Friday, October 19, 2007

Government Chutzpah on the subprime market

My friends at The Other Club brought up how Massachusetts Governor Deval Patrick wants to force mortgage companies to forgive loans on low income borrows who bit off more than they could chew, linking to a Boston Globe article on the matter:  
Governor Deval Patrick [D, Mass] plans to introduce an ambitious program today to assist Massachusetts communities in preventing foreclosures by pressing lenders to accept losses on their mortgages so that homeowners are able to sell their properties and pay off smaller loan balances....
In one key part of the plan, the state would press lenders to agree to a "short sale" with homeowners late on their monthly payments. In a short sale, lenders accept less than the full value of the loan, so that the homeowner can sell the house at today's market price - typically less than he or she paid for it - and use the proceeds to pay off the smaller loan balance. Short sales are a way for borrowers to prevent foreclosure.

But Thomas Callahan, executive director of the Massachusetts Association for Affordable Housing, which provides mortgages to homebuyers with modest incomes, said the administration does not have leverage, legally, to force lenders to cooperate. He said most subprime lenders are out-of-state companies that are not regulated by the state.

What is funny (or sad) about this is that both these initiatives had one Deval Patrick ivolved, either as a civil rights attorney for the Clinton Administration or as Governor of Massachusetts.   Deval Patrick was responsible for bullying financial institutions into making loans to various preferred groups, regardless of credit history or proof of actual discrimination.  From Reason Magazine:
 In an October 26 Washington Post story, Deval Patrick, head of the Justice Department's civil rights division, defended the administration's aggressive stance by saying, "It's nuts to think that we could reverse the effects of 300 years of deprivation by a few court decisions and a few good statutes."...

Perhaps the most breathtaking civil- rights enforcement affects financial services. Along with the proposed CRA regulations, the Justice and Treasury departments are pursuing banks and other financial institutions that are allegedly violating fair- lending practices. Justice has already sanctioned banks in Mississippi, New England, South Dakota, Georgia, and Maryland for supposedly discriminating against members of racial minorities. Barnett Bank, Florida's largest, is under investigation.

But there's little evidence that systematic discrimination is taking place. In the Maryland case, Chevy Chase Savings Bank was forced to cough up $140 million to African Americans by, for example, offering below- market- rate loans to minorities and placing ads in black- owned newspapers. Justice showed no evidence that Chevy Chase, the largest thrift in the D area, had denied loans to individuals because of their race. Rather, Chevy Chase hadn't opened new branches in predominantly black neighborhoods. The bank had been operating branches in African- American neighborhoods, but that didn't satisfy civil- rights enforcers: Either those branches had been acquired in a merger or the neighborhoods in which these branches operated had been predominantly white when the branches opened.

Two governors of the Federal Reserve System have criticized the proposed CRA regulations, saying financial institutions will make risky loans to women or racial minorities so that they can avoid discrimination lawsuits. Fed Governor Lawrence Lindsey considers the regulations a blatant power grab by political micromanagers in Congress and the White House. He has recently encouraged public comments, presumably critical, of the regulations. And Governor John LaWare told the Dow Jones News Service, "I feel very uneasy about the de facto allocation of credit and banking resources by administrative fiat."

Let's review.   Clinton administration threatens lenders into giving sub rate loans to minority borrowers even though they would not qualify under normal lending practices.   Clinton administration, with Deval Patrick at point, states that quantative measures like credit risks and default rates don't matter - just that the loan portfolios should "look like America".
     Without going into detail on the abject stupidity of this policy, the banks did a cost benefit analysis and essentially figured it that it would be cheaper to throw the dice, loosen their credit standards to minority lenders, and risk some defaults instead of throwing a lot of money into attorney's fees fighting the government.
     Now that the governments demand for looser credit standards has played role in the sub-prime mortgage mess, these same government officials now chatise the banks for their "predatory" lending practices, and now demand regulation to "fix" the problem.

Why aren't we surpised.


Harry said...

Absolutely correct. That is exactly the situation.

Sadly, the Boston Globe has covered Patrick's "call for action" during the past few weeks without ever mentioning his former service in the DoJ or later as a Board Member of #1 subprime lender Ameriquest.

Anonymous said...

Seeing as there's no other "Contact the Author" section here, I guess I have to hijack this comment section for personal gain. This is Dan O'Connor. I believe this is the Mitch Day I went to High School with. If it is, e-mail me at If not, sorry for the intrusion.