden fees and costs. In fact, the Wall Street Journal has reported that more than 60 percent of borrowers who received subprime loans in recent years could have qualified for less expensive conventional loans.
Ironically, Mr. Schwarzman acknowledged that banks not only made subprime loans but also lowered lending standards for various other commercial, residential and consumer loans. In addition, he noted that banks widely underwrote and sold securitized pools of subprime loans that were given AAA ratings without performing minimum due diligence. Was all of this, too, the result of governmental pressure?
Are we now to applaud banks for "becoming conservative" about loans to small businesses and thereby not heeding government initiatives intended to fuel economic growth and job creation?
By now, some prominent experts had long been countering faulty allegations about the causes of the housing debacle. For example, in a New York Times posting, Nobel laureate Economist Paul Krugman had this to say:
“It was deeply depressing to see Raguram Rajan write this: ‘The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans.’
That’s a claim that has been refuted over and over again. . . Just to repeat the basic facts here:
1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act.
2. The housing bubble reached its point of maximum inflation in the middle years of the naughties [2000s].
3. During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization, while securitization by private players surged.”15
By the end of June 2010, the Post had begun to more broadly identify who was to blame for the housing calamity, admitting in an editorial that “the fact remains that government, business, and ordinary consumers, all shared the Street’s cockeyed optimism about the housing market and other investments during the boom.”
Continuing to single out other plausible causes of the housing crisis, the Post (Editorial, August 5) was now asserting for the first time that the real lesson of homeownership was that over many years “subsidies and lax financial regulations” had inflated the homeownership rate beyond what could have been sustained.16 The Post, however, was once again affirming that too many people had obtained mortgages they could not handle. Worse, the Post neglected to write anything about the onslaught of defective loan products over the past decade that had been highly instrumental in causing the housing disaster.
Homeownership tax subsidies had never before led to massive foreclosures. At worst, the most affluent had over time obtained the fat share of such subsidies, causing home prices to rise and making it more difficult for working families to afford buying a home. At the same time, the homeownership subsidy programs available for low- and moderate income households had been considerably under funded. In addition to blaming homeownership tax subsidies, the Post was at least correct in blaming lack of strict regulations since it was the absence of such regulations that caused the pervasiveness of inappropriate loan products, poorly rated mortgage-backed securities, and other highly flawed Wall Street innovations. I emphasized these points in a letter I sent to the Post. The Post, however, did not publish any letter challenging its August 5th editorial.
By now, Post reporters had already identified several chief causes of the crisis. Nonetheless, Post editorials continued to blame borrowers “with weak credit” and government policies that promoted homeownership as the primary culprits. In addition, hardly any reporter, columnist, or economist had made a serious effort to distinguish the different types of "subprime" mortgage loans that had been offered when the housing tragedy occurred. Certainly, a vast difference exists between traditional subprime loans made at one to three interest rate points above prime and the subprime loans introduced a decade or so ago. These new “subprime” loans were extremely difficult to understand, contained hidden fees, and included teaser rates that gave borrowers the mistaken impression that they were getting better loans than the ones they already had or could be offered by banks making conventional prime loans.
In fact, many borrowers who normally considered themselves well-informed were victimized by predatory lenders. For example, a study in 2007 by the Federal Trade Commission found that 20 percent of borrowers who were shown mortgage disclosure forms could not identify the interest rate they would be paying, the amount of cash due at closing, or the monthly payment; half could not correctly identify the loan amount; and, nearly nine-tenths could not identify the total amount of up-front charges in the loan.17
I therefore tried to convene a meeting between the Washington Post's Editorial Board and representatives of the National Association of Hispanic Real Estate Professionals (NAHREP) and other national minority and housing organizations. The purpose of the meeting was to discuss and reconcile allegations that blamed minorities and immigrants as well as government homeownership policies for causing the housing crisis in contrast to recent findings and data reported by the Post itself, which repudiated such claims.
