WashPost Blames HUD for Housing/Credit Crisis

In a story this morning, the Washington Post picks up a meme circulating amongst conservative thinkers, and gives it front page treatment:

"In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

How much did it contribute? What percentage of total mortgage lending was related to the U.S. Department of Housing and Urban Development  policies?

The article notes that a "very high concentration of these loans [are] in low-income and African American neighborhoods" — how does this relate to the massive waves of foreclosures in Florida, Southern California and Las Vegas ? 

What is so odd about the article is that the headline and first few paragraphs bely what comes after:

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers’ qualifications.

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number. In 2001, HUD researchers warned of high foreclosure rates among subprime loans.

Did HUD add to the problem — or were they ahead of the curve in warning about them?

Numerous conservative commentators previously have sought to blame the credit crisis and housing collapse in part on the Community Reinvestment Act, a relatively small program that had nothing to do with the abdication of good lending practices amongst financial institutions. Now, we see an attempt to paint HUD as the villain.

My problem with this meme is one of context: It ignores the reality of lending practices that had nothing to do with either the CRA or HUD at all. For example, the following loan types are independent of HUD, and were the primary cause of the current foreclosure wave and the root of the current credit crisis.

• No Income, no job, and no assets loans (NINJA)
• 100% Loan-to-Value (LTV) Mortgages
• Piggyback Mortgages (simultaneous 1st & 2nd mortgages)
• No Documentation, No Income Verification (LIAR loans)
• 0% down payments
• ARM Mortgages with high resets
• Negative Amortization Mortgages
• Interest Only, No Principal Repayment Mortgages

The current housing and credit crises was caused by many factors, but the primary ones have to be the Greenspan Federal Reserve which had abdicated its regulatory responsibility to supervise banks, and a  banking industry which forgot what lending standards were for. The securitization process, corrupt ratings agencies, and a lack of Wall Street due diligence are the next level. A false belief that Housing Prices never decline also gets some blame.  At the real estate level, Appraisal fraud,  buyer foolishness, and financial ignorance also contributed.

But HUD as a primary cause of the crisis? Puh-leeze!

The cognitive dissonance caused by the current Market failure — that’s right, I wrote Market failure — is leading to some revisionist history, and wild flailing about, in a futile attempt to ignore reality.

I’ll have more on this failure of Markets later . . .

>

Source:
How HUD Mortgage Policy Fed The Crisis
Carol D. Leonnig
Washington Post Staff,  June 10, 2008; A01
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html

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What's been said:

Discussions found on the web:
  1. IdahoSpud commented on Jun 11

    “market failure”… kinda rolls off the tongue doesn’t it? :)

  2. Jim Haygood commented on Jun 11

    Writing in The Atlantic, Dr. Robert Schiller — who coined the term “irrational exuberance” in 1996 — describes the fundamental cause of the housing Bubble as “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena.”

    http://www.theatlantic.com/doc/200807/housing

    But of course, such social phenomena are far more likely to erupt in a climate of easy credit and financial innovation. Thus my rule of thumb, that market valuations are driven half by fundamentals, and half by sentiment (mass psychology).

    Whatever the truth about HUD’s influence on the housing Bubble (and I agree that it was minor), one thing is for sure. Up until late 2006, the source of the cited item — the Washington Post — carried a steady drumbeat of articles about runaway real estate prices, condo speculation, eye-popping profits from flipping houses, etc. etc. In heavy-breathing, “act now or miss the boat” tones, the WaPo quoted both “experts” and amateur speculators who told readers what they wanted to hear — that leveraged real estate speculation was the lazy, safe way to easy 30% annual gains, as far as the eye could see.

    Now, of course, the WaPo is playing the wailing violin of woe along with the rest of the MSM. And eventually, when they declare the situation “hopeless,” it will be safe to buy again. But during the critical years of Bubble-blowing, the WaPo served as a flawless megaphone for the Bubble-blowing shills. I don’t recall it publishing a single caveat that prices might be overvalued, or that risk might be rising. That wasn’t journalism; it was an ongoing advertorial to sell display ads and classifieds in the real estate section.

  3. SINGER commented on Jun 11

    i thought it was the Aliens that caused the housing decline?

  4. Rentin in Mass commented on Jun 11

    “revisionist history, and wild flailing about, in a futile attempt to ignore reality.”

    Good summary. I think we’re in for a lot of that in the coming years. It’s part of the nature of idealogues.

  5. CaptiousNut commented on Jun 11

    When the historical size and consequences of *market failure* are compared to the record of GOVERNMENT FAILURE…discussing the former seems thoroughly juvenille.

  6. tranchefoot commented on Jun 11

    Basically, don’t let the truth get in the way of a good rant, eh, CN?

  7. Dave commented on Jun 11

    How about the Bush tax cuts? The sudden windfall from the removal of capital gains taxes created a larger ability and need to invest capital in the marketplace, leading to the creation of new mortgage products that made no sense. I say that unchecked investment, investments for the sake of investments without the creation of a worthwhile product helped create the problem.

