Viewpoint: Mortgage Mess Generates War of Entitlement

The nation’s housing crisis appears to be moving towards another high note — or low note, more accurately — as federal and state authorities move to put legislation into effect that promises to change how lenders and servicers both make and manage loans. While efforts on Capitol Hill to push a behemoth housing package through before July face an uncertain fate, key state-level and local legislators are busy with their own attempts to “do something,” led in large part by a vocal minority of consumer advocates that are clamoring for sprawling access to government funds in the name of preserving (and even expanding) homeownership gains. For those with a history in mortgage banking watching this unfold, the shifting ground the industry is now one that must seem, at the very least, ironic. After all, the roles now being played by key actors were once very different — and our nation’s collective memory is being proven, yet again, to be astoundingly malleable. It wasn’t that long ago, after all, that nearly everyone was swept up in “the Ownership Society” — with the White House issuing press release after press release challenging lenders to loosen their credit standards and make riskier loans to minorities in the name of “expanding homeownership.” Consumer groups often even partnered with lenders to make riskier loans to the very minority groups they’re now indignantly suing lenders for lending to. Let’s take a trip down memory lane, shall we? Consider this press release from Citigroup in September of 2004, which finds ACORN and Citi happily holding hands and pushing “the goals of both organizations to promote homeownership in low- and moderate-income neighborhoods, especially in immigrant communities.” From the press statement:

“With this agreement, ACORN will be able to expand our mission of strengthening communities by helping low- and moderate-income families, including new immigrants to this country, become homeowners,” said Maude Hurd, National President of ACORN.

It’s not as if Citi and ACORN were the only ones jumping deep into subprime lending together, either. Economic policy research at the time centered on how lenders were denying loans to those with poor credit, often minorities; consider the following conclusion from a September 1999 study:

The Urban Institute report issued today says that “not all Americans enjoy equal access to the benefits of homeownership, in part because of unequal access to capital.”

“Fair lending” essentially became synonymous with a universal lowering of credit standards — and as lenders loosened credit standards, community groups cheered, and the White House lauded the commitment to “expanding homeownership.” Legislatively, President Bush went so far as to propose eliminating down payment requirements altogether. In a September 2004 press statement, administration officials touted a so-called “Zero-Downpayment Initiative” that would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers. Even when we had clear data suggesting that lending to people who couldn’t afford their loans would likely end up badly, we ignored it. Consider this story from April 2004, which noted a Fannie Mae study that found that 49 percent of English-language Hispanics, 46 percent of Spanish-language Hispanics, and 42 percent of African Americans cited “credit concerns” as the primary reason they had not yet bought a home. Instead of realizing that borrowers’ concerns over their credit and finances might actually be valid, we — and that means everyone, from lenders to legislators, to community and consumer groups — decided to convince them otherwise, out of the belief that being part of the “Ownership Society” trumped small-minded credit concerns. There was a bigger experiment in social progress at stake, after all. We unfortunately now know all too well how well pursuing “greater access to credit and capital” turned out, not only for ACORN and Citi, but for nearly every lender and consumer group out there that bought into the strange and wonderful ethic of “the Ownership Society.” None more than Countrywide Financial. Yet, it’s now often the very same consumer groups screaming about “subprime sludge” who are pushing legislators to stop the lending practices they were often complicit in helping make happen. John Carney at DealBreaker offered up one of the few honest takes I’ve seen yet on this mess, way back in January:

… don’t blame Mozilo. He was only responding rationally to the incentives created by that all too compassionate monster, the state. Long before the Bush administration attempted to rebuild Iraqi society, it set out to rebuild American society. Although it went under the banner of “compassionate conservativism,” the Bush adminsitration’s call for an “Ownership Society” was, at its core, central economic planning on a colossal scale. The market had failed to make enough Americans homeowners, and so the Bush administration set out to “expand homeownership.”

And the consumer groups lined up right behind the White House to help make it happen. We’re now reaping was was first sown back then, a war of entitlement spawned by the ideals of the “Ownership Society.” For many, housing has become more than a privilege; it has transformed into an inalienable right, on the level of free speech. And that sense of entitlement is what has driven many consumer groups from working side-by-side with lenders to make risky loans on one hand, to now pushing legislation that seeks to use federal and state funds to maintain the ideals established by the “Ownership Society,” on the other. That sense of entitlement has given traction to guys like Bruce Marks at the Neighborhood Assistance Corporation of America, whose boorish tactics would be universally condemned at any other point in our nation’s history. Instead, the use of those tactics get him named “Bostonian of the Year” by the Boston Globe, and find him putting banks in a veritable vise grip — perhaps even rightfully so — over their lending tactics. That sense of entitlement has pushed state legislators in places like California to consider some extreme housing measures, which when defeated earlier this month led consumer groups to be “outraged,” according to an LA Times Story. To be sure, we face a complex and changing housing and mortgage crisis — one that isn’t likely to be solved quickly. But if we’re to develop a sound and lasting solution for borrowers and industry participants alike, doing so should at least require that we all take the time to truly understand how we got here. Which is to say that entertaining support for knee-jerk solutions rooted in the very same logic that got us into this mess to begin with strikes me as a sure-fire way to make things worse.

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