I have always had a certain unquenchable lust for the lost works of Sophocles, member of The Three, and of whom only seven works survive the looting of the Library of Alexandria- though we have cause to believe he crafted many, many more. I like to think some nimble librarian, or patron of the library stole away to the shelf where his works were kept and slipped away with just as many (seven) as he could fit in the folds of his clothes. But in this, I am likely a romantic.
His most recognized works, marvelous as they are, will forever be incomplete as they represent single samples of his four volume treatments. Before the world of finance, when such things were more apt to cause me wonder, I thought after what other commentary on sovereignty, The State and power we might have seen from this great tragedian, if only his other works were available to us. Freud notwithstanding, Oedipus Rex is, after all, primarily about The State, power, executive arrogance, willful blindness and the consequences thereof. But, and this is key, I think most of all, Oedipus Rex is about a total disregard for the inevitability of reality, and, it is this point, as it happens, that leads me to my present subject.
I find it intensely interesting that a number of commentators have alternately attempted to blame and exonerate the Community Reinvestment Act (hereinafter the "CRA") for complicity in the alarmingly complete inflation of the real estate bubble and, in effect, the current credit crisis. It takes only a few readings of the most prominent (or at least the most prolific) of these authors to discern a woefully inadequate coverage of the context and history of that act, its predecessors, and the regime of mortgage regulation that they spawned. This particular perspective, that is to say the stubborn focus on a single piece of legislation in the midst of a vast and interlocking series of statutes, rules and regulations ceaselessly built up over three decades, permits the easy (and, indeed, somewhat smug) dismissal of the CRA with the continually repeated line: "The foreclosure statistics do not support such an argument."
Early on in the development of my thinking in this area I wondered why foreclosure statistics should necessarily falsify the thesis that the CRA (or the twisted, multi-branched family of mortgage regulation that preceded and accompanied it) bears some of the responsibility for the present malaise. We do not, after all, have to write a mortgage down to levels even remotely near salvage cost to see tremendous losses once it has been securitized. This becomes particularly obvious when we remember that, prior to about eighteen months ago, mortgage backed securities were generally regarded with Madoff-like confidence. Any break from the norm would easily cause a panic. Could, therefore, a pool of mortgages suffer from such a serious confidence blow that their value would be written down to pennies on the dollar without the consummate spike in foreclosure rates? To what extent would pools of low FICO loans be written down independent of any reference to foreclosure rates? Surely, wise investors will use the only real metric they have for the cash flow prospects of these assets: the borrowers' ability to repay, no? In this connection, insofar as every piece of historical data about foreclosures seems to have been fairly useless in averting the present crash, how likely are current or past foreclosure figures to have any impact on careful students of this market? None, I would argue, where smart players are looking to guess where the next spike in foreclosures will hit.
This question only served as the seed for a different question: How did we come to find ourselves in the molasses-like regulatory pool in which we presently swim? What came before during and after Fannie and Freddie? When did it become so routinely fashionable to tamper with the mortgage market that, even when shown the facts as plain as day, otherwise bright and skeptical minds refuse to see any issue with an entirely backwards incentive and capital structure developed over thirty years by the legislature of the United States? Alarmingly, there was very little work on this topic to be found. That too made me curious.
It turns out it all began in the 1960s, with a series of slow changes that, typical of the beginnings of massive upheavals, passed unnoticed. What followed in the 1970s and particularly the 1980s was a literal hockey-stick curve of mortgage regulation, legislation, incentives, grant programs and the seeds of a centralized financial-industrial lending policy that brought us to where we are today. Make no mistake, there is no simple cause for the present crisis. There were, however, simple seeds.
To be certain there is much blame to go around. This author will attempt no defense of the various "big banks" that participated in the fiasco that is our current real estate market. Be this as it may, it bears mentioning that no one was complaining fifteen or even twenty years ago, when the trouble started. Banks are only the most visible and current culprits. Their bad tidings, however, would not hardly be interesting but for the worst laid plans carved laboriously out of the wood of populist pandering for more than twenty years. Unfortunately, now the flames of said pandering have been fanned, and today apparently we think that forcing Citi to break their $50 million contract for delivery of a Dassault Falcon 7X in some kind of pathetic retroactive spanking delivered by this nation's chief executive behind the Congressional woodshed, makes some kind a difference. (I suppose, however, Citi could at least have bought American and acquired a Gulfstream).
