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The Diversity Recession, or How Affirmative
Action Helped Cause the Housing Crisis
Steve Sailer
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, isn't 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 won't 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, "if they own it, they won't 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, we'll help
even more Americans to buy homes. Some families are more than able to
pay a mortgage but just don't have the savings to put money down.
Long before Bush came up with the phrase
"ownership 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 LBJ's
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 "community" as, say,
stretching only five miles north and south from Mulholland Drive along
the top of the Hollywood Hills.
Then, who's more likely to offer mortgages
to Compton and Pacoima? Why, high-pressure bucket shop operations that
have no skin in the game-they're 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 "bad" 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 lender's 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 applicant's 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 "targets" (i.e.,
quotas) for Fannie Mae and Freddie Mac, which are quasi-governmental
publicly-traded for-profit thing-a-ma-bobs, to encourage "affordable"
and "underserved" (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 "low-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 "perverse." On March 12, 2008,
Bloomberg News reported:
Freddie Mac Chief Executive Officer Richard
Syron said he's urging changes in federal rules that enabled too many
low- and moderate-income Americans to buy houses they can't afford. It's
'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, "Syron 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 "Fannie
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 people's 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
'America's 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, "Creating new mortgage
products to meet the unique needs of recent immigrants."
The President bragged:
Many organizations have already responded
to the President's 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 that's far above what they can
document from their 1040: Who knows? Maybe Uncle Adnan's 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 "Undermining American Workers,"
immigration has driven a large fraction of California's economy
underground. Not only can't it be taxed, but it can't be documented
either.
And the problem is not just that
"undocumented workers" get "undocumented mortgages." It's also that so
many others get drawn into the "undocumented 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 don't want me to keep a lot
of documents on them, so I pass my savings on to my customers who don't
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 wouldn't document their income. But a lot of the people
applying for mortgages by claiming to be successful cash-only
businessmen weren't 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
aren't 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 "triple 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 didn't understand. One said she was married to a man
she didn't 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 else's 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 it's 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.