  8. wally commented on Jun 11

    The problem is price.

  9. Jessica commented on Jun 11

    Barry,
    I am grateful for you taking up your cudgel on this one.
    I would contend that one key factor behind this bubble was the exemption of all those with real power from accountability. The very fact that WaPo would think it is in a position to throw the first stone has more to do with all this than some folks nearer to the bottom of the ladder trying to hop on and climb like everyone else.
    There are strong parallels with Iraq here, in the sense that those who made the main mistakes are still in power and are more interested in protecting themselves from appropriate accountability than in solving the problem.

  10. tomboy commented on Jun 11

    Pretty clearly the Clinton appointees running HUD in 2000 were different from that schmuck Alphonso Jackson that Bush appointed.

    Jackson was at the forefront of the “record number of american homeowners meme” Bush was so fond of.

  11. Marcus Aurelius commented on Jun 11

    As a middle aged native Washingtonian, I can remember when the Post was a newspaper. Nostalgia is melancholy.

  12. brasil commented on Jun 11

    Jim Haygood..your posts are always excellent ..thanks

  13. Neal commented on Jun 11

    Fisrt hammered for not being loose enough with requirements, then hammered with the charge of being too loose with requirements.

    Get into office by claiming the government is incompetent, then appoint incompetent fools, encourage back-dealing, rule breaking and corruption and, voila!–government is incompetent.

    Case made, mission accomplished!!

  14. Steve Barry commented on Jun 11

    A person asked me last night how I knew the Fed was too easy with the money supply…I thought about it and said I don’t have money supply figures in my head…but if gold rockets to 900, oil goes to 135 and the dollar index drops 40%, if they aren’t “easy” then they at least should be much tighter. The housing bubble ties in…too much money and the Fed turned the other way on lending standards and banking regulation. The Fed was the enabler…blaming HUD is akin to blaming every rinky-dink sub-prime lender or the borrowers themselves.

  15. JIMB commented on Jun 11

    Barry – It can’t be “market failure” if the Fed was printing the money … the market certainly would have been using a different money than the dollar if it had the choice … Witness the runup in the contra-dollar play: oil.

    Lets get back to citizens having the right to store their saving in any good of their choosing and not having their hard-earned capital churned away by being forced to use goverment money. Let’s go back to free market money with no capital gains tax on monetary transactions.

    With market money, I could just keep using it and let the government churn itself into oblivion until it decided to behave and issue currency that is sound. It used to be that way …

  16. TDL commented on Jun 11

    Barry,
    How could it be “market failure” when massive government intervention was involved?

    Regards,
    TDL

  17. Arthur commented on Jun 11

    Nice one, Barry.

    Wasn’t Larry K bleating this revisionist stuff a while back when you were a “guest” on his show? It was sickening and yet deeply revealing; I’m still in awe of that mendacity posing as imformed opinion.
    A

  18. michael schumacher commented on Jun 11

    “the ownership society”

    It’s a bitch when it turns on ya…IMO they were a year early on almost every part of the puzzle…this is just one part of it.

    HUD (and it’s fantastically stupid sec.) is/was just another form of playing the enabler.

    No home sales=no “financial product creation”=no fee collection

    All part of a plan unfortunately..

    Ciao
    MS

  19. michael schumacher commented on Jun 11

    OT:

    You know those shares we sold you at 28 and guaranteed a return on??? Well we need to talk about that-

    Erin Callan

    Ciao
    MS

  20. Adam Smith commented on Jun 11

    Market Failure, as used by Barry, is a term of art — it is the condition where the allocation of goods and services by a free market is not efficient.

    Market failure can be viewed as a scenario in which individuals’ pursuit of self-interest leads to bad results for society as a whole. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.

  21. riverrat commented on Jun 11

    Great post Barry. Emblematic of why I visit here daily.

  22. Steve Barry commented on Jun 11

    Put your crash helmets on…a bullish oil inventory numer in 2 minutes could spike oil and destroy stocks.

  23. Steve Barry commented on Jun 11

    Got the number I was looking for…bullish drawdowns…Erin Burnett looks about to cry.

  24. Steve Barry commented on Jun 11

    S&P just broke 50% fib retracement of low volume bounce off March low…next stop, March low for re-test and failure.

  25. michael schumacher commented on Jun 11

    SB-

    You are leaving out intervention as a buying strategy…..I do not disagree with your call however 12k (or just below) will be defended at all costs. That they call it the “march lows” and fail to mention any of the “alphabet soup” creations that fueled it.

    Ciao
    MS

  26. wunsacon commented on Jun 11

    Quite a few people believe laissez faire will return us to the prosperous days of yore, as though the pre-FDR fake boom of the 1920’s didn’t directly lead to the hard times in the 1930’s.