If you are looking for big catalysts, and most astute Going Private readers are, there are a number of fairly convincing candidates. To understand how big, however, one must understand the nature of the environment before The Community Reinvestment Act. What no one bothers to mention today is that the CRA broke the firewall of a long trend in the regulation of mortgage lending in the United States. Prior to that act, legislation like Title VIII of the Civil Rights Act, the Fair Housing Act of 1968 and the Home Mortgage Disclosure Act of 1975 focused on the prohibition of rank discrimination and used disclosure as a means to impose fairness on the mortgage market.
Without a doubt, these were areas that needed addressing, and for the most part, I find the means these statutes employ reasonable and appropriate. In fact, it doesn't take long to see that the Home Mortgage Disclosure Act of 1975 looks nothing like legislation when viewed through today's frosty glass. Consider:
The Congress finds that some depository institutions have sometimes contributed to the decline of certain geographic areas by their failure pursuant to their chartering responsibilities to provide adequate home financing to qualified applicants on reasonable terms and conditions.
The purpose of this title is to provide the citizens and public officials of the United States with sufficient information to enable them to determine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located and to assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment. (12 USC § 2801).
The act continues:
(1) Each depository institution which has a home office or branch office located within a primary metropolitan statistical area... shall compile and make available, in accordance with regulations of the Board, to the public for inspection and copying at the home office, and at least one branch office within each primary metropolitan statistical area... in which the depository institution has an office the number and total dollar amount of mortgage loans which were (A) originated (or for which the institution received completed applications), or (B) purchased by that institution during each fiscal year (beginning with the last full fiscal year of that institution which immediately preceded the effective date of this title).
(2) The information required to be maintained and made available under paragraph (1) shall also be itemized in order to clearly and conspicuously disclose the following:
(A) The number and dollar amount for each item referred to in paragraph (1), by census tracts, for mortgage loans secured by property....
(B) The number and dollar amount for each item referred to in paragraph (1) for all such mortgage loans which are secured by property....
(Much detail about statistical area definition elided)
The act goes on, in typical legislative fashion, to describe in detail at once great and burdensome, the various definitions and requirements and accessibility issues surrounding these disclosures.
It is pretty hard for any libertarian or otherwise free-market-disposed party to argue against this sort of thing. Perhaps one might make the argument that market information is being disclosed to competitors, but really, and particularly in the context of 1975, this is a difficult position to cling to without a certain amount of self-deception.
I also want to highlight part of the finding of the Congress used to support the passage of this legislation. Specifically:
The Congress finds that some depository institutions have sometimes contributed to the decline of certain geographic areas by their failure pursuant to their chartering responsibilities to provide adequate home financing to qualified applicants on reasonable terms and conditions. (Emphasis mine).
Everything you ever needed to enforce equality in lending is contained in this simple description. I submit that, despite the fact that the "Finding and Purposes" section of most legislation is fluff, a lot of thought went into this particular passage. Or, alternatively, the importance of this sort of thing simply occurred more readily to the Congresses of old- 1975 seems very old to me, your mileage may vary.
Consider the components here:
1. Adequate home financing...
2. ...to qualified applicants...
3. ...on reasonable terms and conditions.
This is pretty reasonable stuff, really. There is a particular genius in public disclosure and transparency statutes, sunlight being the best disinfectant and all. It recalls a period, some years before my birth, where there was a sort of basic trust that, once exposed to the hot glare of public scrutiny, market actors would clean up their act. Government had to do little.
I think this very artful and elegant. Unfortunately, we have come a long way since 1975.
Enforcement for the act was provided for directly in the statute. To wit:
For the purpose of the exercise by any agency referred to in subsection (b) of its powers under any Act referred to in that subsection, a violation of any requirement imposed under this title shall be deemed to be a violation of a requirement imposed under that Act. In addition to its powers under any provision of law specifically referred to in subsection (b), each of the agencies referred to in that subsection may exercise, for the purpose of enforcing compliance with any requirement imposed under this title, any other authority conferred on it by law. (12 USC § 2807).
