Redlining hasn't left

In the "good old days," whites kept minorities out of their neighborhoods by deliberate discrimination, with banks refusing to lend to blacks who wanted to buy homes in predominantly white areas.  While civil rights laws have prohibited that particular practice, financial institutions have continued to redline.

The ratio of rejection for African American is 3, even 4-to-1 compared to whites. 

At the highest income level measured - $157,000 - for every four African American home loan purchase applications rejected only one white applicant was rejected. 

By contrast African Americans and other minorities are much more likely to get costly subprime deals. Again at the highest income level the ratio of African Americans with subprime home purchase loans is 6-to-1 compared to whites. 

And of the 25 largest metropolitan areas, which might you expect to have the worst racial record?  New Orleans?  Atlanta?  No.

Minneapolis.  Way to go, Minnesota Nice.

From the last debate: should we be buying mortgages?

In last night's debate, Sen. McCain suggested that the Treasury Secretary should be buying up individual mortgages to help out homeowners. Seems like a winner for the middle class, until you read up a bit more. Get the skinny from economist Brad DeLong:

The McCain plan is:

• Take $300 billion.
• Pay double current market value to banks that have troubled mortgages on their books, thus:
  • Give a present of $100 billion to the bankers who made the loans.
  • Acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.

There's a big difference here: Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.

His entire post is worth a read, because he explains the fundamental difference between the European actions and Secretary Paulson's plan, and why the former is a lot more likely to return taxpayer money.

Bernanke: pass this bailout or a recession is coming

Top story:

Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday they risk a recession with higher unemployment and increased home foreclosures if they fail to pass the Bush administration's $700 billion plan to bail out the financial industry.

Hmm.  The administration comes up with a plan that is getting a lot of skepticism, wants it passed in a hurry and with little guarantee that it can solve the crisis.   Sound familiar?  Let's flash back to 2002:

On NBC's "Meet the Press," Vice President Dick Cheney accused Saddam of moving aggressively to develop nuclear weapons over the past 14 months to add to his stockpile of chemical and biological arms.

...[Condoleezza] Rice acknowledged that "there will always be some uncertainty" in determining how close Iraq may be to obtaining a nuclear weapon but said, "We don't want the smoking gun to be a mushroom cloud."

That kind of talk lying led to six years in Iraq with no clear strategy and a multi hundred billion dollar price tag.  Ready to bring our Iraq strategy home?

Obama: bailout Main Street not just Wall Street

Obama's response to the bailout proposal:

Why this bailout is not the right one

Taxpayers are about to ante up $700 billion to save the financial giants.  But what do we get in return?

Paul Krugman analyzes the bailout and his comments can be summarized as this:

• It's not clear that the bailout can actually accomplish its goal.
• Even if it does, it may do so by over-paying for bad mortgages and leaving taxpayers with nothing in return.
• We'd be a lot better off with a plan that involves injecting capital into failing firms in exchange for stock, rather than buying up their worthless assets.   In this plan, if the financial giants recover (the whole point), taxpayers get something in return.

Here's the full story:

What is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let’s talk.

First, a capsule analysis of the crisis.

1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.

2. The losses in MBS, in turn, have left the financial system undercapitalized — doubly so, because levels of leverage that were previously considered acceptable are no longer OK.

3. The financial system, in its efforts to deleverage, is contracting credit, placing everyone who depends on credit under strain.

4. There’s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.

So where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.

But the more I think about this, the more skeptical I get about the extent to which it’s a solution. Problems:

(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.

(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.

Government privatization undone - by Bush

Formerly government-owned, then government-back private mortgage companies Fannie Mae and Freddie Mac have returned to the federal fold.

For a more detailed story, check out this coverage from non-profit news source, MinnPost.

Mortgage crisis: Fannie, Freddie, and the rest

If you're familiar with "when banks compete, you win," then you probably listen to a news source that discusses the mortgage crisis.  Paul Krugman's been keeping me informed, and he does a nice job of explaining what's going on:

• Fannie and Freddie are more closely regulated than private companies, so they're shenanigans were limited.  They couldn't do subprime loans - loans given with no income verification - by rule.
• However, they weren't completely innocent, as they tried to stretch their ability to participate within the rules as much as possible.
• The housing market is so bad, that even these more regulated companies are sinking as people with conventional mortgages end up with negative equity.
  

The mortgage crisis was not a surprise

Federal officials were warned - multiple times - that exotic and subprime mortgages were contributing to a shaky and unsustainable housing market. Let's give a big hand for the free market.

The mortgage crisis: illustrated version

Trying to understand how a bunch of "subprime" loans caused a mortgage crisis? This animated mortgage crisis illustration might explain. Basically, banks sold mortgages as "securities" (think mutual funds) to other investors but dramatically underestimated the risk of widespread defaults (foreclosures).

In other words, when those crazy adjustable-rate mortgages started bankrupting people all over the country at once, the flow of cash dried up. And that meant that those securities (stocks) dropped precipitously in value. Oops.

The home mortgage crisis: illustrated version

Bubble might be an understatement.

How home buying turned into the stock market

This is an interesting look at the way the mortgage market changed from a tightly regulated way to ensure homeowners had the income to buy a house to a quick way to make a buck.

In the golden age of American home buying — the years after World War II — savings-and-loan institutions or government agencies supplied returning G.I.’s with fixed 30-year mortgages. Home prices appreciated, steadily but at modest rates, and lending fiascoes were rare...

...The world began to change in the late 1970s, when Salomon Brothers...pioneered the mortgage security...Instead of keeping his mortgages in a drawer, the banker on Main Street could unload his risk by selling them to Salomon. The banker was thus converted from a long-term lender to a mere originator of loans.

The game continued, with non-bank entrants into the mortgage market offering all sorts of products like adjustable-rate mortgages or allowing people much more house than they could afford.

Lenders and borrowers alike knew that such loans were dicey; they were counting on the borrowers to refinance — which, as long as home prices kept rising, was a cinch. Naturally, when prices stopped rising, the music stopped.

So what happens now? Some states are looking to help bail out the unfortunate borrowers who didn't understand how their mortgage was merely a risky investment by a Wall Street hedge fund investor. But how to do so without rewarding the investor, who ought to be left holding the tab for their poor choice.

Houses are homes, not investments

While you're still better off building equity instead of paying rent (and deducting mortgage interest from your taxes), my friend at 28th Avenue notes that the housing market isn't the greatest right now.

The big thing: don't expect a lot of value appreciation in your home in the next couple years. 28th links to Calculated Risk, which quotes Fed Chair Bernanke:

To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far.

Update 4/12: Check out the comments from EKM, where he links to an amazing tool posted by the New York Times for calculating whether it's better to rent or buy in your particular area.

Moneylenders receive comeuppance

A number of news sites are reporting on the rising incidence of late mortgage payments, as increasing interest rates push monthly mortgage payments higher. You can tell the language was crafted by the Mortgage Bankers Association:

Lenders to subprime borrowers — people with blemished credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up with their mortgage payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.

Battered is a term to use for women who are victims of domestic violence, not lenders who get their comeuppance when their poorest clients can't make payments. Especially not when these lenders crafted the adjustable rate mortgage to make more interest in the first place.