[BretLudwig]

The Diversity Recession, or How Affirmative Action Helped Cause the Housing
Crisis

Posted by Steve Sailer on June 22, 2008

"Uncovering the roots of the disastrous home mortgage bubble that popped
last year will keep economic historians busy for decades. Yet, one factor
has so far been largely overlooked: the bipartisan social engineering
crusade to drive up the rate of homeownership by handing out more
mortgages to minorities.

More than a negligible amount of the blame for the mortgage meltdown can
be traced back to multiculturalism: government-mandated affirmative-action
lending, demographic change, illegal immigration, and the mind-numbing
effects of political correctness.

The chickens have finally come home to roost.

About half of all mortgages for blacks and Hispanics are subprime, versus
roughly one-sixth for whites. Not surprisingly, the biggest home price
collapses have occurred in heavily Hispanic cities such as Las Vegas,
Miami, Phoenix, and Los Angeles.

The mortgage bubble was essentially a bet on the purportedly increased
creditworthiness of the bottom half of the American population. After
three decades of the home ownership rate stalling at around 64 percent, a
series of federal initiatives to increase minority and low-income
ownership helped push the rate up to just below 70 percent.

As this graph from a 2006 article by three economists with the Federal
Reserve Bank of St. Louis shows, the great bubble of the last dozen or so
years was driven by bets on marginal households well below the median.

Economist William T. Gavin, a vice president at the St. Louis Fed wrote in
2006:

One of the stated goals of current and past administrations since the
Great Depression has been to increase home ownership. After remaining
relatively stable around 64 percent, the rate of home ownership has risen
to 69 percent in the past decade. This uptrend has been driven by a sharp
rise in the rate of home ownership among young, minority and low-income
households.

In contrast, at least the previous bubble, the Internet stock boom of the
1990s, had a bit of prima facie credibility. It was a largely a wager on a
three-phase business plan:

1. The smart fraction of American society would invent amazing new online
services.
2. ?
3. Profit!

As it turned out, bright young people really did start up lots of websites
that did things that almost nobody in 1994 had imagined. The problem turned
out to be getting from Phase 1 to Phase 3. So many of them became competent
at website creation that few (with the huge exception of Google) ended up
with the kind of lucrative quasi-monopoly of which investors dreamt.

The housing bubble, on the other hand, never made much sense. The lower
half of American society, where the new homeowners had to come from,
isnt getting better educated, is not settling down to more stable
family structures, and is not developing a more rigorous code of honor
about paying debts.

Nor was the government doing much of anything to help the bottom half earn
more in order to afford home ownership. Indeed, by not enforcing the laws
against illegal immigration, the Clinton and Bush Administrations were
flooding the country with unskilled workers who competed down the wages of
blue-collar Americans.

The home construction industry lured in Mexicans to build new exurban
houses for Americans trying to get their children away from public schools
overrun by the children of illegal immigrants€”in effect, a Ponzi scheme
that had to break down eventually.

It turned out, not surprisingly, that contrary to the assurances of the
Great and the Good of both parties, many of these marginal homebuyers
should have continued to rent.

Pushing black and Hispanics into buying was risky for all concerned.
Economist Edward N. Wolff calculated that in 2004 the median net worth of
black households was only $11,800, exactly one order of magnitude less
than the median net worth of whites. (Hispanics were similar to blacks.)

Yet, pointing out that expanding credit to minorities was likely to lead
to a debacle is not the kind of thing a prudent corporate manger would put
in an email--too great a chance it would be discovered in a discrimination
lawsuit.

For four decades, political leaders have viewed subsidizing minority home
buying as insuring social peace. The Wall Street Journal reported on white
flight from a Chicago neighborhood on March 2, 1977:

The whites in Marquette Park are particularly embittered over the
Federal Housing Administration mortgage insurance program, which they
claim is causing neighborhood deterioration by subsidizing home purchases
by blacks too poor to maintain them. Long conservatively run and an engine
of the post-World War II suburban housing boom, the FHA program was
liberalized shortly after the 1968 urban riots to encourage lower-income
black home ownership (€˜if they own it they wont burn it was the
maxim of the time).

Whether home ownership actually precludes riots is uncertain. In the
Florence-Normandie neighborhood in South Central Los Angeles, where the
1992 race riot broke out, five of every eight residences were
owner-occupied.