Responsibility for promulgating regulations related to the act ultimately fell to the Federal Reserve Board.
Again, this is pretty reasonable stuff.
There are some other interesting provisions, including the requirement of an annual report to Congress on the utility of the effort (12 USC § 2801) and a requirement for the aggregation of the data (12 USC § 2809).
In essence, the statute was a fairly obscure reporting statute known intimately only to the growing breed of back office administrators we would today recognize as "Compliance Professionals." Its effect was less obscure. While the average man on the street might have been unaware of its existence, interested parties, in particular activists concerned with civil rights, now had the tools necessary to crunch data and root out discrimination in effect (if not discrimination in intent). The phrase "The data in the study come from the Home Mortgage Disclosure Act" is so rampant in the relevant literature today it seems obvious what impact the statute has had. A quick cross-reference search of the "Home Mortgage Disclosure Act" and the name of any prominent civil rights leader makes it obvious that the data liberated by the act became the go-to ammunition for taking on lenders.
In this connection, there is no doubt that the practice of "redlining" (named for the unfortunate map fallen into the hands of investigators that outlined in red the areas to which a financial institution which shall remain nameless would not lend under any circumstances) was a serious issue at the time. Ironically, however, we have come full circle and then some. Cases like Hargraves v. Capital City Mortgage Corp. (140 F. Supp.2d 7 (D.D.C. 2000)) have successfully argued against "reverse redlining," wherein courts have held that artificially pumping funds into a given area on the basis of race (perhaps with the expectation of forcing foreclosure) is, in fact, "predatory lending" and just as bad. Of course, we have the Home Ownership and Equity Protection Act (15 U.S.C. § 1639) to eliminate this practice. No word yet on its success.
One cannot help but feel a little sorry for the General Counsel of a mortgage lender at this point, situated as she is between a legislative rock and a judicial hard place. This quote from Hargraves is priceless:
Redlining creates the market conditions in which reverse redlining thrives. It should come as no surprise that the United States recently settled a case charging Chevy Chase Federal Savings Bank with redlining the exact areas that Defendants are now accused of targeting for predatory lending (140 F. Supp.2d 7 (D.D.C. 2000)).
Observant Going Private readers may point out that once you legitimize the practice of legislative underwriting, the regulatory world and the slings and arrows of the tide of public opinion get intensely confusing, and fraud works easily in both directions. An astute practitioner once told me "fraud expands to fill the envelope," meaning that such schemes are ever-present and, like expanding gas, always pushing gently to discover the limits of their freedom. Another friend of Going Private, a former counter-narcotics analyst, put it much more succinctly. "We are just squeezing the Jell-O."
I will hardly argue that Hargraves was wrongly decided. I merely note that the dilemma Congress has created solves few of the issues of the day and creates parallel problems just as bad, if not worse. Rather, most certainly worse.
But, context being critical to the discussion, let us dial the Wayback Machine to 1989. 1989-1990 was an amazingly prolific period for federal intervention in housing and mortgage matters. Right next to the Global Warming Prevention Act of 1989 even the most cursory of searches returns a literal spew of bills including:
The HUD Reform Act of 1989: To ensure competitiveness in procedures for approving applications for housing assistance and to provide for refinancing of mortgages, loans, and advances of credit under the lower income homeownership program of section 235 of the National Housing Act.
The Homebuyers and Renters Relief Act of 1989: To increase the affordability of homeownership for first-time homebuyers and promote the development of low-income rental housing.
The Housing Opportunity Zones Act of 1990: To remove legislative and administrative barriers to the production of new and substantially rehabilitated housing that is affordable to lower-, moderate-, and middle-income families.
The Department of Housing and Urban Development Accountability Act of 1989: To prevent abuses of the process for selection for housing assistance under programs administered by the Secretary of Housing and Urban Development.
The Community Housing Investment Partnership Act.
The Recycling of Existing Assets for Cost-Effective Housing Act of 1989: To authorize the Secretary of Housing and Urban Development to make grants to States to establish revolving funds to assist low- and moderate-income homebuyers and renters.
