Hummler blames the victims
I explained this point in my column last year.
“I found Hummler’s real views in his Investment Commentary No. 262 (March 16, 2009). Remember, this is a newsletter Hummler indicates goes out to roughly 100,000 recipients. Hummler explained that banks made rotten subprime loans when they started to make loans “favoring … particular sections of the populace.” That, of course, sounded like code. Hummler explains later in his newsletter who he thinks was being favored – and why. “It is said that the vast majority of insolvent home-owners belong to ethnic minorities.” The phrase “it is said” is a sure sign that the author has no reliable information he can cite. It is no surprise that Hummler’s demons are “ethnic minorities” in the U.S. Hummler then explains why the U.S. banks suddenly began to make huge numbers of loans to “ethnic minorities.”
“[S]ub-prime mortgages in the USA. Encouraged – indeed, driven – by the politicians, who had championed home ownership with the “Community Reinvestment Act” (1977/1995), the banks offered loans to households that would never have been regarded as creditworthy by normal standards.”
Hummler presents the favorite theoclassical explanation of any malady – misplaced governmental efforts on behalf of ethnic minorities led to unexpected negative consequences.
Hummler then adds a further racial element – President Obama is an ethnic minority.
“It is understandable that the Obama administration is inclined to take an accommodating approach to these home-owners, and that appropriate financial help is on its way.”
“[T]he obfuscatory approach adopted by Obama, with (again) the favoring of particular sections of the populace…”
“The righteous are ‘punished’.”
Because the “vast majority” of the people defaulting on their mortgages are “said to be” “ethnic minorities,” it follows that the people who are not defaulting are white and represent “the righteous.” It is “understandable” that Obama is inclined to help “these home-owners” – the ethnic minorities by adopting an “obfuscatory approach” designed to “favor[]” … “particular sections of the populace” [ethnic minorities]. I interpret Hummler as arguing that because Obama is black it is “understandable” that he has adopted policies designed to “favor” ethnic minorities and “punish” primarily whites (aka, “the righteous”).
Collectively, Hummler asserts that these U.S. policies that favor ethnic minorities and punish whites constitute a public subsidy that violates sacred property rights. “In terms of property theory, this constellation represented the provision of a subsidy in the form of free guarantees to a certain section of the populace….”
In fact, the U.S. has not provided “appropriate financial help” to homeowners of any ethnicity under either President Bush or President Obama.”
The reality is that it was overwhelmingly lenders and their agents (typically the loan brokers) who put the lies in liar’s loans and committed appraisal fraud. The widespread fraud was due to a Gresham’s dynamic.
“Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share…. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete.” Miller, T. J. (August 14, 2007). Iowa AG.
“[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.” [Iowa AG]
“Marc S. Savitt, a past president of the National Association of Mortgage Brokers, told the Commission that while most mortgage brokers looked out for borrowers’ best interests and steered them away from risky loans, about 50,000 of the newcomers to the field nationwide were willing to do whatever it took to maximize the number of loans they made. He added that some loan origination firms, such as Ameriquest, were ‘absolutely’ corrupt.” (FCIC 2010: 14).
“More loan sales meant higher profits for everyone in the chain. Business boomed for Christopher Cruise, a Maryland-based corporate educator who trained loan officers for companies that were expanding mortgage originations. He crisscrossed the nation, coaching about 10,000 loan originators a year…. (FCIC 2010: 7).
“His clients included many of the largest lenders—Countrywide, Ameriquest, and Ditech among them. Most of their new hires were young, with no mortgage experience, fresh out of school and with previous jobs ‘flipping burgers,’ he told the FCIC. Given the right training, however, the best of them could ‘easily’ earn millions.” (FCIC 2010:
“He taught them the new playbook: ‘You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower or whether the loan performed.’ He added, ‘I knew that the risk was being shunted off. I knew that we could be writing crap. But in the end it was like a game of musical chairs. Volume might go down but we were not going to be hurt.’” (FCIC 2010:
“From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets.”( FCIC: 18)
Note that these facts refute Hummler’s bare assertion that “ethnic” Americans caused the housing crisis. The reality is that American minorities were disproportionately victims of the lenders’ mortgage frauds. They were induced, often by inflated appraisals, to purchase homes they believed (due to the appraisals) to have substantial net worths. The borrowers reasoned that if they could not meet the payments they could always sell the home at a profit. Nonprime borrowers were often brought into the market at its most inflated peak and saddled with loans with variable payments and interest rates that were likely to increase sharply and cause mass defaults.
