Peter Schweizer: Secrets of the financial crisis

Our friend Peter Schweizer is a Hoover Institution research fellow and the author of books including Reagan’s War, Victory, Do As I Say (Not As I Do) and Makers and Takers.
Most recently, in Architects of Ruin, Peter argues that the global financial crisis was caused by an unholy alliance of liberal activists and politicians, rebutting the claim that it somehow constitutes a refutation of “unregulated capitalism.” John Hinderaker posted his interview with Peter regarding the new book here.
Peter has graciously accepted our invitation to sketch the theme of his book for our readers. Peter writes:

For all the ink that has been spilled about the mortgage crisis in America, there remains a secret that almost all the major media has ignored: for all the talk of unsold condos in South Florida and McMansions sitting empty in California, the epicenter of this crisis is really in urban and minority neighborhoods.
Why is this story being ignored? Simple. By identifying the epicenter of the crisis we can find the culprits who helped get us all in this mess in the first place.
Studies show that those hardest hit by the financial crisis are poor and minority neighborhoods. A massive study by the Boston Federal Reserve Bank looked and hundreds of thousands of mortgages and foreclosures and discovered that “in the current housing crisis foreclosures are highly concentrated in minority neighborhoods.” The study notes that this is a unique phenomenon, “even relative to past foreclosure booms.” The study found that those in poor and minority neighborhoods were seven times more likely to lose their homes to foreclosure that then general population.
Another study by the Pew Research Center has found the same thing. The study discovered that the most significant determinant of the rate of foreclosure was the “immigrant share of the population” and the “native-born Hispanic homeownership rate.” An analysis by the New York Times (one of the few media outlets who have picked up this story) echoed those findings. The paper discovered that in areas where default rates are at least double the national average, 85% of the neighborhoods are majority black and Latino. Minority mortgage holders had a foreclosure rate three and a half times higher than the national average.
This reality gives us evidence to find out who got us into this mess in the first place: housing activities and government officials who pushed for and got an aggressive affirmative-action lending program for home mortgages.
The idea sounds appealing enough: encourage homeownership in order to reduce crime, unemployment, and broken families. But activities pushed their agenda by demanding that lending institutions loosen their lending standards and look the other way when lending to people with bad credit. Activist groups such as ACORN, the Congressional Black Caucus, and the Service Employees International Union pushed banks to use “less traditional income sources such as food stamps, unemployment, part-time jobs, non-court ordered child support and foster care payments” while considering a mortgage application.
Liberal activists also pushed banks to agree “to lower down payment and closing costs” for lenders. What this meant is that the borrower would have little or no money in the game–no incentive to hang on if times got tough. The activists also pushed banks to allow people to take out larger loans on lower incomes, upending the traditional notion that people should only be allowed to have a mortgage payment account for, say, 28% of their income. Activists argued that this was all necessary in the name of social justice.
Subprime lenders such as Countrywide were all too happy to go along because it allowed them to sign even more loans that they could eventually sell to Fannie Mae and Freddie Mac. Countrywide provided, in their own words, “zero- and low-down payment loans and underwriting guidelines that recognize diversity and cultural differences in the way minorities and immigrants may view and conduct their personal financial situations.” Defaults and credit histories were now “cultural differences.”
Angelo Mozilo, the CEO of Countrywide, proposed “elimination of down payment requirements for low-income and minority borrowers” to close the gap in home ownership. He wanted to look at “alternative payment histories” on loans and “properly factor in cultural differences on credit, income and spending habits.” From a business proposition this made perfect sense. Countrywide was selling most of its mortgages to Fannie Mae anyway, so they wouldn’t have to remain on the books. In any given year 30% of the mortgages that Fannie Mae was buying were from Countrywide.
But now that the mortgage bubble has burst, who are the activists blaming? If they once accused banks of making too few loans to minorities, now they claim they are making too many. They claim the financial crisis is a result of unscrupulous lenders giving high-interest or adjustable rate mortgages to poor applicants who didn’t know what they were signing. When the rates adjusted, bam, they lost their homes. But the problem is there is little evidence to prove this. Indeed, the problem seems particularly focused on the black community.
The Boston Federal Reserve found in a study of subprime lending that blacks suffered foreclosure rates three times those of whites and Hispanics, and Hispanics twice that of whites, even when they had the same kinds of loans. Blacks tended to put less money down, had lower incomes, and had taken on more debt. They were given the loans because of the flexible underwriting rules activities and their allies in Washington had been pushing for three decades.
The Boston Fed study also found that when it came to adjustable-rate mortgages, the majority of people who lost their homes were foreclosed on before the rate was even adjusted. So it wasn’t bad loans. The problem was an affirmative action lending problem that encouraged people to take out loans that they should not have.
There is also no evidence of racism in lending. A study by the New York Federal Reserve Bank looked at more than 75,000 adjustable-rate mortgages and found that minorities did not pay higher interest rates than whites. Indeed, the study concluded that “minority borrowers appear to pay slightly lower rates, as do those borrowers in zip codes with a larger percentage of black or Hispanic residents.”
The real culprits here are the social activists and their allies in Washington who pushed an activist agenda. They helped to propel us into the mortgage crisis we face today.

Peter expands on all these points in Architects of Ruin. Analyzing the origins of the current financial crisis in a relatively brief and highly accessible fashion, the book is necessary reading now and for the foreseeable future.

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