Still, €œif they own it, they wont burn it€� provides a
hardheaded-sounding excuse for a complex web of policies that please real
estate developers, who contribute so much to local campaigns. (For
instance, Barack Obama has admitted to receiving a quarter of a million
dollars from developer Tony Rezko, recently convicted on 16 counts).

Republicans theorized that raising the rate of home ownership would create
more conservative voters, as Margaret Thatcher was said to have done in
Britain by selling public housing flats to their tenants. Thus, George W.
Bush campaigned in 2004 under the rubric €�the ownership society.€� As
the President explained in his eye-glazing prose style:

...[i]f you own something, you have a vital stake in the future of our
country. The more ownership there is in America, the more vitality there is
in America, and the more people have a vital stake in the future of this
country.

Thus, in a 2004 address to home builders, Bush called for the Federal
Housing Administration to issue zero down payment mortgages in order to
aid 150,000 first-time buyers per year, saying,

To build an ownership society, well help even more Americans to buy
homes. Some families are more than able to pay a mortgage but just dont
have the savings to put money down.

Long before Bush came up with the phrase €œownership society,€�
Democrats had gleefully been using this justification to funnel vast sums
of mortgage money to their base voters among minorities through the
liberal-dominated quasi-state institutions Fannie Mae (once run by former
Obama adviser Jim Johnson) and Freddie Mac and via leftwing NGOs such as
ACORN (to which Obama had long and close ties). The government both
devised de jure quotas and leaned on lenders with discrimination lawsuits
to get them to impose their own de facto quotas.

The strong growth in the homeownership rate from the early Forties into
the early Sixties was a symptom of an economically and socially healthy
society in which good-paying jobs were widespread and human capital was
rising. The high school dropout rate, for example, fell steadily from
early in the century until the end of the Sixties.

In the mid-Sixties, however, the fraction of households owning their
residence plateaued at around 64 percent, where it more or less remained
into the mid-1990s, as the collateral damage of the Sixties cultural
revolution hit the lower half of the population hard. The upper reaches of
American society flourished under the new customs that emerged in the
Sixties €¦ but they already owned their own homes. To boost homeownership
beyond 64 percent would require millions of people in the bottom half of
society to convert from renting to owning.

In retrospect, this post-Sixties stagnation of the ownership rate
stagnation was hardly surprising. American society began fragmenting in
the Swinging Sixties, reducing the number of grown-ups per household. For
example, the percentage of babies born to unmarried women has risen from
six percent in 1963 to 39 percent in 2006. The 22 percent black
illegitimacy rate that so alarmed LBJs advisor Daniel Patrick Moynihan
in 1965 has grown to 71 percent. The percentage of babies born to
unmarried white women hit 27 percent in 2006, and the illegitimacy rate of
Latinas, a category that barely mattered in the 1960s but now accounts for
a quarter of all babies, is now 50 percent.

After 1973, economic inequality grew steadily as well.

Moreover, the human capital of the bottom half of society stopped
improving. According to a 2007 study by Nobel laureate economist James
Heckman, the high school dropout rate has risen from around 20 percent in
1969 to about 25 percent in 2000.

Rather than make the fundamental reforms needed to help the bottom half
actually become economically productive and domestically stable enough to
afford to buy a home, the government tried to juice the home-ownership
rate directly. Indeed, without ever-increasing government efforts, such as
the 1977 anti-redlining Community Reinvestment Act (CRA), to artificially
boost minority housing purchases, the rate would have naturally fallen due
to the increasing number of single parent homes.

The CRA enables leftist lobbies like ACORN to shake down big financial
firms whenever they tried to merge. Economist Thomas J. DiLorenzo observed
that the Community Reinvestment Act:

compels banks to make loans to low-income borrowers and in what the
supporters of the Act call €˜communities of color that they might not
otherwise make based on purely economic criteria. €¦ These organizations
claim that over $1 trillion in CRA loans have been made €¦The law is set
up so that any bank merger, branch expansion, or new branch creation can
be postponed or prohibited by any of these four bureaucracies if a CRA
€˜protest is issued by a €˜community group. €¦ They use this
leverage to get the banks to give them millions of dollars as well as
promising to make a certain amount of bad loans in their communities.

To avoid the Community Reinvestment Act hassles, more than a few
respectable institutions avoided doing business in minority communities. A
lender could define its €œcommunity€� as, say, stretching only five miles
north and south from Mulholland Drive along the top of the Hollywood
Hills.