The elite banks were all aware of the endemic fraudulent nature of the liar’s loans “backing” (not really) CDOs. The FBI’s twin warning in 2004 was that there was an “epidemic” of mortgage fraud and the FBI prediction that it would cause a financial “crisis” if it were not stopped. MARI, the mortgage industry’s own anti-fraud group, sent the following five warnings to all members of the Mortgage Bankers Association (MBA):
- Stated income loans “are open invitations to fraudsters”
- Study: fraud incidence in such loans is “90 percent”
- “[T]he stated income loan deserves the nickname used by many in the industry, the ‘liar’s loan.’”
- “It appears that many members of the industry have little … appreciation for the havoc created by low-doc/no-doc products that were the rage in the early 1990s. Those loans produced hundreds of millions of dollars in losses….”
- “Federal regulators of insured financial institutions have expressed safety and soundness concerns over these loans….”
Only a fraudulent lender would make liar’s loans or inflate appraisals. The CRA has never required a lender to make a fraudulent loan or inflate an appraisal.
In response to these governmental warnings against liar’s loans – the industry massively increased the amount of fraudulent liar’s loans it made and purchased and their use to “back” CDOs. Between 2003 and 2006, the number of liar’s loans grew by over 500% and the growth continued in 2007 well after the collapse of the housing bubble until the secondary market for endemically fraudulent liar’s loans collapsed.
“Despite the well documented performance struggles of 2006 vintage loans, originators continued to use products with the same characteristics in 2007.” Iowa AG
Note that the contemporaneous documents from the industry’s own anti-fraud group stresses that “federal regulators” are warning against – not promoting or mandating – liar’s loans. This makes liar’s loans the perfect “natural experiment” to evaluate rival suggested reasons why lenders made vast quantities of nonprime loans and Wall Street and (eventually) Fannie and Freddie purchased vast amounts of nonprime loans. The investment banks were not subject to CRA or any affordable housing goals, yet they drove the expansion of nonprime loans (overwhelmingly by lenders who were also not subject to the CRA). Fannie and Freddie eventually purchased vast amounts of liar’s loans not because of any governmental mandate, but for the same reason the investment banks did so – the accounting control fraud “recipe” is optimized by making and purchasing crappy loans at a premium yield.
“Overall, while the mortgages behind the subprime mortgage–backed securities were often issued to borrowers that could help Fannie and Freddie fulfill their goals, the mortgages behind the Alt-A securities were not” (FCIC 2010: 125).
“Alt-A” loans were almost exclusively liar’s loans by 2006.
“Alt-A mortgages were not generally extended to lower-income borrowers, and the regulations prohibited mortgages to borrowers with unstated income levels—a hallmark of Alt-A loans—from counting toward [Fannie and Freddie’s] affordability goals” (FCIC 2010: 125).
Not only did “the government” never mandate that Fannie and Freddie purchase liar’s loans – the rules generally forbade Fannie and Freddie from counting such loans towards Fannie and Freddie’s affordability goals. Recall also that liar’s loans involved the endemic, substantial inflating of the borrower’s income by the lender and its agents. Inflating income would have been a poor strategy for maximizing “affordability” loans (generally loans to borrowers with below median income) even if such loans counted toward Fannie and Freddie’s affordability goals.
It should also be remembered that the Bush administration had the ability to ban liar’s loans at all times pursuant to the Home Ownership and Equity Protection Act of 1994 (HOEPA). The Federal Reserve had the unique authority to ban liar’s loans by all lenders, including those that were not insured by the FDIC (and not subject to the CRA). ACORN, the NAACP, and many housing advocates asked Greenspan, and then Bernanke, to use HOEPA to ban liar’s loans. The Bush administration never did so. It was only under Congressional pressure – and the death of the secondary market for liar’s loans – that Bernanke finally used HOEPA to ban liar’s loans (citing the MARI warnings) on July 14, 2008. Even then, Bernanke delayed the effective date of the rule for 15 months. One would not wish to discomfit any surviving fraudulent lenders.