September 17, 2008
The government giveth standards, the government taketh them away
...if Freddie and Fannie had stuck to low-risk lending they would today not be needing any government bailout.So said Arnold Kling (who bases his view partly on personal experience), and while I'm not an economist, I'm inclined to agree.
It strikes me as logical that "low risk lending" is impossible without the presence of standards to evaluate risk. Otherwise, how could a risk be called low?
But in any case, they threw the standards out. As to the reasons why, Stan Liebowitz suggests that groups like ACORN played a role:
Perhaps the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards--done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.Again, I have no way to track the numbers and evaluate this stuff. But if he's right, the problem was largely caused by government being constantly goaded and pressured by activists:
bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.Years ago (back in the 1980s) you couldn't buy a house if any of the downpayment was borrowed. The loan applications asked about that in a direct question, and if you answered "Yes," the banks could not make the loan. They also required independent appraisals to verify that the bank's 80% mortgage was solid.
I'm not saying that everything that happened is a direct result of lowering standards, but it's hard not to see the lowering of standards as a major cause.
And I think I'm being charitable by not saying "eliminating" standards.
What did they expect would happen?
Might as well eliminate grades in school.
posted by Eric on 09.17.08 at 02:13 PM
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