Senator Warren’s Subprime Demagoguery

Unintended Consequences
Unintended Consequences

[mc_name name=’Sen. Elizabeth Warren (D-MA)’ chamber=’senate’ mcid=’W000817′ ] may have been the least qualified professor to teach at Harvard University since Dr. Agassiz was measuring skulls to determine the validity of phrenological inquiries about racial intelligence. That; or she is the least honest woman to hold a powerful position in American politics. Her latest assault on American interracial comity comes hot on the heels of riots in St. Louis, Berkeley, and New York City over police shootings of African-American suspects. Like the old Chicago Outfit getting cut out of a Volstead Act Era illicit rum shipment; Senator Warren sees the Social Justice Ship sailing away from her. She can’t afford to be left out of the outrage racket. Thus she has to prove she can throw Caucasians (other than 31/32 of herself) under the bus as well as any other leading Democrat. Hence she equates the default rates of subprime mortgages during the recent housing crisis with you guessed it…..!RACISM!

You see Lieawatha Liz was having a get-together with 50 people who just so happen to be rich enough and Liberal enough to fund that run for the White House as a far left Progressive that she swears up and down that she isn’t considering. Politico pinkie-swears that she who goes by the ancient tribal honorific “Dances With Soros” wasn’t, you know, fundraising. She was just spewing demagogy to stay in form for the well of the US Senate and uncorked the following observations below.

She ascribed some of the problem to a worsening climate of economic opportunity for African-Americans than existed even a decade ago, according to attendees. And she said that the mortgage crisis affected black and Hispanic families more heavily, describing those groups as being “targeted.”

To understand the maliciousness of this particular lie, we need to review some recent American economic history. It was 1999, the economy was in boom mode and HUD was out there making sure these gains were equitably distributed in the interests of social justice. The New York Times describes the gains in minority home ownership made during this time below.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent. In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

This was good, but not good enough. Their eyes were still on the prize. Time, space and economic reality would have to bend in the name of social justice! According to a study conducted San Jose State University entitled “The Nature and the Origin of the Subprime Mortgage Crisis.” here’s how the mortgage lending industry got changed to meet the needs of social justice.

In the 1990’s under the administration of Franklin Raines, a Clinton Administration appointee, Fannie Mae began to demand that the lending institutions that it dealt with prove that they were not redlining. This meant that the lending institutions would have to fulfill a quota of minority mortgage lending. This in turn meant that the lending agencies would have to lower their standards in terms of such things as down payments and the required incomes. These subprime borrowers would be charged a higher interest rate. Having put the lending agencies into the position of granting subprime mortgages Fannie Mae then had to accept lower standards in the mortgages it purchased.

This, of course, led to a predictably consequent outbreak of massive moral hazard.

Because Fannie Mae and Freddie Mac made a market for subprime mortgages the lenders did not have to worry about of the soundness of the mortgage contract they wrote. Thus the lenders could write the mortgages as adjustable interest rate mortgages knowing full well that an upturn in the interest rates could easily throw the borrower into insolvency. For example, when the interest rate is 6 percent the mortgage payment for a 30-year $200,000 mortgage is $1199 per month. If the interest rate goes up to 7 percent the mortgage payment would increase by $131 per month, an 11 percent increase. For many of the subprime borrowers living on the edge of insolvency this would be enough to push them over the edge. The guilt for the subprime mortgage financial crisis lies both with the lenders who knowingly put borrowers into booby trapped mortgages and the management of Fannie Mae and Freddie Mac for making a market for such booby trapped mortgages thus giving the lenders the incentive for writing them.

The two takeaways here are as follows.
1) Government intervention demanded that more mortgages be cut for minority borrowers irrespective of whether they were credit-worthy. (So evil, White, Southern Presidents like James Earl Carter* and William Jefferson Clinton** really cracked the whip on flogging those subprime loans.)
2) Fannie-Mae offered to buy the risk from the originators so that it would be painless to ignore economic reality at the street level. This created a systemic anomaly that eventually munched the housing market.***

Now one could argue that Presidents Carter and Clinton were attempting to make America colorblind and expand economic opportunity. That wouldn’t change certain immutable economic facts. People with less wealth tend to have trouble paying bills. Hispanic and African-American families have historically lagged behind other racial groups in net worth and disposable income. Credit risks are inversely-proportional to personal wealth regardless of individual merit or personal honesty. Poor people, even very nice and decent poor people, are more likely to get behind on a mortgage when economic times turn evil.

So yes, Senator Warren, minorities were adversely impacted by the economic crash. They were inversely impacted because under the auspices of social justice they were offered mortgages at a rate of credit risk that would have otherwise led to them being rejected. When the economic cycle did what economic cycles eventually do; they were disproportionately at risk. As a result, they were disproportionally hammered.

But no, Senator Lieawatha, they were not targeted. They were not singled out for malicious punishment in a way that would get Ndamukong Suh ejected from an NFL game. People with genuinely beneficent intentions misunderstood the fundamental rules of economics and thereby inflicted a disparate impact on traditionally impoverished minority populations. It’s not like either Franklin Raines or Eric Holder walks around hating black people. So lay off the inciting racial smoke signals and learn some economics.

*-The Community Reinvestment Act that gave HUD the authority to end “Redlining” was signed in 1977.

**-Put Franklin Raines in charge of Fannie Mae.

***-And that probably deserves a whole ‘nother post in and of itself.