Alyssa Katz` Our Lot: A Liberal Perspective On How Political Pressure To Boost Minority Homeownership Helped Blow Up The Economy.
Our Lot: How Real Estate Came to Own Us
by Alyssa Katz, [Email
her] a liberal journalist and
NYU journalism professor who writes for
Mother Jones, is
the best book yet on how the sacred cause of
“diversity”
merged with pedal-to-the-metal capitalism to bring us the
Great
Mortgage Meltdown.
The book
hasn`t garnered the attention it deserves—probably because
it makes clear the
bipartisan
responsibility of both
her
opponents on the Right and
her friends on the Left.
Our Lot
focuses equally on the misdeeds of both
capitalists and leftists. But I won`t give the
boiler room boys as much attention in this review
because they`re a more familiar tale, while Katz`s reporting
on the role of her side is compelling
“testimony
against interest“.
Katz is remarkably frank about how
government programs and political pressure to boost minority
homeownership helped blow up the economy. She`s particularly
good at explicating how leftist housing activists, such as
ACORN and
Gale Cincotta, the godmother of the Community
Reinvestment Act, worked with
Democratic politicians such as Bill Clinton, HUD
Secretary
Henry Cisneros, and Jim Johnson, CEO of
Fannie Mae,
to lay the groundwork for the Bubble and Bust.
Katz doesn`t devote quite as much depth to
the
Bush Administration`s culpability (which, to my mind, is
even greater). Perhaps she lacked Republican contacts to
give her the kind of inside story she got on her own party`s
mistakes.
Still,
Our Lot makes
clear that on housing policy, the Clinton-Bush years form a
single continuum with one overarching plan: boost the
minority homeownership rate by
lowering
credit standards. I call it the Era of Multi-Culti
Capitalism.
And
there`s little reason to think that its lessons have been
learned yet.
Katz begins her book in 1972, in the
collapsing
Austin neighborhood on Chicago`s Far West side, where
Gale Cincotta was a Greek-American housewife.
Fortuitously for me,
Our Lot fills in the political backstory of my own in-laws` lives.
My wife grew up in Austin, which had been a peaceful,
densely populated working class where small children could
play safely on the crowded sidewalks. Suddenly, in the late
1960s, middle class blacks began buying into the
neighborhood.
Friends warned my late father-in-law, a
classical musician and union leader, to
flee, that underclass blacks would follow. But he and my
late mother-in-law, a schoolteacher, resolved to show that
integration could work.
After my future wife was
mugged twice and her younger brother once, however, my
in-laws finally sold in 1970—losing half their life savings.
They moved 63 miles out of Chicago, to a dilapidated farm
where they lacked running water for their first two years.
(And my father-in-law started voting Republican.)
How did
this disaster hit Austin? Katz demonstrates that it was the
direct result of a 1968 change in the Federal Housing
Administration, which set off a bubble and bust in America`s
inner cities, like a smaller precursor of this decade. As in
2005,
“In 1972, in Chicago and in every other city in the nation, almost anyone
could get a home mortgage, including borrowers who didn`t
earn enough to pay them off, on just about any house, for
any reason. … And just like the recent adventure in lending
beyond any rational limits, the mortgage disaster of the
early 1970s was born from a lofty ideological conviction
that enabled the basest of crimes and most foolish of
gambles under its cover, insulated from almost any scrutiny
until the damage was already done.”
Franklin D. Roosevelt had
started the Federal Housing Administration to insure
home loans, and Fannie Mae to buy loans from lenders.
Together, these agencies created the familiar template of
30-year-year fixed rate mortgages with a moderate down
payment that underpinned the growth of home-owning
suburbanites after WWII.
FDR`s FHA, however, was reluctant to back
loans in black neighborhoods—a practice that Cincotta later
dubbed
“redlining”. Eventually, in 1968, liberal Illinois
Republican Senator Charles Percy and the Johnson
Administration revamped the FHA in a more politically
correct direction. Katz explains:
“The FHA was now, in effect, a front in the War on Poverty. … Under the
new regime, homebuyers living in Chicago and other inner
cities weren`t just eligible for loans. Lenders who signed
up to sell FHA-insured mortgages were asked to do everything
they could to make sure the buyers got them.”
Of
course, the results of the Federal government`s encouraging
mortgages with down payments of never more than $500
were
absolutely predictable:
“Across the country,
neighborhood destruction became a booming business, financed
by the federal government. In Chicago they called it `panic
peddling.` In New York, it was `blockbusting.`
… The FHA-insured loans threw gasoline on that smoldering
fire. … Indeed, the insurance made it profitable to seek out
the most impoverished and unreliable borrowers, since the
sooner a borrower defaulted on a loan, the more quickly the
lender would get paid back in full by FHA.”
In Chicago, Gale Cincotta started a
national coalition of
“community activists”, who helped pass the
Home Mortgage Disclosure Act of 1975 and the
Community Reinvestment Act of 1977. Cincotta remains a
heroine to the author, although she can`t quite make clear
Cincotta`s logic. If the feds encouraging lending to
minorities had destroyed Austin, how was more hair of the
dog that bit you supposed to fix Austin?