Then, whos more likely to offer mortgages to Compton and Pacoima? Why,
high-pressure bucket shop operations that have no skin in the
game€”theyre just sales outfits that immediately repackage often
fraudulently documented subprime mortgages and sell them to Wall Street.

Two events in 1992€”a much-publicized study and a new piece of
legislation€”ratcheted up mortgage affirmative action.

U. of Dallas economist Stan Liebowitz recently pointed out:

Yet a €˜landmark 1992 study from the Boston Fed concluded that
mortgage-lending discrimination was systemic.

That study was tremendously flawed€”a colleague and I later showed that
the data it had used contained thousands of egregious typos, such as loans
with negative interest rates. Our study found no evidence of
discrimination.

As Peter Brimelow noted in Forbes on January 4, 1993, blacks had the same
default rates as whites, suggesting racial fairness. After all, if current
financial institutions were really discriminating irrationally against
minorities, it would be highly profitable for a non-discriminator to enter
the market, just as the Brooklyn Dodgers won six National League pennants
in the decade after they became the first team to sign black baseball
players.

In reality, as Insight on the News reported in 1999:

A recent study by Freddie Mac, the federally chartered Federal Home
Loan Mortgage Corp. that buys mortgages from banks to resell to investors,
documents the shaky financial standing of minorities. The study found that
nearly half of black borrowers and a third of Hispanics have €œbad€�
credit records€”that is, they have a record of delinquent loans or
bankruptcy€”compared with a quarter of whites. Moreover, income does not
explain the disparity, according to the study. Among people with incomes
of $65,000 to $75,000, 34 percent of blacks have bad credit, compared with
20 percent of whites.

Today, however, non-Asian minorities (NAMs) have much higher default
rates, suggesting racial bias has entered the system of judging
creditworthiness.

Liebowitz went on:

Yet the political agenda triumphed€”with the president of the Boston
Fed saying no new studies were needed, and the US comptroller of the
currency seconding the motion.

No sooner had the ink dried on its discrimination study than the
Boston Fed, clearly speaking for the entire Fed, produced a manual for
mortgage lenders stating that: €˜discrimination may be observed when a
lenders underwriting policies contain arbitrary or outdated criteria
that effectively disqualify many urban or lower-income minority
applicants.

Liebowitz asked:

Some of these €˜outdated criteria included the size of the
mortgage payment relative to income, credit history, savings history and
income verification. Instead, the Boston Fed ruled that participation in a
credit-counseling program should be taken as evidence of an applicants
ability to manage debt.

This is just standard operating procedure when the government wants
private firms to impose racial quotas on themselves. The same procedure is
used in hiring. Objective measurements that have €˜disparate impact on
legally protected groups have been subjected to severe judicial and
legislative review for decades, with the burden of proof severely resting
on the firm.

Liebowitz goes on:

Sound crazy? You bet. Those €˜outdated standards existed to limit
defaults. But bank regulators required the loosened underwriting
standards, with approval by politicians and the chattering class. A 1995
strengthening of the Community Reinvestment Act required banks to find
ways to provide mortgages to their poorer communities. It also let
community activists intervene at yearly bank reviews, shaking the banks
down for large pots of money.

Banks that got poor reviews were punished; some saw their merger plans
frustrated; others faced direct legal challenges by the Justice Department.


Also in 1992, Congress passed the Government Sponsored Enterprises bill,
which set €œtargets€� (i.e., quotas) for Fannie Mae and Freddie Mac,
which are quasi-governmental publicly-traded for-profit thing-a-ma-bobs,
to encourage €œaffordable€� and €œunderserved€� (more or less
minority) home loans.

Both the Clinton and Bush departments of Housing and Urban Development
raised the quotas repeatedly. For example, initially, the Clinton
Administration required 21% of these quasi-governmental mortgages must go
to €�underserved areas€� (which are officially defined as €œlow-income
census tracts or in low- or middle-income census tracts with high minority
populations"), but the quota for 2008 established by the Bush
Administration is 39 percent.

Reuters reported October 13, 1999:

The mortgage industry intends to pursue minorities with greater
intensity as federal regulators turn up the heat to increase home
ownership in underserved groups. €˜We need to push into these underserved
markets as much as we can, said David Glenn, president and chief
operating officer of Freddie Mac. €¦

In September, Freddie Mac launched a new lending program, based on
research done in collaboration with five black colleges, to bring more
African-Americans into the market.

