First a Tragedy, Now a Farce

Today's WSJ has an interesting article by Edward Pinto on the current housing mess. Basically, politicians still think they can have their cake and eat it too, subsidizing new homebuyers at rates that guarantees too much housing. What is 'too much'? That which is unsustainable. The 3.5% down mortgage that dominates the under $250k market is almost solely a government creation. As it says in the article:

In 1990, one in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%... Columbia University's Charles Calomiris to increase minimum down payments by 1% per year over 15 years, bringing them back to 20%, where they had been for decades.

Charles Calomiris was a professor of mine at Northwestern, and he is an expert on economic history, as well as how finance relates to business cycles. This is only natural because you discover quite quickly that the history of economic busts is that of financial panics. His proposal is considered extreme, highlighting the current insanity.

Anyway, to see how we got here, note that many are trying to say that the housing crisis was created by one blade in the supply-demand scissor: greedy bankers. Now, this is really rich because bankers--paradoxically to some--have suffered most, much more than the poor family that put up almost nothing to live in a nice house for a couple years. The Fed and otherwise intelligent Ben Bernanke would like you to believe the Community Reinvestment Act (CRA) had absolutely nothing to do with the 2007 housing crisis. Barry Ritholz went so far as to offer a $100k prize to someone who can 'prove' it caused the crisis, and Paul Krugman argues it had nothing to do with the crisis.

These are often semantic debates. I don't think the CRA caused the crisis, as in if the CRA legislation had not existed the crisis would not have happened. Yet it was symptomatic of the mindset that led to the crisis. The zeitgeist suggested that lowering underwriting criteria for homeowners was costless, turn renters with their various social and economic deficiencies into homeowners with their various social and economic proficiencies, and be morally just. The mindset that underlay the CRA, not the CRA itself, caused the housing crisis. The CRA was joined by the Fair Housing Act and other explicit legislation. The regulators from the OFHEO, OCC, FDIC, SEC, and Federal Reserve were all on board with the tactics consistent with the strategy, meaning that bankers weren't criticized for lowering their standards in regards to home lending, but rather congratulated. The US Department of Housing and Urban Development, and Department of Justice had similar objectives and initiatives to those in the CRA. The CRA, in this context, was unnecessary.

Consider what was being argued before it became patently obvious that you can have too much of a house. In the National Housing Institute Journal, which contained a lot of economics and social justice (funny how these are conflated when convenient), Gregory Squires wrote in 2003:

And the Community Reinvestment Modernization Act would likely not have been produced if it were not for the advocacy efforts of the National Community Reinvestment Coalition, ACORN, the National Training and Information Center and community organizations around the country.

Saul Alinsky argued that there are no permanent friends or permanent enemies. And there are few, if any, permanent victories. Progress has been made in fair lending and community reinvestment, but that progress is threatened, as the rise of predatory lending in recent years demonstrates. Homeownership may be at record levels today, but low-income and minority neighborhoods remain underserved. Future goals for community reinvestment and fair lending seem reasonably clear, as do the tactics and strategies for achieving them. Sustaining the type of efforts responsible for past victories and required for future ones remains the challenge of the day.

A course on Community Development at the University of Buffalo lays out the housing strategy as part of what is true and good, and gives a grading scale with precision to the second decimal, as if the idea to redistribute via housing subsidies hidden within mortgages is so obviously true, we are just concerned about the decimals in any academic work in that subject.

In The Future of Community Reinvestment, Occidental College Poli Sci professor Peter Dreier lays out the conventional wisdom before anyone tried to lay blame for the insanity that peaked in 2006. Here are some of Dreier's Seven Key Ingredients to Community Reinvestment in 2003, which celebrated the housing bubble trends (he's being sincerely laudatory of all these trends):

Ingredient 2:

Activists pressured banks to invest more money in specific urban neighborhoods...Under pressure to channel credit into redlined neighborhoods--and to co-opt protects from community organizing groups and win favor with regulators and ploiticians--banks forged partnerships with community development corporations. for the most part, protest groups shook the money tree, and CDCs collected the rewards.

Ingredient 4:

Within a decade after the CRA was enacted, many banks created separate "community reinvestment" divisions. these divisions were often staffed by liberal individuals who sympathiszed with teh amis of the community reeinventment movement. Indeed, some of these individuals had themselves been cummunity activitists who were recruited by banks to serve as liaisons with community groups.

Ingredient 5:

The movement's organizing strategy gave residents a clear set of remedies at the national, state, and local levels that went beyond neighborhood organizing... through the National Commuinty Reinvestment Coalition, they worked with other groups to pressure Congress to strengthen the CRA and HMDA.

Ingredient 6:

By requiring banks to meet community needs as a prerequisite for obtaining various approvals from federal bank regulators and by giving consumer and community groups the right to challenge these approvals, the CRA provided these groups with leverage to bring banks to the negotiating table.

Ingredient 7:

Local groups working on the same issue were able to learn from one another. This learning occurred through several national organizing networks and training centers, particularly National Peoples Action, ACORN, the Center for Community Change, and the National Community Reinvestment Coalisiton.

The paper ends with a plea:

We Need a Progressive Agenda: the community reinvestment movement is part of struggle to make access to capital more democratic.

Dreier is unrepentant, arguing in the many posts online that ACORN has been unfairly demonized, and that the housing crisis had nothing to do with his earlier proposals for meeting loan quotas irrespective of standards. People at ground zero in this crisis who have been insulated from its direct effects--academics, wonks, politicians--have learned nothing from this conspicuous failure between theory and reality: the old 20% down payment was not arbitrary hatred of black people, it was merely prudent lending. Markets abetted the housing crisis as investors were co-conspirators with everyone else, but at least they learned a lesson. Clearly politicians have not learned and want to continue the madness at 3.5% downpayments forever. It's not sustainable.