Sadly,
Austin remains unfixed. On a visit to Chicago earlier this
month, my wife drove by her old house. Her former home had
no doorknob, just an empty hole in the front door. But at
least it was still standing, unlike two large apartment
buildings on her old block, which are now just
crabgrass-covered vacant lots.
Cincotta died in
2001—across the municipal border from Austin in
Oak
Park. In telling contrast to Austin, that prosperous
suburb that had succeeded in saving its famous district of
Frank Lloyd Wright homes (where my father was born in 1917)
by limiting the number of blacks allowed to move in through
its notoriously illegal but effective
“black-a-block“
quota.
Katz notes that Cincotta`s organization of
the left, combined with the invention of mortgage
securitizing by investment banker
Lewis Ranieri in 1983, made possible the disasters of
this decade.
Cincotta began siccing her
“pushy capitalist radicals” on Fannie Mae, which remained reluctant
to buy the dubious mortgages of likely deadbeats. Still,
Katz writes, “The
reality was that to meet its growth objectives, Fannie Mae
needed these poor people as much as the poor people needed
them.”
Looking
back from 2009, Katz asks:
“How did Fannie Mae
and Freddie Mac … turn into the world`s biggest funders of
Wall Street-backed subprime mortgages? … It all started with
the
best of
intentions, with
… the activists who demanded bank loans for the poor and
urban.”
Democrat
Jim Johnson took over as CEO of Fannie Mae in 1991. He soon
came up with a nice round number as a goal: one trillion
dollars to lend by 2000 to ten million incremental
homeowners. Katz writes:
“Jim
Johnson only needed to point to the
Atlanta
Journal-Constitution`s
[Pulitzer Prize-winning investigative series]
The Color
of Money to show
that he was embarking on nothing less than a civil rights
crusade. …”
Fannie Mae wanted to raise the
homeownership rate to 75 percent, which meant, Katz notes,
that “Consumers would
have to borrow more and pay less up front.”
Johnson, whom Barack Obama had put in
charge of vetting his Vice-Presidential candidates until it
was revealed that he had snagged a cheap mortgage as a
“Friend of
Angelo”
[Mozilo], quickly found a private partner:
“By 1993, he`d made
a deal with
[Mozilo`s]
Countrywide to
buy $2.5 billion in loans for lower-income and minority
borrowers. Financially, these homebuyers would be a motley
lot, with no money in the bank, other debt to deal with, and
less than stable employment. … Fannie Mae targeted much of
its advertising budget to
Black Entertainment Television
and made a
sponsorship deal with
Univision,
the dominant Spanish-language TV network. … The advertising
campaign explicitly targeted young families,
new
immigrants, and
single parents.”
Katz
points out the culture-changing role that Fannie Mae played:
“More than anything,
Fannie Mae made working people comfortable with the idea of
taking on vast debt as the price for participating in the
American Dream. From 1989 to 2004, mortgage debt for
low-income people increased by 46 percent, compared with
just 15 percent for upper-middle-income and 5 percent for
high-income.”
Johnson,
to his credit, retained important limits on debt, such as 3
percent minimum down payments. But George W. Bush would go
to war against down payments in 2002.
Meanwhile Johnson`s allies in the Clinton Administration
decided to goose the homeownership rate to at least 67.5
percent. But who was left to lend to? Katz comments:
“The reality was
that the consumers the
[mortgage] industry
had depended on … were spoken for. More than nine of every
ten suburban middle-class white households owned their
homes. If the industry were going to grow, it would have to
tap new borrowers, and HUD`s research team concluded that
those were going to be urban, black (only 43 percent were
homeowners), Latino (41 percent), and people under age
thirty-five (just 38 percent).”
So
Clinton decided to enlist the real estate and financial
industries in Fighting Racial Bias for Fun and Profit. Katz
quotes him from a
1994 speech to the National Association Of Realtors
Conference:
” `I want to target
new markets, underserved populations, tear down the barriers
of discrimination wherever they are found,` he proclaimed to
cheers at the Realtors` annual convention.”
Did Clinton really believe that in 1994
lenders were passing up profits out of prejudice? This
theory was always
economically illiterate. As
Gary Becker`s
Ph.D. thesis (based on a
suggestion by his adviser, Milton Friedman) pointed out, if
firms were
irrationally discriminating
against minorities, it would be
profitable for nondiscriminators to enter the market
and cash in. The
much-hyped 1992 Boston Fed
report that claimed to prove discrimination existed was
easily refuted at the time by
Peter Brimelow and Leslie
Spencer in Forbes
Magazine, when they demonstrated that it had misunderstood
the meaning of mortgage default rates. But no-one
wanted to
hear that.
Still, if you had doubts about
discrimination claims, Clinton had another argument for you:
his
National Homeownership Strategy would transform
dissolute renters into respectable middle class citizens
through the responsibility-generating magic of owning a
home.
Unfortunately, this theory was based on the usual social
engineer`s misperception that correlation equals causation.
Katz writes:
“Eventually,
scholars found that once they set aside the various traits
that tend to determine whether someone chooses to own or
rent one`s home, the homeowners and tenants really aren`t
all that different.”
