Monday, February 18, 2008


A picture is worth a thousand words. So is the jump-page graph that accompanied a recent front-page North County Times story. Though the graph was of the gee-whiz variety, the near vertical rise of median home prices in San Diego County from 2001 to 2004 was still impressive.

Having sold a house in North County during that boom period, the graph didn’t inform me of anything I didn’t experience firsthand. It did, however, provide a vivid visual representation of the financial vertigo that sellers and buyers should have been experiencing at the time.

If the graph had been passed around to lenders and folks buying houses and condos during those years, it might have occurred to them that this “irrational exuberance” couldn’t last forever. And this thought might have made their decisions more prudent.

Another news story about the rash of foreclosures in Oceanside’s 92057 zip code made clear that a majority of these purchases were financed with no or little down payment—a practice that’s difficult to understand given the balance sheets of many of those borrowers and given the possibility that mortgage rates would be adjusted upward in a couple of years.

One of the little-known reasons that financial institutions were willing to make such dubious loans is that they were encouraged to do so in the name of ending discrimination. As economist Stan Liebowitz observed, “From the current hand-wringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards—at the behest of community groups and ‘progressive’ political forces.”

Liebowitz notes that activist groups like ACORN had been making charges of discriminatory “redlining” for years. Moreover, despite a detailed study debunking those charges, government regulators insisted that discrimination, not economics, was keeping minorities from realizing the dream of home ownership.

Accordingly, the Boston Federal Reserve produced a manual for lenders that condemned underwriting policies that “contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” Examples of “arbitrary or outdated criteria” included the ratio of income to mortgage payments, an individual’s credit and savings history, and income verification.

Moreover, “the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant’s ability to manage debt.” Not surprisingly, the lender that took these ACORN-friendly standards most to heart was Countrywide. Rising home prices masked the rising number of foreclosures.

An odd beneficiary of these lending standards is described in the 92057 story mentioned above. A homebuyer in that troubled zip code is walking away from his obligations after netting $50,000 from refinance loans, paying off $8,000 in personal debts, and taking his family on a vacation to Hawaii. He’s now looking forward to renting a bigger house. Perhaps regulators might consider this dude’s credit history a relevant lending factor in the future—no matter his race or ethnicity

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