There has been considerable discussion of the cause of the 2008 Financial Crises. Most seem to agree that Mortgage backed securities and derivatives were the trigger. Investors Business Daily makes the case that the rot started much earlier, and that the precipitating policy document is at hand.
By PAUL SPERRY,
INVESTOR’S BUSINESS DAILY
Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.
At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.
The seed from which this mighty weed of regulation and market manipulation sprang was James Earl “Dhimmy” Carter’s CRA. The fertilizer was a study, which claimed to show there was rampant and overt racism in the approval of mortgage applications. This result was arrived at by very carefully NOT examining the past lending record (past delinquencies, etc.) of those rejected.
The result was “a 20-page ‘Policy Statement on Discrimination in Lending‘ and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending.” This little known body was set up by Clinton to coordinate an unprecedented crackdown on alleged bank “redlining.”
The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.
When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.
With the thumb of government placed “benignly” on the scale of mortgage approvals, here’s what happened to that market:
It became a government created bubble.
Hat Tip: Glenn “Instapundit” Reynolds, and kudos to various of our commenters (jim_m and docepador, among others) for keeping this issue alive.