The Diversity Recession: Political Correctness Makes Lenders Stupid

The American economy is

sinking under the weight
of trillions in dubious
home loans, as exemplified by
this month`s failure
of Pasadena-based mortgage
lender

IndyMac
and the Treasury Department`s plan for

a taxpayer bailout
of the privately-owned but
"government sponsored"


Fannie Mae and Freddie Mac
. Savers are increasingly
finding the value of their assets inflated away as the
Federal Reserve Board devalues the dollar to spread
around the suffering from bad loans.

Traditionally, markets work by balancing
greed and fear.
Why was greed allowed to outrun fear
so badly this time?

One clue comes from looking at the places with the
sharpest decline in home prices, such as California,
South Florida, Arizona, and Nevada. For example, the
median price of homes sold in California last month was
$328,000, down

31.5 percent
from a ridiculous $484,000 in June
2007. Almost 42 percent of all homes sold in California
were in foreclosure.

Why did the

housing bubble
get out of control in many heavily
Hispanic regions?

Because many important people wanted it to.

A widely overlooked reason behind this economic
disaster is that the politicians, real estate interests,
and financiers told the public that they weren`t
speculating wildly on the insane hope of home prices
rising forever. No, they were actually

helping minorities
share in the American Dream!

A percipient April 13, 2007 article in the nonprofit
San Diego Voice by Kelly Bennett,

Foreclosure Wave Said to Hit Latinos Hard
,

reported:

"This decade, a national
push to increase homeownership among Latinos coincided
with one of the longest, most dramatic periods of
appreciation for home values. Latino mortgage and real
estate professionals put forth aggressive outreach
campaigns in the community, while lenders reached out to
huge, untapped sections of the market by loosening
qualifying standards. …

"Because a widened
lending gate allowed many more Latinos and other
minorities into the housing market than had entered
previously, lawmakers and special interest groups
championed the lenders` efforts to extend homeownership
to those groups."

It`s important to understand that practically every
politician who comes up through the ranks from state and
local government

owes favors to real estate interests.
(Consider how
now-convicted slumlord

Tony Rezko
sponsored

Barack Obama`s career.
)

 Why? Because developers are

more interested in local and state politics
than
anybody else is. (C`mon, admit it, local politics seem
kind of boring.) They`re interested because they have
financial interests in

land use decisions
.

Politicians control developers, so developers control
politicians.

Thus, politicians, developers, and
financial institutions
have developed a vast
interlocking system of doing subtle favors for each
other by leaning on the lending process. It all works
smoothly for years at a time with nobody on the outside
the wiser … until there`s a downturn. Suddenly, the
public is left holding the bag, paying off both directly
and through enduring stagflation.

Diversity served as the perfect politically correct
excuse for rampant irresponsibility. It gave insiders a
rationale for putting their thumb on the scales of the
vast lending market in the

sacred name of anti-discrimination.
Who dared be so
racist as to argue that blacks and Hispanics

should get fewer loans
per capita
because they were less likely
to pay them back? That`s

"the soft bigotry of low expectations."

In a June 22 article in Taki`s Magazine,

The Diversity Recession
, I recounted a few of
the countless examples of politicians from Jimmy Carter
to

George W. Bush
pushing for more lending to
"underserved"
minorities. The Bush Administration,
for instance, raised the quota for Fannie Mae and
Freddie Mac to 39 percent for "underserved"
regions.

Perhaps worse than quotas, though, was the attack on
traditional lending standards in the name of expanding
minority homeownership. We`ve seen repeatedly over the
decades that, bad as they obviously are, racial quotas
are often less debilitating than eliminating tests
altogether due to their

"disparate impact."
At least with a quota you select the best
people from each race (although,

by definition,
not the best overall). When you junk
the standards altogether, however, you end up taking at
random from all races.

