Strange bedfellows in the mortgage fight

NAACP and the National Council of La Raza find themselves allied with financial industry figures in opposing new mortgage rules. Count me among the skeptics.

(This is cross-posted on TCF’s Taking Note site.)

Kevin Drum and Ezra Klein have pieces today on the financial industry’s opposition to new mortgage regulations, in particular, opposition to provisions that would require mortgage originators to retain five percent interest in loans in which (to roughly summarize) the borrower does not make a 20 percent down-payment, or loans which amount to more than 28 percent of monthly gross income. (Added later: See this terrific Alyssa Katz piece in TAP for a different perspective from mine. She predicts a progressive split over Dodd-Frank. I think she is spot-on.)

The industry and its allies argue that these new rules will choke access to credit among low-income or minority households. Drum notes several good reasons to reject extreme industry criticisms of the proposed rule. I’m interested in two other matters: First, the tendency to conflate provision of easy credit with the actual transfer of resources to help low- and moderate-income people, second, the alliance of the NAACP and the National Council of La Raza with financial industry figures in negotiating the new rules.

The first matter was discussed in Raghuram Rajan‘s provocative book Fault Lines: How Hidden Cracks Still Threaten the World Economy. I’m not a financial expert, and I don’t agree with everything Rajan says. I do believe that one of his arguments is clearly right. It resonates with smart progressive and smart conservative critiques of the financial crisis, too.

It’s easy, but doubly dangerous, to conflate the provision of easy credit with the actual transfer of resources to low- and moderate-income households. We’ve learned to our sorrow that lax housing finance policies dangerously empower misconduct and recklessness within the financial industry. These policies also dangerously encourage families–often on unfavorable terms–to assume a risky, highly-leveraged investment that does not serve them well.

Public policies should help families of modest means afford homes. This should be done explicitly and carefully, not implicitly by perpetuating industry practices have proven so disastrous. Requiring mortgage originators to keep some skin in the game is a necessary step in curbing these problems.

The second matter was raised in a June 1 New York Times story on the lobbying battle in Congress. It turns out that the N.A.A.C.P. and the National Council of La Raza are important industry allies in this fight.

This is part of a concerning pattern, too. In many cases, respected civil rights organizations and advocacy groups become involved in the political process on behalf of firms whose practices within minority communities raise serious concerns. The Congressional Black Caucus Foundation exemplifies many of these concerns. As the New York Times reported last year, the Foundation’s backers include (among others) Altria, Coca-Cola, Heineken, Anheuser-Busch, and rent-to-own furniture enterprises. The accompanying problem speaks for itself.

The NAACP and La Raza make legitimate arguments in the current fight. Perhaps some adjustments should indeed be made in the proposed regulations. As Janis Bowdler of La Raza puts things:

Most people don’t have 20 percent to put down… These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.

Still, I can’t be the only person concerned about what anonymous federal regulators label “the unholy alliance” between the financial industry and some consumer and civil rights groups. If our nation fails to establish strong and enforceable financial regulation, we know whose communities will be left holding the bag.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect, tnr.com, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

11 thoughts on “Strange bedfellows in the mortgage fight”

  1. The “new” regulations on mortgages that can be 100 percent sold to the secondary market, are exactly those which were used for conforming conventional mortgages in the eighties and at least part of the nineties. What the regulations seem to do is establish an identifiable marker for securitizations where the underlying mortgages have been subject to traditional due diligence versus pools of riskier mortgages. These regulations really need to be designed to do one thing, and that is to restore some semblance trust into the secondary markets. It is true that everything not marked with the “gold standard” then is a riskier loan, and investors can and should demand a risk premium for underwriting the loans. In fact, one can rightly argue that such regulation is a minimal step in the direction of restoring the secondary market.

    Now, may a lot of prospective home owners be adversely affected. Simply yes. And if the government chooses to promote those activities, it has the option of becoming some form or another of excess risk guarantor to perhaps offset some of the risk premium.

    With our current real estate pricing, the reality is that home ownership is too costly for many people. In a lot of the coastal areas, it takes a huge chunk of two incomes to support housing. Short of taking on additional spouses or putting children to work, or converting McMansions into multi-family housing units, that isn’t going to change. Is it really in our collective interest to support over-priced home ownership by encouraging low cost, high risk financing?

