Let’s wind back to 1993 and Roberta Achtenberg’s arrival on the Washington political scene. Achtenberg had made her name in San Francisco as a civil rights lawyer and activist, campaigning to keep open the city’s gay bathhouses, and (I promise I’m not making this up) pressing for an increase in the number of gay Scoutmasters. Bill Clinton offered her a job in his new administration, and Roberta Achtenberg became the first openly lesbian nominee ever to receive a Senate confirmation. She duly took up her post as Assistant Secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development (HUD).
The main thrust of the Clinton housing strategy was to increase home ownership among the poor, and particularly among blacks and Hispanics. White House aides, in familiar West Wing style, could parrot the many social advantages that would accrue: high levels of home ownership correlated with less violent crime, better school performance, a heightened sense of commun-ity. But standing in the way of the realisation of this dream were the conservative lending policies of the banks, which required such inconvenient and old-fashioned things as cash deposits and regular repayments — things the poor and minorities often could not provide. Clinton told the banks to be more creative.
Meanwhile, Ms Achtenberg, a member of the kickass school of public administration, was busy setting up a network of enforcement offices across the country, manned by attorneys and investigators, and primed to spearhead an assault on the mortgage banks, bringing suits against any suspected of practising unlawful discrimination, whether on the basis of race, gender or disability. Achtenberg believed racism was a big factor in keeping minorities from enjoying the same level of home ownership as whites. She doubted if much could be done to change people’s attitudes on racial matters, but she was confident she, in cahoots with Attorney General Janet Reno, could use the law to change the behaviour of banks.
However, when little or no overt or deliberate racial discrimination was discovered among the mortgage lenders, HUD’s investigators turned to trying to prove ‘disparate treatment’ of minority groups, a notion similar to that of unintentional ‘institutional racism’. If a bank refused loans to proportionally more black applicants than white ones, for instance, the onus would fall on it to prove it had good grounds for doing so or face settlement penalties running into millions of dollars. A series of highly publicised cases were brought on this basis, starting in 1994. Eventually the investigators would turn somewhat desperately to ‘disparate impact’, a form of discrimination so abstract and rarefied as to be imperceptible to its supposed victims, and indeed often only discernible at all through the application of multivariate regression analysis to information stored on regulators’ databases. In fact, by 1995 Achtenberg was actually having to rein in her zealots, issuing a clarification that the use of the phrase ‘master bedroom’ in a property advertisement was, despite its clear patriarchal and slave-owning resonances, not actually an actionable offence under the anti-discrimination laws.
These mortgage banks, which have been responsible for issuing about three quarters of the dodgy subprime loans that are proving troublesome today, quickly took the hint. From the mid-1990s they began to abandon their formerly rigorous lending criteria. Mortgages were offered with only 3 per cent deposit requirements, and eventually with no deposit requirement at all. The mortgage banks fell over one another to provide loans to low-income households and especially to minority customers. In the five years from 1994 to 1999, the number of African-American and Latino homeowners increased by two million.
So, by the end of the 20th century most of the ingredients that would combine to cause today’s subprime crisis were already in place. Nevertheless, the 1990s can seem a long time ago, and to grasp the connection between the situation then and what is happening now, it’s important to realise that only a small proportion of the subprime loans made since George W. Bush became President have gone to new, first-time buyers. A huge number of them have been refinancing loans, replacing mortgages originally taken out perhaps eight, ten or 12 years ago.
Imagine yourself in the place of one of those low-income householders who acquired a property in the late 1990s as a result of the Clinton home-ownership drive. What happened next? Chances are you managed OK for a while, but after a few years found that like most poor Americans, your income wasn’t going up, it was declining. Around 2003, with your credit cards maxed out, you desperately needed to release some equity from your home. Luckily there was equity there to release, so you refinanced for the first time and enjoyed having some real money for a change. A couple of years later a pushy mortgage broker called to suggest you do it all again, squeezing out the last drops of equity and opting for a low-start mortgage. So you did — and that was fine while it lasted, but the interest rate just sky-rocketed. You will never pay off that loan, it is pure poison to you, just like it’s pure poison to the investment bank that ended up with it on its books. You will just walk away. It’s not your fault. It’s not the bank’s fault. And it certainly isn’t George W. Bush’s fault — every attempt he has made to reform the mortgage market has been blocked by Congressional Democrats.
This is possibly the single most enlightening article I have read on the credit crunch. Read the full article HERE.