And, it
turns out, some people just aren`t responsible enough or
capable enough to buy a home.
Hiring
“diverse“
mortgage brokers only
exacerbated the situation:
“The experience in
neighborhoods confirmed what Fannie Mae`s market research
was also discovering: Borrowers who were new to home buying,
especially if they were members of minority groups, tended
to care more about how they were treated by
the person selling them a loan
than about the
financial soundness of the loan itself. If it were a friend
or a family member selling the mortgage or property, so much
the better.”
Subprime
lending grew—but as long as Fannie and Freddie wouldn`t
bless it, the problem might remain chronic rather than
critical. However, under Clinton the mandates were already
in place that were pushing Fannie and Freddie to covertly
back subprime mortgages. Katz:
“Remember what
[community activists] won back in 1991: By now, nearly half of the loans financed by Fannie
Mae and Freddie Mac had to go to low-income borrowers and
urban communities. … “
But
where can you find enough borrowers who are both poor and
prime? Fannie and Freddie couldn`t. So they started buying
mortgage-backed securities that mixed some subprime in with
prime. Katz explains:
“By buying
prime-heavy portions of the securities as investments,
Fannie and Freddie could meet Congress`s quotas for the
number of loans they had to finance for low-income
borrowers. … But because the riskier parts of the pools
consisted almost exclusively of subprime loans, Fannie Mae
and Freddie Mac were effectively putting their billions into
financing subprime lending…”
Momentum was building:
“Under HUD secretary Andrew
Cuomo, the Clinton administration gave a parting gift to
the burgeoning subprime industry”: Cuomo raised the
government-sponsored enterprises` quotas for lower-income
borrowers from 40 percent to 50 percent.
Most of
the pieces were now in place for the foolhardy Bush
Administration to push to a cataclysmic conclusion. That
didn`t stop Bush from adding his special flavor, though:
“To this brew,
George W. Bush added something quite peculiar for a
conservative: a racial quota. Under pressure from the Bush
administration, which had launched an investigation into
their financing practices, in 2002 Fannie Mae and Freddie
Mac together committed to finance $1.1 trillion in loans
specifically for minority borrowers. … By the time George W.
Bush left office, HUD decreed, three out of every five
mortgages financed by the government loan funds would have
to go to the poorer half of America …”
Katz
doesn`t give Bush as much of a drubbing as he deserves. But
she does tell the story of a Mexican carpenter in Arizona,
Jorge Sotelo, who was employed doing the jobs Americans just
won`t do (namely, building houses Americans just can`t
afford). This immigrant had such a bad credit history that
he couldn`t qualify for even a subprime mortgage. So he had
to have his uncle to sign for it:
“Sotelo thought it was a joke when, in March 2004, his boss
at a construction firm told him to prepare to meet the
president, not of the company but of the United States.
Jorge Sotelo
would appear with George W. Bush as an exemplar of
minority homeownership. … `No
tienes que estar nervioso. Esto va a ser muy sencillo y muy
divertido,` President Bush reassured Sotelo backstage…
[`No need to be nervous. This is going to be very simple and
very fun.`]”
By the
way, Katz runs into the same problem I`ve had finding
coherent quotes in transcripts of Bush`s speeches: he always
mangled key phrases:
“`There is a
minority homeownership gap in America,`
Bush shared with the audience
in the vast hangar. `Not enough minorities own their homes.
It seems to me`—he paused to thump his palm on his chest,
confessionally—`like it makes sense to help all people own
their own homes.` Bush peered down to a lectern to locate
the number he was looking for. `Five point five new—million
new minority homeowners into homes over the next five
years.`”
[Transcript]
The President invited Sotelo and his wife
to a White House Christmas party that year, but the expense
left them short of cash. And they wanted two new cars.
“So
they were grateful when they started getting offers for home
mortgages that would let them get cash back in the
transaction. In the two years since Jorge Sotelo`s
convergence with George W. Bush, Jorge had turned from a
pariah into a desirable customer.”
Sotelo extracted $246,000 out of his home
equity—which is a lot
more than the house is worth today. But don`t worry:
“Sotelo`s got it all
figured out. With a low enough mortgage payment, they could
cover the bills by renting the Avondale house to a tenant.
He`d move his family out to a new place.
They`d be renting
that home, right?
“`Oh,
no,” says Sotelo, surprised at the question. `We`ll own
it.`”
Katz
sums up this decade:
“This
was everything Gale Cincotta had fought for—and a worse
nightmare than she could have imagined.”
The
Mortgage Meltdown, and the Diversity Recession that it has
precipitated (if we`re lucky), are worse nightmares than any
of us could have imagined.
Unless we look
frankly at the causes, it will all happen again.
Alyssa
Katz goes at least some way to doing that.
[Steve Sailer (email
him) is
movie critic for
The American Conservative.
His website
www.iSteve.blogspot.com
features his daily blog. His new book,
AMERICA`S HALF-BLOOD PRINCE: BARACK OBAMA`S
"STORY OF RACE AND INHERITANCE", is
available
here.]


