Ridiculous Story of the Day award
And today’s Ridiculous Story of the Day award goes to … it’s a tie: Wall Street and Capitol Hill.
The Consumer Financial Protection Bureau is pushing new rules to force mortgage lenders to make sure borrowers have at least a decent chance of being able to repay before giving them a loan. Bloomberg reports:
Richard Cordray wants lenders to adhere to the most basic tenet of banking: making sure borrowers can repay. Getting them to agree on how is proving tougher.The director of the Consumer Financial Protection Bureau is aiming to discourage lenders from making home loans with risky features and outlining steps they must take to verify borrowers’ finances, as part of the “qualified mortgage” or QM regulation. Banks that follow the guidelines will gain legal protection against borrower defaults.”Here’s what should be the least surprising lending advice you’ve ever heard: If you are going to lend money, you should probably care about getting paid back,” Raj Date, the agency’s deputy director, said in a speech April 20 in Los Angeles.
The rule change is needed since taxpayers now back the vast majority of mortgages in America. More than 9 in 10 new mortgages only exist because Fannie Mae and Freddie Mac, the two government-owned mortgage behemoths, provide the money. Without this government intervention, there would be no mortgage market in America, at least not at “affordable rates.”
But the rule change is also strangely ironic, even for over-the-top hypocritical Washington. Trumpet columnist Stephen Flurry tells all in “How Political Correctness Wrecked the Economy”:
While there’s plenty of blame to go around for America’s mortgage meltdown, one cause that few are talking about is the hazardous lending practices the federal government actually encouraged … in order to placate activists who criticized mortgage lenders for discriminating against minorities. …In 1992, for example, the Federal Reserve Board released the results of a study that found, among other things, that blacks were twice as likely as whites to be denied mortgages. The chairman of Freddie Mac said the study was “very disturbing.” He concluded, “It is incumbent upon the industry to work together to eliminate any discriminatory lending practices, whether they are deliberate or inadvertent” (Washington Post, Oct. 28, 2008). The chairman of Fannie Mae expressed similar concerns. …Liberal activists were angry too. One representative of acorn—an association of community organizations for low-income people—said, “Once again we are presented with overwhelming evidence that discrimination is alive and well in our banking system.” She asked, “What is the government going to do about it?” ([ibid]). As it turns out, the government did a whole lot. But instead of concentrating on any individual instances of credit-worthy minorities being discriminated against, it enforced sweeping policies designed to arm-twist banks into making loans available to practically anyone—even those with horrible credit ratings. … In 1994, Fannie Mae—at the time, America’s largest source of mortgage money—announced that it would commit $1 trillion to help finance 10 million homes for low-income families before the end of the 1990s. That “investment,” the Christian Science Monitor reported, was “the largest commitment ever made by a public or private corporation” (April 6, 1994). … In March 2000, fresh off his $1 trillion commitment to low-income homeownership during the 1990s, Fannie Mae Chairman Franklin D. Raines pledged $2 trillion in loans for minorities, single moms, new immigrants and, according to the Washington Post, “other undeserved consumers” (March 16, 2000). According to the Post, Raines said it would be a “stretch” for Fannie Mae to meet its $2 trillion goal, but by developing “new, more flexible ways to assess the creditworthiness of borrowers, especially those who have had troubled credit histories,” he felt good about its chances.As challenging as it was to dole out that many more bad loans, Fannie Mae managed to pull it off! It did so by removing the few remaining credit requirements that had survived the 1990s. …To be sure, there’s plenty of blame to go around. But if you want to talk about root causes of the financial crisis, a conversational centerpiece has to be political correctness run amok. The seemingly noble idea of removing even the most basic mortgage underwriting standards in order to dramatically increase the chances of minority homeownership—not to mention loans for single moms, new immigrants, etc.—resulted in the biggest housing bubble in history.
So now, America’s leaders in Washington are pretending to heroically stand up for taxpayers by making sure banks lend to strict lending standards—the same lending standards that Congress blackmailed the banks into loosening in the first place.
Only in America would we need a law to force banks to at least make a casual attempt to determine that a borrower will be able to repay the money that the bank is lending.