Top officials and representatives who were ready to participate in this important meeting included: Gary Acosta, co-founder of the National Association of Hispanic Real Estate Professionals (NAHREP); Brian Wilkes, National Executive Director, League of United Latin American Citizens (LULAC); Barry Zigas, Director of Housing Policy, Consumer Federation of America; and Lotario Diaz, Vice President for Housing and Community Development, National Council of La Raza (NCLR).
Fred Hiatt, the editorial page editor of the Post, responded to my request for a meeting by indicating that the Post would “pass on this offer” to meet with the key representatives of national housing and civil rights organizations I had identified and convened. However, he added that the Post would still be willing to review the background material I had prepared. I therefore remained hopeful that the Post would at least review my material, most of which is included in this chronology of events. Only time would tell if such material would result in the Post becoming more careful, accurate, and thorough in its recognition and description of the true causes of the housing crisis.
In October 2010, the Post finally published another one of my letters in response to an editorial it had written regarding the Troubled Assets Relief Program (TARP). This time I emphasized that if the government from the very beginning had been able to call for the implementation of streamlined loan modification that included the forgiveness of principal, hundreds of thousands of homes and jobs could have been preserved.
There's no silver lining in TARP's failure on housing relief
The Washington Post
Thursday, October 7, 2010; A26
The Post was right in claiming that the Troubled Assets Relief Program produced more benefit for the U.S. economy than even its strongest supporters expected ["The tale of TARP," editorial, Oct. 3]. It also correctly pointed out that TARP has clearly failed in its attempt to channel mortgage relief funds to troubled homeowners.
The Post, however, went on to suggest that there is a silver lining in government's failure to prevent a greater number of people from losing their homes. Because so few people qualified for relief, The Post incredibly found comfort in knowing that the government hardly spent any of the $41 billion set aside for this important task.
This completely missed the point. Had the government put in place streamlined loan modifications that included loan balance reductions from the very beginning, hundreds of thousands of homes and jobs could have been saved.
There continues to emerge increasing evidence that the housing bubble was driven substantially by the making of defective loans that were also managed poorly over time. At a time of historically low interest rates and hopeful signs of a housing recovery, it is still not too late to rescue troubled homeowners and prevent the deterioration of thousands of American communities.
Alejandro Becerra, Silver Spring
By late January 2011, the Financial Crisis Inquiry Commission (FCIC) had released a major report which identified the major causes of one of the worst economic crises in the nation’s history. According to the report, more than 26 million Americans were out of work, four million families had lost their homes, and nearly $11 trillion in household wealth had been lost.
What did the Post do about reporting this important story? The Post buried it on page A14, while prominently displaying on its front page a story about the Senate Tea Party Caucus meeting for the first time. Worse, the Post’s reporters undercut the report’s significance by suggesting that the report did not contain “any major revelation that would fundamentally alter popular perceptions of the crisis.”18 Ironically, on the day prior to reporting the actual findings of the FCIC report, the Post provided extensive coverage to a dissenting view by Peter Wallison. Wallison, a fellow at the conservative American Enterprise Institute, based much of his evidence on information he badly misconstrued. For example, Wallison cited a 2005 HUD report that said “lenders have been encouraged by HUD and banking regulators to increase lending to low-income and minority households. . . . Sometimes these borrowers are higher risk, with blemished credit histories and high debt or simply little savings for a downpayment. Lenders have responded with low downpayment loans and automated underwriting.”19
The following day, the Post story did emphasize that there was plenty of blame to go around, with the report blaming the Federal Reserve for failing to stop dangerous lending practices and blaming derivatives known as credit default swaps for amplifying risk throughout the financial system. The Post even listed the main causes identified by the Republican dissenters, including the proliferation of subprime and other high-risk mortgages, as well as excessive risk and massive leveraging. The Post story, however, did not blame the government, immigrants, or “low-income” people with “weak credit” for the housing calamity. Were such accusations then not the “popular perceptions” that Post editorials had long been fostering?
We soon had our answer. A week after the FCIC report was released a Post editorial again blamed federal housing policy, this time for helping to “destroy” communities.20 Post editorials had previously concluded that Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs), had not created the subprime crisis but rather had enabled it to enrich their shareholders and management and to meet affordable housing goals. Since 2008, the Post had also strongly insinuated that the making of loans to “underserved” groups played a major role in causing the housing debacle. The Post has never substantiated these accusations.