For example, in January 1981 the outgoing Carter
Administration threw out the federal

civil service exam
, the exquisitely validated PACE,
because

blacks and Hispanics didn`t perform as well on it on
average.
Since then, federal employees have been
hired mostly on the basis of resumes and interviews,
which explains a lot about the decline in the competence
of the federal government.

Likewise, the mortgage industry once had traditional
tests of creditworthiness, such as being able to afford
a substantial

down payment.
Being able to put cash on the
barrelhead provided tangible evidence that you weren`t
just making up the numbers you were putting down on your
loan application.

But the politicians encouraged lenders to speculate
on dubious borrowers,

all in the name of racial equality.
For example,
MSNBC stated in a March 27, 2004 report subtitled "President
wants to add new minority home owners
"
that Bush
was putting the Presidential imprimatur on the
no-money-down mortgages that so exacerbated the bubble:

"He also proposes to make
zero down-payment loans available to first-time buyers
whose mortgages are guaranteed by the Federal Housing
Administration."

Similarly, "undocumented
workers
"
and

undocumented mortgages
(colloquially known as
liar loans
) tend to go together.

The mortgage brokers were

notoriously abusive,
putting innumerate clients into
teaser mortgages that reset the monthly payment sharply
upward after two years. What`s seldom mentioned, though,
is that Hispanics generally turned to Hispanic mortgage
brokers. Bennett observed:

"Among minorities, the
pull toward using an agent or a loan broker from the
same minority group is strong… `People tend to go with a
loan broker or officer that they know,` said Gabe del
Rio, director of homeownership for

Community HousingWorks
, a nonprofit housing
organization in San Diego. `Everybody`s got a cousin or
a friend who`s in the business. And, especially in
ethnic communities, there`s a propensity to stay with
someone you know.`

"But sometimes, the
broker the borrowers know is also the broker who takes
advantage of them, abusing the trust of their client by
tacking on fees or inadequately explaining the terms of
the contract they`re signing."


Spanish-language radio stations
are now

hurting badly b
ecause so much of their advertising
came from Spanish-speaking mortgage brokers and real
estate agents.

An article in today`s San Diego Union-Tribune,

Busted neighborhoods: Foreclosures ravage parts of
county where many used risky loans
, by Lori
Weisberg and Emmet Pierce confirms Bennett`s findings
from 15 months ago:

“`Any place where there`s
a high density of lower-income and less-educated
Hispanics and African-Americans you`ll see a larger
decline in values because many of these families were
put into subprime loans they didn`t understand and
shouldn`t have qualified for, more so than in other ZIP
codes,` said Clifford Arellano, a real estate broker
whose office is in Barrio Logan.

Not surprisingly, illegal immigration has played a
big role in bubble and bust:

"A large share of those
who took out risky loans were recent immigrants who
spoke little English, said Gabe del Rio, vice president
of lending and homeownership at Community HousingWorks,
a nonprofit developer of affordable housing. Many who
have come to his agency for counseling say

they didn`t understand the terms of their loans.
"

The homeowners who have been meeting their
obligations are suffering collateral damage:

"Residents forced to
vacate their homes leave a void in the neighborhood,
said Enrique Gandarilla, executive director of the City
Heights Business Association…  `It`s only getting worse.
A lot of loans were made to people who never should have
gotten them. The impact on the community is terrible.
You have vandalism. You have deterioration in values.
You see homes that now are targeted by

graffiti
.`"

The article sums up what will be the verdict of
history on America in this decade:

"Typically, a severe
housing slump is preceded by a recession and job losses,
but that is not the case this time around, [
John
Karevoll of DataQuick] said. `So now all us number
crunchers are scratching our heads. This wasn`t caused
by a recession, but by

stupidity
.`"

But it`s not just the fault of stupid borrowers,
although a national policy of
importing more of them by not enforcing the immigration
laws
clearly worsened the problem.

Stupidity extended all the way up the hierarchy—and
that was intentional.

Political correctness makes people stupid, so
diversity provided the ideal cover story for financial
crime of the century.