Reed Construction Data

Jim Haughey blames the subprime debacle on Washington’s insistence that “some people were entitled to be homeowners even if they could not afford to buy a home with the rules set by private lenders”. Yet his own history shows this good intention was not the cause. He says for twenty year under the relaxed lending rules “the total default cost was not large enough to threaten the profitability of the overall mortgage business.”

The problem, as he notes, arose from a 1995 amendment to Community Reinvestment Act and rating services subsequently giving AAA ratings to bonds that did not deserve it. He blames the ratings on deceptive “guarantees provided the banks”. If banks see expanding home ownership to lower income groups as an opportunity for deceptive business practices, he should blame the banks, not the government policy.

Mr. Haughey would have us believe that there is some relation between the rise and fall of housing prices and low income borrowers getting mortgages they cannot afford. A moment’s reflection would tell him that low income borrowers buy homes in low income areas. A rise in housing prices in those areas would have little effect on housing prices where affluent borrowers are likely to buy.

The Wall Street Journal noted in March, 2007 “a large chunk of the subprime-loan market has shifted to higher-income metropolitan areas. In many of those wealthier areas, the delinquency rate has increased quickly. In the Sacramento, Calif., region, where the median household income ranks among the top 10th of major metropolitan areas, the portion of subprime mortgages delinquent for 60 days or more hit 14.1% in December—more than four times the level a year earlier.”

Clearly, subprime loans in affluent areas is far beyond the purview of HMDA and the CRA. Speculation fueled by lax lending policies is the more likely explanation for both the rise and the collapse of housing prices. It is an old story and has nothing to do with social engineering.

You are both missing the point.  He is saying that the social engineering led to the production of a dodgy loan type.  People later used these loans to buy houses they couldn’t afford (in both poor and affluent areas) and that led to a run up in housing prices.  Eventually prime borrowers (ones who could have afforded the houses) balked at the prices and that led to the collapse.  In other words, social engineering is the pebble that got the whole avalanche started.

I’m not sure I believe the whole argument because I think that these loan vehicles would have been developed eventually without the social engineering since they shift the interest rate risk from the lender to the borrower.