The problem with the Post’s posture as arbiter of the housing crisis is that it has not adequately addressed the issues, but instead has left many questions unanswered. For example, the Post needs to explain how the setting of affordable housing goals led directly to the GSEs’ purchase and sales of millions of Wall Street subprime securities, which were backed by faulty nonprime loans that were extended to all borrowers regardless of race, ethnicity, or income.
In fact, HUD Secretary Shaun Donovan testified before Congress last year and stated that the argument that affordable housing goals were a principal cause of the GSEs collapse was not supported by the facts. Instead, Secretary Donovan said that “one of the primary factors driving GSE losses was the desire to recapture market share and increase profits. The housing boom saw a rapid rise in non-prime and Alt-A originations and securitization outside of the GSEs. To regain market share, and increase revenue, Fannie and Freddie made poor strategic decisions to take on greatly increased risk, notably in Alt-A mortgages. Management made clear that increasing revenue was the motivation for purchasing non-prime and other alternative mortgage products that subsequently produced significant losses.”21
Most recently, Judy Kennedy, President of the National Association of Affordable Housing Lenders, wrote that Joe Nocera and Bethany McLean, authors of the book "All the Devils Are Here," had asserted that in the 1990’s lower- and moderate-income Americans were being swept along in the tide of homeownership not because of Fannie and Freddie, but in spite of them. She wrote that in the book, Fannie Mae executives are reported as bragging about writing “the housing goals . . . in such a way they “had no teeth" and that Fannie Mae “preferred to game their housing goals rather than meet them, using methods that Fannie Mae internally referred to as 'stupid pet tricks.'”22
Indeed, at the height of the housing boom, NovaStar Financial, a notorious subprime lender, actually sent out promotion memos to its 16,400 unsupervised mortgage brokers across the country that boasted: “Did You Know NovaStar Offers to Completely Ignore Consumer Credit!” and “Ignore the Rules and Qualify More Borrowers with Our Credit Score Override Program.”23 For the Post to allege that the GSEs and other lenders were motivated primarily by the government to promote such unscrupulous lending is therefore incredibly inadequate and misleading. Indeed, as an avid reader of the Post, I do not recall the Post publishing a full-fledged investigative story in recent years that focused on any major financial institution that had practiced highly deceitful lending practices.
Paradoxically, the Post recently published a story that painted a grim outlook for local economies that had been built over time around interconnected housing and construction labor markets, and were now seriously distressed as a result of the housing bust. According to the Post, in states such as Florida, Nevada, and Arizona, where unemployment persists and the pain from the collapse in real estate is most severe, “carpenters, landscapers, mortgage brokers, furniture sales people and interior designers thrown out of work have little hope of regaining their jobs.”24 Thus, even though the Post continues to acknowledge the crucial role that the subprime crisis has played in the nation’s economic decline, it has yet to offer a viable way out of the quagmire in housing.
Equally inconsistent has been the Post’s criticism of the government’s policy of promoting homeownership -- especially for working families -- while at the same time deploring the inadequacy of funding for affordable housing at both the federal and local level. On June 30, for example, a Post editorial lamented that thousands of people have been priced out of the housing market, forced onto the streets or squeezed into overcrowded apartments with relatives or friends in Fairfax County, Virginia, one of the richest counties in America.25 The Post, in fact, forecasts that in the absence of public funding for affordable housing in that county, local private sector partnerships and even such creative efforts as the establishment of a foundation to raise funds will prove totally insufficient to the task.
Countering Conventional Wisdom the Post Fostered
More fundamentally, the Post must not only be consistent in its reporting and editorializing of housing issues but also must take into account prominent research groups such as the McKinsey Global Institute, who found that it was middle- and upper middle-income borrowers that propelled the housing bubble — not lending to low-income borrowers who were buying a home for the first time. According to the study, lenders had “determined” that such borrowers did not qualify for prime loans because of “poor credit histories” and instead made subprime loans to them that required no downpayment or low or no documentation of income.