The federal government in the meantime has increased pressure on
lenders to seek out minorities, as well as low-income groups and borrowers
with poor credit histories.

Fannie Mae recently reached an agreement with the U.S. Department of
Housing and Urban Development to commit half its business to low-and
moderate-income borrowers. That means half the mortgages bought by Fannie
Mae would be from those income brackets.

Now, even the head of Freddie Mac has protested that the quotas have
become €œperverse.€� On March 12, 2008, Bloomberg News reported:

Freddie Mac Chief Executive Officer Richard Syron said hes urging
changes in federal rules that enabled too many low- and moderate-income
Americans to buy houses they cant afford. Its €˜perverse that
Freddie Mac and Fannie Mae, the two biggest providers of money for U.S.
home loans, have been encouraged €˜to put people into homes that they end
up losing, Syron said at a meeting with analysts and investors in New
York.

Ironically, Syron helped get us into this mess when he was head of the
Boston Fed. His Freddie Mac biography boasts, €œSyron also was sponsor of
a landmark study on racial discrimination in mortgage lending €¦€�

Similarly, the Clinton Administration used the Community Reinvestment Act
and Fair Housing Act to set, in effect, racial quotas for private lenders.
Cynthia Latta, an economist with DRI/McGraw-Hill, commented in 1999:

We have created a tremendous amount of risk€¦Banks are under a great
deal of pressure to lend in these communities. It is very political

The Fed pumped so much money into the system after 9/11 that, with stocks
in disfavor after the Internet bubble burst, the liquidity flooded into
the home market, postponing the day of reckoning in housing until now.

Straightforward tax-and-spend programs were out of favor in the 1990s, but
lean-on-lenders for the benefit of your political constituents is always in
season.

For instance, an article entitled €œFannie Mae Bending Financial System
to Create Homeowners, Says Raines€� reported in 2000:

Yet home ownership is unevenly distributed in society, [Fannie Mae
head Franklin] Raines said. He quoted the famous pronouncement by W.E.B.
Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th
century is the problem of the color line. Du Bois also observed that the
size and arrangement of peoples homes is an index of their
condition€¦

In the early days of the movement, he said, there was a significant
commitment of government funds. €¦ Now, said Raines, more money is being
invested in community development through private mechanisms, including
Fannie Mae, which works through mainstream lenders to reach out to
underserved communities.

During the 1990s, Fannie Mae pledged $1 trillion in capital over seven
years to boost home ownership among underserved populations. Last spring,
said Raines, the commitment was completed ahead of schedule, and Fannie
Mae pledged a further $2 trillion to assist 18 million families during the
next decade.

George W. Bush got in on the game too. The Bush Administration announced
on June 17, 2002:

Today, President Bush announced a new goal to help increase the number
of minority homeowners by at least 5.5 million before the end of the
decade€¦ The President also issued €˜Americas Homeownership
Challenge to the real estate and mortgage finance industries to join in
his effort to increase the number of minority homeowners by taking concrete
steps to tear down the barriers to homeownership that face minority
families.

Bush called for, €œCreating new mortgage products to meet the unique
needs of recent immigrants.€�

The President bragged:

Many organizations have already responded to the Presidents
challenge by committing to substantially increase by at least $440
billion, the financial commitment made by the government sponsored
enterprises involved in the secondary mortgage market, specifically
targeted toward the minority market.

$440 billion here, $440 billion there, pretty soon you are talking about
real money.

In 2004, President Bush promoted his Zero Down Payment Program for FHA
insured loans, thus giving Presidential respectability to the ruinous
trend toward no money down deals. MSNBC reported in a March 27, 2004,
article subtitled €�President wants to add new minority home owners:€�

He also proposes to make zero down-payment loans available to
first-time buyers whose mortgages are guaranteed by the Federal Housing
Administration.

The Washington Post reported on June 10, 2008, in €�How HUD Mortgage
Policy Fed the Crisis:€�

In 2004, as regulators warned that subprime lenders were saddling
borrowers with mortgages they could not afford, the U.S. Department of
Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own homes,
the agency required that two government-chartered mortgage finance firms
purchase far more €˜affordable loans made to these borrowers. €¦
Housing experts and some congressional leaders now view those decisions as
mistakes that contributed to an escalation of subprime lending that is
roiling the U.S. economy.