    One beneficial effect of the “gold standard” qualification standards is that they lay down a marker or benchmark for what is prudent to spend on housing, and whether or not home ownership is really in the cards. That is a role played by the banks and realtors and others in the past. That is not a bad thing.

    To me, at the end of the day, these financial regulations need to server one master, and that is defining a set of rules for underwriting risk. All the other agendas, no matter how worthy don’t have dog in this fight.

  2. My father, a policeman, taught me that it is very difficult to cheat an honest man. The rest of us, evidently, not so hard.

  3. Katz wrote: “As I wrote in the June issue of the Prospect, extensive research shows that high-risk borrowers can succeed with low down payments when the mortgages are designed to be affordable. True mortgage-market reform would target government support to make sure that credit is available on stable terms that ensure those borrowers succeed, and not only within the constraints of the Federal Housing Administration insurance program. But regulators are loath to give lending institutions any leeway.”

    This is an important point. People can be “low income” but still have stable jobs and possibly even extended family to help out during rough patches. Without owning a home, how would they ever retire? I am also not sure I like the direction of the Obama administration here. I know people with very stable jobs who aren’t eligible to re-finance because of these picky rules. It is yet another advantage for the rich.

    Also, let’s not forget, we should be talking about living wage jobs.

  4. Bruce, I’m guessing that your father financed his home before the last round of deregulation.

  5. I can’t understand this homeownership fetish. It is a horrible investment, for many reasons:
    1. Opaque, illiquid, volatile market with enormous transaction costs.
    2. In a regional recession, people go underwater about the time they lose their jobs. It makes it harder to move.
    3. Unless you are very lucky, appreciation isn’t all that impressive.
    4. Tax advantages are overrated, especially the home mortgage deduction, which is impounded into the price and doesn’t help people with lower incomes. (Nontaxability of imputed rent income, OTOH, is sweet.)
    5. Adam Smith would roll over in his grave, at the thought of all of these very competent accountants, nurses, disk jockeys, bankers, welders, etc., acting as incompetent plumbers, electricians, and carpenters. Congregate living promotes specialization.

    About the only thing I can say in favor of homeownership is that evil zoning often forces people to buy homes in order to get decent schools for their kids. This statement is structurally similar to saying that corruption forces people to bribe others to get decent anything for themselves. This might be a partial defense of bribery in that highly perverse context, but that ain’t much of a defense of bribery.

  6. Homeownership is a key component of being socialized and accepted in America for many people. For others, home ownership for some reason imparts a sense of security. For others afraid of Wall St investments, the home is a major investment. That is how our society works. No one talks about the lack of liquidity or the amount of work that goes into it.

  7. Dan,
    I’m not arguing with your psychology or sociology; I agree with it. But home ownership is still crappy economics, and dubious public policy. I don’t understand why the NAACP is pushing it, although with those guys, I think that sometimes dignity trumps the kind of conventional policy analysis which works off internalized wealth maximization.

  8. Scrooge,

    Step back and think of it from the perspective of the average family working to make $50,000 a year and lives in a rental. Things like internalized wealth maximization and policy analysis aren’t motivating factors. Getting out from a landlord with effective impunity in raising your rent can be a big motivator. Having to answer to someone else’s budget/scroogery (!) tendencies in dwelling maintenance is a constant headache (why won’t he pay to get this leaking roof fixed already?). Yeah, the traditional wisdom of home ownership being the safest investment a family can make may be dead, but there’s much to be said about stabilizing the quality of life in owning your own home. Dignity is a part of that, but not all. Honestly, I can’t understand why more minority representative groups aren’t getting involved in this regulation.

  9. This isn’t so much an unholy alliance as payment of protection money. The banks are saying, in effect, “We’re not going to lend to minorities if we have to maintain some skin in the game”. And the government doesn’t have anywhere near the data-crunching or other enforcement resources that would be needed to protect the minorities who would be affected. (No, I’m not saying that the low-downpayment loans all go to minorities, rather that it’s quite plausible for banks to cut off the supply of low-downpayment loans to minorities should they so choose.)

  10. A couple of years ago when I testified against the Bank of America’s subsidized takeover of Countrywide I was amazed at the number of purported community groups the BoA had gotten to testify in support of the subsides for this exploitative deal.

    Many of the groups’ representatives were quite clear about why they were there. Not so much because of the excellence of the deal, more because the BoA called in the chips it had earned by giving out money to groups purporting to represent various minority communities.

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