As emphasized before, 60 percent of all “subprime” loans made to all borrowers in 2006 required little or no income documentation. Coincidentally, during the peak of the housing bubble, more than 60% of all borrowers who had received subprime loans could have qualified for less expensive conventional loans. It is hard to believe therefore that the sheer promotion of affordable homeownership and the making of “subprime” mortgage loans exclusively to low-income minorities and immigrants triggered more than $11 trillion in housing wealth losses.
Importantly, some housing experts point out that the characteristics of the loan product itself proved to be far more relevant as a contributing factor of the housing crisis than the characteristics of the borrower. Historically, affordable loans that fully take into account the borrower’s ability to repay perform well. In contrast, loans that are costly and minimally regard the borrower’s ability to repay perform badly. During the past decade, unfortunately, such loans were churned out in assembly line fashion by unscrupulous lenders who relied heavily on the use of minimum underwriting standards and deceptive loan practices.
On the other hand, one of the untold stories of the housing crisis is that for several decades working families have been able to achieve sustainable homeownership through the use of well-structured and well-underwritten affordable loan products that are fully documented and often accompanied by home buyer education and counseling. For example, Housing our Communities (HOC), a nonprofit housing organization based in Arizona and Nevada, has successfully assisted hundreds of low-income families through the use of HUD’s Voucher Homeownership Program, the Neighborhood Stabilization Program (NSP), and the Federal Home Loan Bank’s Affordable Housing Goals Program, and other homeownership assistance programs.
In 2010 alone, HOC created 288 first-time homebuyers. Remarkably, it has had only nine foreclosures in its 23-year history. HOC provides quality home buyer education and one-on-one counseling, and fully prepares home buyers to obtain the right affordable loan product.
Overall, the Post can regain trust by documenting that any previous Administration actually compelled highly unregulated financial institutions into making and securitizing unaffordable and toxic unconventional mortgage loans. As long as the Post continues to insist that the “old government-sponsored enterprise” model is a proven failure, it also has a moral obligation to prove it and to report what did work well in the past that resulted in the accumulation of wealth and equity for millions of Americans and in unparalleled prosperity for the nation.
The Post must also close ranks with President Obama who has finally begun to publicly call for mortgage lenders to provide struggling homeowners with longer-term modifications and principal reductions when the situation warrants it.26 The Post’s message should echo the President’s belief and that of many Americans that if the US government came to their rescue when they got into trouble, then lending institutions and banks should equally be there for Americans when they are also having a tough time. The future of America’s economy is at stake.
According to Nobel laureate Economist Paul Krugman, our top economic priorities must be to put the unemployed back to work and to reduce the enormous mortgage debt that households ran up during the housing bubble years. He believes that these priorities can be successfully addressed by instituting W.P.A.-type programs that create jobs which involve constructive work like repairing roads, thereby raising incomes and making it easier for households to pay down debt.27 At the same time, Krugman also advocates the implementation of a serious program of mortgage modification that would reduce the debts of troubled homeowners, an action that is now crucial to eliminating uncertainty in the housing sector and to reinvigorating the economy.
In the near term, a new mortgage finance system must include housing finance objectives that are prioritized within the context of historical and well-grounded national housing policy. With respect to the nation’s historical commitment to decent, safe, and sanitary housing for every American, housing finance policy must balance the goals of affordable quality rental housing and sustainable homeownership. It should ensure not only the establishment of a safe, stable and reliable system of mortgage financing and securitization but also the availability of a constant and ample supply of credit – consistent with sound underwriting – that is readily accessible to meet the nation’s housing needs, especially among low- and moderate-income households.
In the meantime, as Hispanics, minorities, and a new generation of Americans begin to rebuild America’s future, we as a nation must remain committed to prodding financial institutions into making mortgage loans the right way. This noble objective can be achieved by exhorting lenders to make mortgage loans properly and transparently, with reasonable loan terms and conditions, and affordable down payments, and most importantly, by offering homebuyer education and counseling, and financial assistance for eligible first-time home buyers.