    I don’t understand that thinking. Even if you argue that recent de-regulation was so poorly executed (by Republicans and centrist Democrats) that the S&L and 2005-2011 solvency crisis shouldn’t become a black mark against laissez faire, how would you explain the 1920’s?

    Also, if the government were so responsible for today’s insolvencies, how does one explain the decision by Hudson City S&L — now larger than Wamu by market cap — not to relax lending standards? Clearly, Wamu and other market participants did not have a government gun to their heads. So, why do market purists seemingly attribute *primary* blame to the government? And, in the face of the enormity of mistakes by private market participants, why would the proposed solution be “they[, the government,] should not regulate” rather than “they should regulate better”? (And, as citizens in a democracy, isn’t it our job to vote for people who regulate better? And to kick out those who regulated poorly?)

    In order to reach their policy recommendations, it seems to me that market purists subconsciously expect “personal responsibility” only of the poor or less-well-capitalized and give the market a free pass in order to rationalize their view of a model society. It might be a model for society to follow at some point in the (distant?) future. But, I suspect it first requires “model” citizens (rational, fully-informed economic actors) and the elimination of externalities (which requires regulation!) to work well.

    As a former market purist, I swear I am not ignorant of the arguments. There’s pedagogical value to them. But, the “government is the problem, less regulation is the answer” recommendations seem appropriate only if you dumb down the fact scenarios of the present and of the 1920’s.

  27. Bob A commented on Jun 11

    The premise of the article does not deserve
    the thoughtful arguments you presented.

    Just call it right wing crap and leave it at that.

  28. Mike G commented on Jun 11

    Wasn’t Larry K bleating this revisionist stuff a while back when you were a “guest” on his show?

    For the market ideologues, markets can never fail; they can only *be* failed.
    Markets are never purely free, so any failures must be attributed to government action.

    As an explanatory meme, it’s about as useful as cadres who say true communism never failed, because it was never tried. You can always blame some external ‘corruption’ of the pure ideology that never existed.

  29. me commented on Jun 11

    “conservative thinkers” = oxymoron

    “contagious optimism” = greater fool theory, same as in stocks.

  30. donna commented on Jun 11

    I don’t see much of our low-income housing failing around here. The HUD projects are pretty well-vetted.

    This is a ridiculous attack on HUD.

  31. Pam commented on Jun 11

    Thank you Barry.

  32. Dervin commented on Jun 11

    In times of economic troubles, the reactionaries try to shift the blame on the Jews, the minorities and the liberals. Going after HUD and CRA takes care of all that.

  33. DC commented on Jun 11

    Haven’t watched Larry “I’m Sick of Subprime” Kudlow in quite awhile. It was costing me a fortune to replace the TV everytime I kicked in the screen.

    Wonder who he’s blaming these days? Andrew Cuomo? Henry Cisneros? Al Gore? Obama? Oprah? Anybody but Bush, Paulson, and the rest of his “we will run government like a business” chuckleheads.

  34. 76s commented on Jun 11

    I’m sure that your heart is in the right place, but almost all of your arguments are misplaced. It’s probably not your fault–you may not have had an opportunity to learn much about mortgage markets, GSE’s, politics, and securitization.

    The GSEs were under tremendous pressure to meet HUD’s irrational housing goals and the Bush administration (abetted by banking and Wall Street interests) was using every instrumentality at hand to punish the GSEs. Underwriting “liberalizations’ and the acquisition of subprime tranches were some of the primary ways that the GSEs tried to meet HUD’s goals.

    The substance of the Post article “belies” your critique. I recommend that you re-read it. There’s a lot of “bubble” blame to go around and HUD’s not immune.

  35. Francois commented on Jun 11

    My oh my!

    Tanta is going to have a field day with WaPo on that one. Doesn’t anyone out there is aware of the treatment she administered to Gretchen Morgenson?

    I smell blood in the e-ink of Calculated Risk. *evil*

  36. Francois commented on Jun 11

    Freakin’ neocons better get over the fact THEY are responsible for doing everything they could to enable the actors of this crisis!

    Like Scalia said: Get over it!

  37. Mark E Hoffer commented on Jun 12

    I’ll echo, and Second, Jessica’s cogent point:

    Barry,
    I am grateful for you taking up your cudgel on this one.
    I would contend that one key factor behind this bubble was the exemption of all those with real power from accountability. The very fact that WaPo would think it is in a position to throw the first stone has more to do with all this than some folks nearer to the bottom of the ladder trying to hop on and climb like everyone else.
    There are strong parallels with Iraq here, in the sense that those who made the main mistakes are still in power and are more interested in protecting themselves from appropriate accountability than in solving the problem.”

  38. v commented on Jun 13

    Thank you BR for bringing up this important matter and setting the record straight. You have been setting the record straight on this topic for some time. It is always refreshing and satisfying to read fact-based, cogent analysis. All I can say is how thankful I am.

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