The Low-Income Housing Credit Act of 1989: To amend the Internal Revenue Code of 1986 to improve the effectiveness of the low-income housing credit.
The Low Income Housing Preservation Act of 1989.
The Housing Affordability Act.
Homeownership and Opportunity for People Everywhere Act of 1990 (The "HOPE" Act).
Really, who could vote against this? Consider:
"There are authorized to be appropriated for grants under this title $96,000,000 for fiscal year 1991, $260,000,000 for fiscal year 1992, and $400,000,000 for fiscal year 1993. Sums appropriated pursuant to this subsection shall remain available until expended."
The more observant of Going Private readers will expect the re-introduction of the HOPE Act any day now, submitted, no doubt, concurrently with the Community Housing Affordability and No Gains to Equity Act (the "CHANGE" Act).
Fair Lending Enforcement Act of 1990: To amend the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act.
The Housing and Community Development Act of 1989.
The Housing and Community Development Act of 1990.
The Community Housing Investment Partnership Act.
The Homeownership Assistance Act of 1989: To authorize the insurance of certain mortgages for first-time homebuyers, and for other purposes.
The Home Mortgage Overcharge Prevention Act of 1989: To amend the National Housing Act to limit the amount of interest paid by a homebuyer upon the prepayment of a mortgage insured under the Department of Housing and Urban Development single-family mortgage insurance program.
The Neighborhood Mortgage Lenders Accountability Act: If any examination of an approved mortgagee by the Secretary (including an examination under subsection (d)) discloses that the mortgagee has failed, in the determination of the Secretary, to meet the lending needs of the community served by the mortgage (as determined by the Secretary under subsection (a)(1)) with respect to residential housing lending, the Secretary may, in the discretion of the Secretary, require that the mortgagee, for continued status as an approved mortgagee for purposes of this Act, develop and submit a plan for remedying such deficiencies.
This bill should ring some alarm bells:
The First-Time Homebuyers Assistance Act of 1989: To authorize the Secretary of Housing and Urban Development to establish a demonstration program to insure mortgages with no downpayment for moderate-income first-time homebuying families.
But, I think it is this bill will likely be the favorite of the typically irreverent Going Private reader:
The Homeownership Through Sweat Equity Act of 1989: To authorize the Secretary of Housing and Urban Development to carry out a demonstration program of providing grants to housing development agencies to acquire abandoned and vacant housing for rehabilitation and rehabitation by homeless and low-income families.
And finally (take note here):
The Fair Lending Oversight and Enforcement Act of 1989: To require lenders to compile and make available mortgage loan and commercial loan information necessary to assess compliance with nondiscrimination requirements.
Granted, most of these examples are taken from the House that, by design, is intended to literally spew forth legislation to later be picked apart and duly considered (and probably rejected) by the slower, sager, more above it all Senate. Even so, I feel like I might be able to discern a pattern in the legislation habits of the 101st Congress. 380 bills from this period contain the word "mortgage."
Why the most basic search of the Congressional Record cannot be made evidence of the almost pathological obsession of the United States Congress with intervening in the mortgage market is somewhat beyond me. How anyone can claim this environment even remotely proximate enough to "free markets" to use as leverage the current crisis in their indictment of capital markets literally tries the patience. Also beyond me is the reason the CRA has become the condicio sine qua non of the argument. It is beyond daft to argue, in light of these facts, that the present market ills are the sole responsibility of any given administration or any given party. The simple fact is that in a rare, multi-decade fit of bi-partisan cohesion, Congress has been digi-copulating the mortgage market for so long and with such enthusiasm that, Plato-like, it stopped occurring to anyone to wonder if that was really such a good idea. Be this as it may, waking up every morning to be crowned with a baseball bat, familiar as it may be, still results in a headache.
What is insidious about the entire matter, and as is typical of the most destructive legislation, the caustic cloud of mortgage assistance masks itself under the guise of righteous and "fair" redistribution goals. It is the nature of the beast that any political animal arguing against these, no matter what the logic, will find herself lonely and out of work.
...to be continued.
[Art Credit: Charles François Jalabeat, Antigone Leads Oedipus Out of Thebes (1849), Musée des Beaux Arts, Marseilles]