Are the Bedfellows on the New Mortgage Rules Really So Strange?

Kevin Drum and Harold Pollack are wondering why the NAACP and La Raza are teaming up with the banking industry to whine that new regulations are going to deny loans to poor and minority applicants:

Yesterday I wrote about financial industry demagoguery over new rules that will force issuers of mortgage securities to keep a 5% stake in the securities they create. The idea is simple: if they have to keep a small stake, they'll have an incentive to make sure their securities aren't loaded up with piles of crappy mortgages of the kind that helped supercharge the housing bubble. However, there's an exemption for securities that contain only ultra-safe mortgages, and now the mortgage industry is trying to scare everyone into thinking that this is a death knell for any mortgage that doesn't qualify for exemption.

In fact, there's little reason to believe this: the effect on normal mortgage rates is unlikely to be more than a tenth of a percentage point or so. But while Wall Street's kvetching about this is predictable, Harold Pollack points out they've teamed up with some strange bedfellows:

It turns out that the N.A.A.C.P. and the National Council of La Raza are important industry allies in this fight.

This is part of a concerning pattern, too. In many cases, respected civil rights organizations and advocacy groups become involved in the political process on behalf of firms whose practices within minority communities raise serious concerns. The Congressional Black Caucus Foundation exemplifies many of these concerns. As the New York Timesreported last year, the Foundation's backers include (among others) Altria, Coca-Cola, Heineken, Anheuser-Busch, and rent-to-own furniture enterprises. The accompanying problem speaks for itself.

The NAACP and La Raza make legitimate arguments in the current fight. Perhaps some adjustments should indeed be made in the proposed regulations....Still, I can't be the only person concerned about what anonymous federal regulators label "the unholy alliance" between the financial industry and some consumer and civil rights groups. If our nation fails to establish strong and enforceable financial regulation, we know whose communities will be left holding the bag.

I'm not sure I'd go as far as Harold. I'm not going to swear that the proposed rules are sacrosanct and shouldn't be modified one bit. But they shouldn't be modified much, and I don't think the NAACP or La Raza do make legitimate arguments. It's simply not the case that anyone without a 20% down payment will no longer be able to buy a house, as they suggest. All the new rules mean is that the cost of loans that aren't ultra-safe will go up slightly -- as they probably should, since recent history suggests they're riskier than we thought.

This is only made mysterious by the activist habit of claiming that the laws they press for are awesome with none but the most minimal side effects.  Here's the thing: this law might be a good law, or it might have only minimal effects on credit.  But both of those things can't be true.

Reducing access to credit is not some unwanted side effect of this law that we might get around with better policy design; it is the whole point of the law.  We are demanding that banks retain a share of the loans that they issue because we think that otherwise, banks who securitize loans have too much incentive to make loans to people who will not be able to repay them.  You often hear that the FHA has made low-income, low-downpayment loans work through "careful underwriting", but underwriting is not some sort of advanced training program for borrowers.  To the extent that their underwriting has kept them (and their borrowers) out of trouble, it's because of the loans that they didn't make to people whose income, loan size, or credit made them poor risks.

Unfortunately, careful underwriting is an art, not a science; really reducing your default rate involves not making loans to a lot of people who aren't going to default; even the majority of subprime loans, most of them made at the height of the bubble, aren't in default.  If this law works as intended, it may not raise interest rates much, but that will be in part because bankers are refusing to lend to the worst risks at any price.


No matter how carefully your loan is underwritten, it is risky to borrow mortgage money with a 5% downpayment; even small movement in housing prices can wipe out your equity.  But as the NAACP and La Raza point out, this is going to make it very hard for people who don't have a lot of access to capital to buy a house.  Those groups are poor people generally, and blacks and latinos particularly, because their history of poverty means that their families and communities do not have the capital for the kind of intergenerational wealth transfers that have historically helped white bourgeois people buy homes.

Now, you can argue that this is still good policy: housing is not likely to be the wealth-building tool that it was for the latter half of the twentieth century, homeownership has a lot of costs, and poor people are the least able to absorb shocks like the loss of their downpayment when prices fall.  I might even agree with you.

On the other hand, homeownership works decently well as forced savings, even if the returns aren't great, which would help build up some of that wealth people in low income communities don't have.  And poor people often want to own houses for the same reason that people like me do: they don't want to be hostage to the whims of a landlord.  So it's not really surprising that advocates for groups who are disproportionately likely to be affected by this law, are against it.