The Great (Fake) Debate
Online Editor's Note:
Working at HousingWire puts two things into perspective. The first is the realization that housing will always be a critical part of the nation's economy. And the second, and perhaps most significant, is the recognition that the long path to getting housing back on track means listening to a variety of viewpoints and giving all sides of the conversation a chance to be heard.
In response to a recent article, we posted on Peter Wallison's Senate Testimony, the Center for American Progress reached out to us, asking to be heard on the issue of whether housing advocates should have a say in housing finance? You can read the original article here, and below is James Carr with the Center for American Progress' response to the assertion that Realtors, housing advocates and builders contributed to the 2008 crisis.
Housing Wire titled its recent article quoting Peter Wallison’s Senate testimony, “The great debate: Should housing advocates have a say in housing finance?” In his testimony, Wallison asserted that “community activists, realtors and homebuilders want loose underwriting standards” and that “none of these groups suffer the losses when the market collapses as it did in 2008.”
The simple answer to whether housing advocates should have a say in housing finance is a resounding yes. Contrary to Mr. Wallison’s assertions, the activist community had been sounding the alarm about predatory lending for more than a decade. Had Congress and regulators heeded these calls, the US would not have experienced the near collapse of its entire financial system and the resulting Great Recession.
Mr. Wallison’s rejection of the facts leading to the worst collapse of the housing market since the Great Depression continues the unproductive and unnecessarily contentious debate about the causes of the recent housing crisis.
He accuses activist groups of promoting loose lending standards, yet surely he is aware that these groups strongly supported the creation of the Consumer Financial Protection Bureau and the mortgage-lending provisions of the Dodd-Frank Act.
Americans for Financial Reform, AFL-CIO, Center for Responsible Lending, National Community Reinvestment Coalition, The Leadership Conference for Civil and Human Rights, AARP, PICO National Network, SEIU, and countless other community groups worked tirelessly to create a consumer-focused agency would have the ability to prevent the kind of reckless and irresponsible lending that triggered the crisis.
Even more perplexing is Mr. Wallison’s second claim, that community activists, realtors and homebuilders do not suffer the losses when the market collapses as it did in 2008.
Communities of color suffered catastrophic losses from the housing meltdown; Latinos experienced a drop of nearly 70 percent of their net worth and Asians and African Americans lost more than half their wealth largely as a direct result of foreclosures and lower home prices. As the Justice Department’s recent string of successful anti-discrimination legal settlements against many of the nation’s largest lenders has demonstrated, racial bias was a major component of the marketing and selling of subprime loans.
For this reason, the leading activist organizations working to eliminate unfair and deceptive mortgage lending included civil rights groups such as the National Council of LaRaza, NAACP, National Urban League, National Fair Housing Alliance, and National CAPACD, to name just a few.
The homebuilding industry also collapsed along with the mortgage market; it experienced one of the highest levels of unemployment and its output remains at only roughly half of its pre-crisis levels. Compare the building industry’s losses with the performance of Wall Street’s financial firms that were bailed out by the government and which are now raking in record profits. In 2012, U.S. banks had their second-best year in history.
In claiming to support responsible lending, Mr. Wallison confuses “flexible” underwriting with “loose” underwriting.
Flexible underwriting takes into account the complexity of credit risk assessment and the reality of different credit profiles for different demographic groups, while aiming to make a sustainable loan.
Neither low down payments nor credit scores themselves were the reason for the exceptional losses on subprime loans. Rather, the loans themselves were, by design, toxic. These designed-to-fail products featured loan resets two to three years after origination that would then force borrowers back to the table to refinance their loans so that originators could collect another round of fees.
It was a very profitable business until the housing market’s Ponzi scheme collapsed and completely wiped out private market securitization.
Right now, home prices are as affordable as they have been in decades, and interest rates are at historic lows. Yet due to the constriction of credit, many families – especially those in the hardest-hit neighborhoods – have not been able to take advantage of the opportunity to buy.
Instead, non-resident cash investors are buying these homes, and while such purchases can be helpful to stabilize prices, when these investors ultimately sell those homes, any wealth generated will leave the community.
Going forward, Congress and the financial regulatory agencies should pay more, not less, attention to community activists and consumer rights groups.
If they do, they can help to ensure that insult is not added to injury by unnecessarily restricting access to credit, particularly to moderate-wealth, working families and communities of color.
Jim Carr is senior fellow with the Center for American Progress and distinguished scholar with The Opportunity Agenda.