I bought my condo in Washington, D.C., 25 years ago, for a
little over $100,000; two bedrooms, two baths, in a “good” part of
the city (meaning safe, about a mile north of Georgetown). As a
freelance writer I had no salary, but I qualified for a mortgage
all the same. How come? Well, when I went to see the money lenders
I brought along some letters, including one I had received from
Ronald Reagan (written before he was president) and from one or two
other political notables as well. I debated whether to include my
Nixon letters (written after he was president!) and can’t right now
recall whether I decided they would impress these gentlemen more
than they would frighten them.
I was deemed qualified. But rest assured, Reagan or Nixon had
little to do with it. By far the most important consideration was
that I had put up 50 percent of the purchase price. In cash. That
no doubt persuaded the moneylenders that I had every intention of
repaying the loan. Which I have done (well, almost).
I have been thinking about this in light of our credit woes
today. It amazes me to read that, until recently, people have been
allowed to borrow the full purchase price of a house without
showing they could repay it. By 2006, the median down payment for
first-time home buyers, once 20 percent, had sunk to a mere 3
percent, probably with a variable-rate mortgage. I wonder how many
of these borrowers even knew what that meant. Some thought of the
loan as something that they wouldn’t ever have to repay. They would
just walk away if the value of the house declined.
How could supposedly intelligent people have believed that house
prices would keep climbing forever? That’s just one of the
mysteries. The then Fed chairman, Alan Greenspan, contributed to
the problem by holding interest rates too low for too long. He
forgot that maintaining a stable dollar was by far the most
important part of his job. It will permanently stain his reputation
for wisdom.
But I would like to bring up one of the least discussed roots of
the crisis. The idea somehow took hold that poor neighborhoods in
inner cities were deteriorating because they were being denied
credit. Bankers should “affirmatively help” meet “community credit
needs.” So Congress enacted a new law, the Community Reinvestment
Act (1977). It was dreamed up by Sen. William Proxmire, massaged by
Walter Mondale, and signed into law by Jimmy Carter. It declared
“redlining” to be illegal.
Redlining means denying a mortgage because the applicant lives
in a particular geographic area. An insinuation of the law,
unstated, is that lenders are inclined to be racist.
When “redlining” came over the political horizon, I was living
in a communal house on Embassy Row. Our most famous tenant was Judy
Miller, who was then with the Progressive magazine. Soon
she joined the New York Times. I do have Judy Miller
stories, along with Nixon correspondence stories, but I guess
they will all have to wait. As Times newcomers must, Judy went to
the metro desk—this was many years before she became a famous
foreign correspondent for the paper, with (it turned out) some
influence over how our Iraq Misadventure was to be interpreted.
In an early redlining story for the Times, Judy wrote
that the new law “has been creating some tough problems for the
nation’s bank regulators.”
She got that right. The regulation of mortgage loans was about
to be undermined by the insistence that banks and S&L s could
no longer be too fussy about borrowers’ credit-worthiness. I
particularly liked the following paragraph in Judy’s story:
The Savings Bank Association of New York contended at the
hearing last week that the law’s goal of encouraging lenders to
meet credit needs of the entire community “is entirely at variance
with the business of banking in a free enterprise system.” The
association said: “Our institutions are not social service
organizations…”
Try telling that to Rep. Barney Frank.
The New York Times, which was then (30 years ago) a
more balanced newspaper than it is today, editorialized that
“measures that would weaken standards are dangerous. New York’s
savings banks already hold large numbers of defaulted mortgages,
including many inner city properties.…We raise a strong word of
caution against the expectation that bank credit is a substitute
for the wages, salaries and other income that are needed to keep a
community alive economically.”
By 1993, with the advent of the Clinton administration, the
Washington Post began publishing articles about racial
disparities in mortgage loans in the Washington area. The following
year the Chevy Chase Federal Savings Bank (the largest such bank in
Maryland) was accused of racial bias by Janet Reno and the Clinton
administration. Without admitting any wrongdoing, the bank settled,
agreeing to open branches in poor neighborhoods and by making $140
million in concessionary loans available to the alleged victims of
“discrimination.” The Times, by now sounding a more
familiar note, warned in 1994 that the Community Reinvestment Act
“requires banks to meet the credit needs of all neighborhoods in a
bank’s service area.”
Credit needs? How long before needs would become rights?
THE CHEVY CHASE BANK has survived, but recently posted a
quarterly loss of $5 million on assets of $15 billion.
Of course, if race and financial assets are correlate (as they
are), then insisting on assets as a precondition for a loan could
look a lot like racism; the variables are confounded. The response
was predictable. Why be so “rigid” about assets? These communities
“need” these loans. And so the unraveling continued.
Going along with the political pressure, as the Chevy Chase Bank
had done, would “buy them friends in high places,” according to the
American Banker. New York Times financial
columnist Peter Passell, who is now with the Milken Institute, said
that banks would find “that the path of least political resistance
is simply to shovel enough money into minority projects to make the
regulators go away.” Congressional Democrats increased the pressure
for politically subsidized loans.
Mortgage risks could be passed on to the secondary mortgage
market by Fannie Mae and Freddie Mac in Washington, D.C., backed by
an implicit federal guarantee. They would buy up these mortgages,
call them “assets,” and sell them to investment bankers who
believed that they were worth a lot more than they turned out to
be. Like a Ponzi scheme, it seemed to work for a while, but when
house prices began to decline everything fell apart.
In recent years, the great political promoter of the Ponzi
scheme has been the chairman of the House Financial Services
Committee, Barney Frank. Fannie and Freddie showered Democrats, and
to a lesser extent Republicans, with campaign contributions. They
have invested in politicians. Since 1989, Connecticut’s Sen. Chris
Dodd has been the top recipient; more recently, one Barack
Obama.
The truth is that the nation’s financial system has been run for
many years with a great deal of irresponsibility. There is far too
much reliance on credit, for one thing. People should be encouraged
to save money, not to rely on loans at every turn. But what
happens to savers? The government allows the dollar to fall,
year after year, thereby repudiating its debts. Prices rise, and
savings buy less and less. The Republicans have sometimes been
worse than the Democrats in this regard. GOP treasury secretaries
are inclined to think it is their job to help business, and so they
imagine that a sinking dollar will encourage exports. Bad
policy.
Meanwhile, the puny interest we may receive on savings accounts
will be taxed away as unearned income (one more opportunity to
punish “the rich”). But if we go into debt with a mortgage,
inflation will erode the value of what we owe and we get a tax
break into the bargain. When are they going to reverse this, with
savings encouraged and debt discouraged? It’s high time.
Tom Bethell is a senior editor of The American Spectator.