A soft, weakened market offering near-record-low mortgage rates and rock-bottom home prices should enable a greater number of Americans to buy a home in the near future. In addition, the built-up demand for homeownership caused by stringent credit and adverse economic conditions strongly suggests that as credit becomes more readily available, an increasing number of immigrants and minorities will be able to obtain a safe and appropriately underwritten mortgage loan at a fair and reasonable price. It will and must be a win-win situation, one that will benefit all Americans, the housing sector, and the nation’s economy.
- Board of Governors of the Federal Reserve, “Report to the Congress on Credit Scoring and its Effects on the Availability and Affordability of Credit,” August 2007, p.S-2.
- Michael Lewis, The Big Short, WW. Norton & Company, New York, p. 100.
- Michael Lewis, The Big Short, WW. Norton & Company, New York, p. 97.
- Kirsten Downey, “Foreclosure Wave Bears Down on Immigrants,” The Washington Post, March 25, 2007, p. A1
- Editorial, “Bubble and Bust,” The Washington Post, August 11, 2007, op-ed pages.
- Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis, Portfolio Penguin, May 2010, New York, p. 255.
- Alec Klein and Zachary A. Goldfarb, “Anatomy of a Meltdown: The Credit Crisis,” The Bubble Series, The Washington Post, June 15, 2008, www.washingtonpost.com
- John V. Duca, “A Conversation with John V. Duca and D’Ann Petersen, Federal Reserve Bank of Dallas, May/June 2007, http://dallasfed.org/research/swe/2007/swe0703e.cfm
- Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis, Portfolio Penguin, May 2010, New York, p. 211.
- Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis, Portfolio Penguin, May 2010, New York, p. 87.
- Kathleen Day, “Villains in the Mortgage Mess? Start at Wall Street. Keep Going,” The Washington Post, June 1, 2008, p. B1.
- Daniel Gross, “Subprime Suspects,” Slate, October 7, 2008, www.slate.com
- Editorial, “Fixing Fannie Mae,” The Washington Post, August 7, 2009, op-ed pages.
- Ezra Klein, “Blaming People for the Financial Crisis,” The Washington Post, January 11, 2010, www.WashingtonPost.com
- Paul Krugman, “Things Everyone In Chicago Knows,” The New York Times, June 3, 2010 www.nytimes.com
- Editorial, “The Real Lessons of Declining Homeownership,” The Washington Post, August 5, 2010, p. A16.
- James M. Lacko and Janis K Pappalardo, “Improving Consumer Mortgage Disclosures,” Bureau of Economics Staff Report, Federal Trade Commission, 2007, pp ES 6-7.
- Zachary A. Goldfarb and Brady Dennis, “Government report blames regulators and financial institutions for economic crisis,” The Washington Post, January 27, 2011, p. A14.
- Zachary A. Goldfarb and Brady Dennis, “Financial Crisis Inquiry Commission to release report Thursday amid dissent on panel,” The Washington Post, January 28, 2011.
- Editorial, “Averting Another Major Crisis,” The Washington Post, February 7, 2011, op-ed. Pages.
- HUD Secretary Shaun Donovan, Testimony at the Hearing Before the U.S. House Committee on Financial Services, April 14, 2010, p. 8
- Judy Kennedy, “Fannie and Freddie Weren’t Pushed into the Muck, They Dove Headfirst, http://www.American Banker.com, March 15, 2011.
- Gretchen Morgenson and Joshua Rosner, “It Teetered, It Tottered, It was Bound To Fall Down,” The New York Times, Sunday May 22, 2011, p. BU1.
- Michael Fletcher, “Architecture of the Bust,” The Washington Post, June 5, 2011, p. A1.
- Editorial, “Housing Blues,” The Washington Post, June 30, 2011, p. A18.
- Carrie Bay, “President Obama on Loan Modifications,” http://www.DSNews.com., May 13, 2011.
- Paul Krugman, “Against Learned Helplessness,” The New York Times, May 29, 2011, p. A19.