None of this was controversial at the time, in part because being
oblivious to the obvious about minorities is the hallmark of authority
these days.

Thus, the home ownership increased over the 1994-2004 period by 8.6% for
non-Hispanic whites, but by 16.1% for blacks and 16.7% for Latinos. I
calculate that ethnic share changes alone between 1994-2004 would have
driven down home ownership rates by 1 to 2 points. Instead, they went up 4
points.

Similarly, from 1994-2004, the ownership rate for married couples went up
7.8%€”but by 15.2% for female-headed families.

One mystery remains: Why was Wall Street was so credulous about all these
dubious mortgages?

Obviously, greed and fear are always at war on Wall Street. Perhaps,
though, one reason greed outgunned fear while phony subprime mortgages
were running amok in recent years was that so many were going to non-Asian
minorities and that Wall Streeters assumed that the federal government
would bail them out rather than see so many NAMs turned out on the
street.

Further, lots of immigrants actually do have more income than they report
to the IRS€”illegal immigrants often get paid in cash under the table. As
USA Today reported in 2007:

Hispanic families are more apt to have undocumented income, leading
them to lenders who make loans without income verification, according to
the National Council of La Raza.

Quite a few of the legal immigrants in Southern California are from
mercantile minorities in West Asia who consider paying taxes something
that only chumps do. The presence of all these immigrants who work in a
grey market cash economy gives a mortgage company like Countrywide a
rationalization for believing loan applicants when they put down an income
figure thats far above what they can document from their 1040: Who
knows? Maybe Uncle Adnans import-export business really does generate
enough cash to cover the loan. Who can tell for sure?

As Fred Dickey showed in his 2003 Los Angeles Times Magazine article
€œUndermining American Workers,€� immigration has driven a large
fraction of Californias economy underground. Not only cant it be
taxed, but it cant be documented either.

And the problem is not just that €œundocumented workers€� get
€œundocumented mortgages.€� Its also that so many others get drawn
into the €œundocumented income€� racket. For example, many of the
highest rates of foreclosure are in fast-growing boomtowns like Las Vegas
and exurbs like Palmdale, CA, where so many people are in the contracting
business building and upgrading housing.

When some of these contractors get a mortgage for their own homes and the
bank asks them to document their income, they wink and imply: €�My
employees dont want me to keep a lot of documents on them, so I pass my
savings on to my customers who dont want me to keep a lot of documents
on them either. Just trust me.€�

And many contractors were getting rich in the housing boom, so they were
safe bets as long as the boom went on even if they wouldnt document
their income. But a lot of the people applying for mortgages by claiming
to be successful cash-only businessmen werent successful, and were just
staying afloat by refinancing their mortgages as interest rates dropped and
home prices went up. Ultimately, even the ones who were raking in the cash
during the Bubble got hammered when the housing construction boom ended.

Finally, a compounding factor in the subprime debacle was that these
complicated exploding adjustable rate subprime mortgages were
disproportionately handed out to people who arent very good with
numbers. For example, the Washington Post profiled the fraudulent
straw-man mortgage received by a Honduran immigrant cook named Glenda
Ortiz, who paid €œtriple what the house had sold for the year before, and
$5,000 more than the asking price€¦€�:

She agreed to a high-interest loan that would cost her more than
$3,000 a month, more than 70 percent of the $4,200 that she and her
husband brought home monthly. She signed papers in English that she
didnt understand. One said she was married to a man she didnt know.
She placed her financial future in the hands of a woman she barely knew
who sold cosmetics and jewelry door to door. She sought no one elses
advice.

In contrast, a list of the ten places with the lowest ratio of subprime to
normal mortgages consists of sophisticated San Francisco and nine classic
college towns, such as Ithaca, NY.

In summary, while blame for this economic fiasco is deservedly widespread,
multiculturalism bears a much larger share of the shame than its gotten
so far.

As Brimelow wrote in National Review in 1993:

Classical socialism called for direct state ownership of the means of
production, distribution, and exchange. Neosocialism just aims at
political control. Socialism claimed to be more efficient. Neosocialism
claims to be more equitable. Above all, neosocialism professes to combat
€˜racism, since this magic word cows all opposition.

Steve Sailer is a columnist for VDARE.com and the founder of the Human
Biodiversity Institute. He also blogs a lot."

http://www.takimag.com/site/article/...e_the_housing/

http://isteve.blogspot.com/2008/06/s...on-or-how.html

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