Commentary by Caroline Baum
April 25 (Bloomberg) -- In its rush to hold hearings, assign blame and seek redress for the collapse of the housing market, the U.S. Congress has looked every which way but inward.
No wonder. Homeownership-for-all has been a goal of policy for so long lawmakers have forgotten the role they played in the current state of ``no-doc'' loans gone bad.
From legislation to root out discrimination in mortgage lending, to the resultant relaxation of lending standards, to the tax-advantaged status of housing, ``the aggressive pursuit of homeownership as a benchmark for success is at the root of the problems we're seeing today,'' says Mark Zandi, chief economist at Moody's Economy.com.
Reasonable people can disagree over the extent to which the 1977 Community Reinvestment Act, designed to eliminate the practice of ``redlining'' minority neighborhoods and denying those residents credit, contributed to today's rising default and foreclosure rates among subprime borrowers. But most agree that government policy played some role.
The CRA was designed to ``encourage depository institutions to help meet the credit needs of the communities in which they operate,'' according to its Web site.
Banks would probably say ``encourage'' understates the thrust of the law. Any bank interested in expanding through mergers and acquisitions had to earn enough points from minority lending to get regulatory approval, says Bob Litan, senior fellow at the Brookings Institution in Washington.
Scrap the Standards
The CRA ``was the mechanism through which regulators could tell banks to change their behavior,'' says Stan Liebowitz, professor of economics at the School of Management of the University of Texas, Dallas. ``The old credit standards were unnecessary. Poor people could handle bigger payments. There was a whole change in the tone'' of mortgage lending.
A 1992 Boston Fed study of public loan data mandated under the Home Mortgage Disclosure Act concluded that black and Hispanic mortgage applicants had ``substantially higher denial rates'' than white applicants. Controversial as the study was -- Zandi says the model created to tease out proof of discrimination from the general profile of the borrower was ``unstable'' -- it ``provided the patina to the claim of discrimination,'' Liebowitz says.
Liebowitz says the study was ``flawed'' and documented the data errors and inconsistencies in a 1998 paper: ``Mortgage Lending to Minorities: Where's the Bias?''
Forsaken Profits
``There are good economic reasons to be skeptical of claims that lenders discriminate against minorities in their approval of mortgage applications,'' he writes. ``Discriminators who would turn down a good loan harm themselves by turning down a profit opportunity.''
Gary Becker, Nobel Laureate in Economics and author of a book on ``The Economics of Discrimination,'' argued against a conclusion of bias in lending from the Boston Fed study in a BusinessWeek magazine article in 1993. If banks were discriminating -- imposing stricter standards on loans to blacks and Hispanics than to whites with comparable credit backgrounds -
- the default rate should be lower, not higher, a sign banks were ``accepting only the best minority candidates,'' he writes in ``The Evidence Against Banks Doesn't Prove Bias.''
While much of the egregious lending took place outside the banking system and out of the reach of regulators, government pressure on banks to lend to minorities -- and liberalize lending standards to do so -- became the mantra.
Everyone an Owner
The Clinton administration decided that a car in every driveway needed an owner in the adjacent home. The homeownership rate set a record of 67.7 percent in 2000, an increase of 4 percentage points since the start of President Bill Clinton's first term.
That rate continued to set records, hitting 69.2 percent in 2004 before falling back.
The suggestion that the government had a hand in the housing boom of the late 1990s and the early part of this decade in no way diminishes the role of shady lending practices, misplaced incentives for lenders, financial engineering that turned subprime loans into AAA securities, complicit rating agencies, ultra-low interest rates and see-no-evil regulators. They all played a part.
The search for an unsympathetic villain to blame for the housing mess has avoided any challenge to the underlying belief that everyone should have a home of his own.
While the social benefits of homeownership are everywhere apparent -- owners take better care of their property than renters, leading to stable neighborhoods -- a good job and regular paycheck may be just as important.
New Incentives
``We need to create incentives for investment, for businesses to operate in the U.S., instead of consumption,'' says Joe Carson, director of economic research at AllianceBernstein. ``Housing is a non-productive asset. It doesn't create income.''
Better to invest in manufacturing plants and office buildings that create streams of income, Carson says. ``Maybe we should be focusing on the income that people need to support a home.''
At some point, maybe we will. Right now, Congress is too busy being reactive -- trying to keep people in homes they couldn't afford to begin with -- to be proactive.
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