Obama Has Learned Nothing From the Mortgage Meltdown Mess

By John Lott

• AP Photo/Carolyn Kaster
  Dec. 12, 2011: President Barack Obama pauses during his news conference with Iraq's Prime Minister Nouri al-Maliki, in the South Court Auditorium on the White House complex in Washington.

Just days before Christmas, the Obama administration gave Bank of America a big lump of coal, levying a hefty $335 million dollar fine on the company for discriminating against minorities in its lending practices.
Supposedly Countrywide, a mortgage company bought by Bank of America in 2008, had not given out enough low interest rate loans to minorities from 2004 to 2008.

What the large fine reveals is that President Obama hasn’t learned anything from the recent financial crisis.

What the president sees as discrimination in awarding a mortgage, lenders saw as wise business decisions.

If a borrower can’t afford a down payment, Obama appears to view charging a higher interest rate as discrimination. Lenders also think that they shouldn’t treat borrowers whose sole source of income is welfare or unemployment insurance, the same as those applicants who have a job. But Obama, again, appears to view this as discrimination.

There is obviously a problem with no down payments: if the price of the house falls so that it is worth less than the loan, people will default and walk away. Similarly, when unemployment insurance or welfare runs out, borrowers might find they can’t keep paying their mortgage.

The Equal Credit Opportunity Act the Obama administration used to impose this fine was exactly what helped cause the mortgage crisis by forcing lenders to make risky loans that they didn’t want to make.

Yet, just last month, Obama put the blame for these risky loans going bad on banks for their “breathtaking greed” that “plunged our economy and the world into a crisis.”

It’s hard to believe that Countrywide, a leading lender of subprime mortgages, wasn’t already doing too much to make these risky loans. Indeed, it was the poster child for doing what the government wanted.

In 2002, Countrywide had adopted its “No Income/No Asset Documentation Program.” Borrowers could get a loan with just 5 percent down. The big government mortgage bundlers, Fannie Mae and Freddie Mac, bought these mortgages and encouraged Countrywide to expand the program. By the first half of 2006, almost two-thirds of Countrywide’s subprime loans had absolutely no down payment.

Certainly President Obama push to encourage banks to make risky loans isn’t unique --  in truth, he is just doing what Presidents Clinton and Bush also did.
Starting with the Clinton administration and continuing through the administration of George W. Bush, if lenders didn’t give out loans under these conditions to minorities, it was viewed as evidence of discrimination. The motive for encouraging risky loans was a noble one: to increase home ownership. It was meant to help people who couldn’t, under the previous standards, afford a home mortgage.

But with hindsight of the disaster these regulations created, Obama has no excuse. These regulations should be scraped and the last thing that should be happening is for banks to feel pressure to make more such risky loans.

Obama’s actions show that we have never left the world where the Federal Reserve and other government agencies told mortgage lenders: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants.”

This is a world where the Federal Reserve told banks that the “outdated” criteria included:

Credit History: Lack of credit history should not be seen as a negative factor.... In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts.... Down Payment and Closing Costs: Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs. . . . Sources of Income: In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits.

Is this really how we want mortgage lending to operate?
It was bad enough that the lenders were forced during the last couple of decades to made such risky loans. Obama’s decision to punish Countrywide because it didn’t go even further with these bad loans sends the wrong message. Instead of working through the bad loans we already had, Obama now wants to continue forcing lenders to make still more of them.

John R. Lott, Jr. is a FoxNews.com contributor. He is an economist and author of the third edition of "More Guns, Less Crime" (University of Chicago Press, 2010).

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