Remember that housing/derivatives/credit crisis that almost destroyed the global economy? Some of the people whose ideas helped to create it are still busy trying to duck responsibility for what they did. (This is true for what occurred both before and after the Great Recession).
The radical deregulation of derivatives, the waiving of leverage limits, the separation of depository and investing banks, were all part of a 30 year long effort to let Wall Street self regulate. It was a miserable failure, and the ideas behind have been, for the most part, discredited.
But that has not stopped the continual attempt to deny reality and rewrite the history of what occurred. We’ve seen this from people ranging from the rational to the batshit crazy.
Take for example Edward Pinto, who in a frenzy to blame anyone but the banks has tried to pin the crisis on: Acorn, the FHA, Community Reinvestment Act, (aka the CRA), Fannie Mae and Freddie Mac. There is no intellectual consistency or honesty here, just an ideologicial flailing he seems to have learned from his AEI colleague, Peter Wallison.
The cognitive dissonance caused by the collision between facts and previously held ideas, beliefs, or ideologies overwhelms the brain. The dissonance occurs when the facts are discarded in order to preserve the newly disproven belief system. This leads to some genuinely odd outcomes as reality gets discarded in order to protect a narrative which become increasingly irrational.
Which brings me to this column today: ‘Mortgage Nanny’ Added to Lender Job Description. I usually love Caroline Baum’s approach to shredding bad thinking. We both agree that the latest bank regulations are not helpful and won’t prevent a new crisis. Indeed, the banks, via their ownership of congress, made sure to neuter most of the new rules.
Where she gets caught in a trap today, however, is this bit of AEI silliness:
“And here I thought it was the borrower’s job to determine if he has the means to repay a loan.”
It used to be. Homebuyers would look at their income, assets, monthly cash flow, job security, debt outstanding and things like that to determine if the family could afford to own a home. The lender’s job was to perform adequate due diligence and protect against loss by requiring a down payment.
No. That is Wrong. It so wrong on so many many levels that I have to stop what I was going to be doing this morning and respond to this silliness instead:
1. Banks — not borrowers — are the ones who actually make the loan decision.
2. Banks have access to capital. Depositors give banks money (FDIC helps that) and banks also can tap the Fed for even more capital. The banks have obligation to all of these entities to adhere to good lending standards.
3. It is the banks job to determine credit worthiness. THAT IS WHAT THEY DO. If they do not care to be bother to make this determination, then perhaps they should consider something other than the money lending business as a vocation.
Left to themselves, most humans would borrow much more money than they can reasonably handle. This is not a political statement, it is an observation about Human Nature.
Banks and other credit sources know this — that is why they review income and FICO scores and past payment history and debt load and employment record and tax returns. It is to verify the credit worthiness of the applicant.
No, this isn’t an exercise in due diligence — “Hey, figure out what you can afford, and we will check your work for you.” That is not what maintaining Lending Standards means.
This is why the no doc, no credit check, liar loans were destined to fail.
To reduce what banks do to a mere “due diligence” exercise in validating the home owners decision is not only wrong, it may be the single silliest thing Ms. Baum has ever written.
Further, the column was caught in a classic false equivalency. Ms. Baum could not help herself to bring up the usual bugaboos: “Without re-litigating the cause of the housing bubble — greedy bankers or government housing policy” — that’s because that debate is over, and the Peter Wallisons and Ed Pintos of the world overwhelmingly lost it.
The only reason to go back to that debate — as was done repeatedly in the column — is because the outcome of that disagrees with your ideology. The statement “Government housing policies caused the crisis” is enormously useful, however, as it signifies cognitive dissonance on the part of its proponent.
Wallison: Still Wrong About Genesis of Housing Crisis (July 2007)
Dogma Versus Reality (December 2010)
‘Mortgage Nanny’ Added to Lender Job Description
Bloomberg January 16, 2013