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.

At the crisis' core are loans that were made with virtually nonexistent underwriting standards--no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.

In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining"--claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

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.

Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with "100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns." Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

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


We have not had a meaningful grade system in our public schools for years, every child who attends graduates.

Hugh   ·  September 17, 2008 5:27 PM

We have not had a meaningful grade system in our public schools for years, every child who attends graduates.

Hugh   ·  September 17, 2008 5:28 PM

Sorry, but that's a rather desparate attempt to blame this Republican generated disaster on minorities and liberals. Phil Gramm is the perp here, loosening the rules for the benefit of the financial sector, not so minorities could get loans. The worse part is that you know it and can't admit it.

Michael   ·  September 20, 2008 3:20 AM

Talk about "desparate" (sic) attempts, Michael. Regulation causes financial problems, not deregulation.

Even from way over here in Sydney Australia we can see this US problem is caused by defaulted mortgages, bad loans to people who cannot repay, covered up while house prices went up and revealed when they (inevitably) went down (after all the Fannie whatever CEO scumbags had ripped off their share).

You US 'liberals' (You don't even known the meaning of the word) are a danger to the world with your obsessions over 'minorities' (whatever they are).

If McCain wins, and I hope he does, please do not come to Australia - US Dems are not welcome here - we're still trying to get the stains out of the furniture from Clinton's 1990's visit.

Hey whatever dude!

bruce   ·  September 20, 2008 4:15 AM

Look, sorry, I don't quite understand your system, there are many fine US Dems, Joe Lieberman is one of my heroes, he restores my faith in humanity, but these 'liberals' or Koskids, or whatever they are called (I call them 'Lee Harvey Oswalds' after the guy I remember from my childhood who least deserved to be called an American), you know who you are and what some of us out here in the wide world think of you. OK?

bruce   ·  September 20, 2008 4:41 AM

My complaint is with the elimination of standards. (No one has refuted the claim that "if Freddie and Fannie had stuck to low-risk lending they would today not be needing any government bailout.")

Standards were eliminated for everyone. Many of the bad loans were not made to minorities, who were used as pawns and suffered more than the fat cats. The claim that I blamed "minorities" when I did not is simply an attempt to impugn my motivation and make the claim that I do not really think what I think.

Saying "you know it and can't admit it" is a classic example of discounting my opinion by asserting that I actually think something else but am too dishonest to admit it. That is not an argument on the merits, and it's about as reasonable as saying that I'm bitter and cling to religion and guns.

Once again, I maintain that it was a mistake to eliminate lending standards. You can disagree with me, but accusing me of bigotry or saying I actually think something else (when I don't) does not refute my claim.

Eric Scheie   ·  September 20, 2008 9:40 AM

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