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@joemgoldner , @AEI , and @TPPatriots Are Lying to You

July 27, 2016

From Debtors’s Prison by Robert Kuttner (Due to length, this is a corollary for my Goodreads review, still a work in progress.)

It is fitting that the Tea Party movement began, in of all places, on the floor of a financial exchange and that it started with a former trader blaming the victims rather than the perpetrators of the most damaging financial scam in nearly a century. But such is the pseudopopulism and inverted responsibility that characterizes the politics of the continuing economic collapse. [Rick] Santelli was echoing a conservative counternarrative about the roots of the financial crisis. Free-market ideologues could not very well admit that the crisis was caused by a catastrophic failure and corruption of private financial markets. It had to be the government’s fault.

In this far-fetched counter-narrative, the housing collapse occurred because politicians, mostly Democrats. had put pressure on banks and thrifts to lend to unqualified borrowers, many of them minorities. It supposedly began with the community Reinvestment Act of 1977, which required federally regulated lenders to serve low- and moderate-income communities as well as affluent ones. the pressure increased under the Clinton administration, with its programs of affordable home finance. Even George W. Bush fanned the flames with his vision of an “ownership society” to turn more low-income Americans into homeowners.

The story line was disseminated in papers by think tanks such as the American Enterprise Institute and repeated endlessly on right-wing talk radio and Fox News and in speeches by Republican congressmen. Peter Wallison of the AEI, in his dissent to the report of the Financial Crisis Inquiry Commission, contended that the U.S. government, through the community Reinvestment Act and other means, “sought to increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards.” As a consequence, he added, lenders and secondary market institutions such as Fannie Mae “were compelled to compete for mortgage borrowers who were at or below median income in the areas in which they lived. this competition caused underwriting standards to decline, increased the number of weak and high-risk loans…and contributed importantly to the 1997-2007 housing bubble.”

But everything about this story is untrue. First, the preponderance of subprime loans were originated by mortgage brokers, who are not covered by the Community Reinvestment Act, which requires sound underwriting standards. Most community banks and thrifts covered by the act maintained normal standards, stuck with conventional mortgages, and had far lower default rates. A research study by the Federal Reserve, no less, found that in 2006, the peak of the subprime madness, only 6 percent of high-yield, high-risk (subprime and alt-A) loans were made by institutions covered by the act.

Second, the investment bankers and mortgage brokers who dreamed up subprime had no government mandate to increase low-income homeownership and could not have cared less about it. The subprime scam was simply a way to maximize the profits of lenders and middlemen. Indeed, studies have found that roughly half the borrowers who were persuaded to take out high-profit subprime loans could have qualified for conventional loans. African American loan applicants were especially targeted for subprime loans, and many borrowers were refinancing paid-up mortgages in order to meet the expenses of old age. They were manipulated into taking on loans whose risks they did not comprehend.

Third, the legitimate programs to expand homeownership had high underwriting standards and exemplary records. President Clinton, impressed by the work of the South Shore National Bank, a pioneering lending institution serving small businesses and homeowners in a depressed Chicago neighborhood, sponsored legislation in 1993 to create other “community development financial institutions” to meet the needs of those whom banks tend to avoid. These institutions carefully evaluate the resources of low-income loan applicants and give them extensive and ongoing counseling. Studies of one such model institution, the Center for Community Self-Help, based in Durham, North Carolina, found that while subprime borrowers with adjustable-rate mortgages suffered default rates of about 40 percent. Self-Help borrowers with comparable economic characteristics had default rates of 8.5 percent, and many of those defaults were due to the recession. (234-5)

The next five paragraphs deal with differences between black and white lending, before Kuttner returns to South Shore:

The South Shore National Bank, founded in 1973, did not go in for subprime lending. In the predominantly black South Side of Chicago, the bank made conventional fixed-rate loans, and it had very low default rats. Renamed ShoreBank in the 1980s, it was hailed as a national model of how to serve low-income communities and maintain high standards. When the subprime collapse hit, ShoreBank, refinanced $32 million worth of local subprime mortgages with fixed-rate “rescue loans/” But as the crisis deepened, housing values in the community it served plummeted. Unemployment rates rose. In 2008, the bank was profitable. By 2009, many of its loans, which had been perfectly sound before the recession hit, were in trouble. The bank booked a $100 million loss on the year, about half of its equity capital.

ShoreBank applied for TARP assistance. It needed $72 million in aid from the Treasury, a pittance compared with the hundreds of billions that the government found for Wall Street’s biggest banks. At the request of regulators, the bank enlisted investors to pump in what eventually totaled an additional $146 million in new capital, exceeding the initial target. Though its prime regulator, the FDIC, voted to approve the TARP assistance, the Treasury refused to concur, and on August 20, 2010, ShoreBank closed its doors.

Citigroup, Bank of America, and Goldman Sachs, which had underwritten the subprime debacle, were too big to fail and received hundreds of billions in government aid. But exemplary ShoreBank was too small to matter. the government’s failure to support this pioneering bank serving responsible low-income borrowers was one more emplematic double standard in the politics of debt and property.

The Tea Party’s modus operandi is to blame the victims and reward the perpetrators, creating ludicrous myths that are nothing more than a pack of lies designed to suit their agenda of stealing the country away from virtuous, deserving, hardworking people like me and (I assume) the majority of readers of my blog.

As long as austerity continues, there will be a continued funneling of money from poor to rich that the Tea Party will continue to justify with more lies.

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