Unmasking the Real Culprits of the Housing Collapse


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FP: What do you say to people who say deregulation, such as the repeal of Glass-Steagall, caused the crisis?

Sperry: Glass-Steagall had nothing to do with lowering mortgage underwriting standards, the central cause of the mortgage meltdown — though you could argue that the repeal of that regulation had the effect of strengthening antiredlining regulations. Glass-Steagall triggered a wave of bank mergers, which in turn helped regulators punish banks that didn’t make enough risky political loans. In order to get merger approval, they had to first pass CRA lending exams, which required banks practice “flexible underwriting.” The added desire to merge and expand gave regulators added leverage over banks.

Make no mistake: Overregulation was the problem, not underregulation. Banks came under siege by regulators who politicized their mortgage-underwriting decisions.

FP: So are you saying banks are blameless?

Sperry: No, but government deserves most of the blame. It’s quantifiable based on the 27 million bad loans in the system in 2008. Washington accounted for 71% of them by virtue of Fannie and Freddie, FHA and HUD and other entities controlled by the government. Obama and the Occupy Wall Street crowd have it wrong: It’s not the “1% economy,” it’s the 71% economy.

FP: Weren’t derivatives, CDOs & credit default swaps part of the problem?

Sperry: Mortgage-backed securities were nothing new. What was new was all the bad underlying loans and the bad underwriting — and that was a function of bad government.

FP: What about the credit agencies — aren’t they to blame?

Sperry: The reason they didn’t rate subprime securities as junk is because the underlying mortgage assets were underwritten by Fannie and Freddie and therefore considered safe as Treasuries. And Fannie and Freddie drove demand on Wall Street for those securities while trying to meet HUD’s hard lending quotas. By 2005, the government-backed mortgage agencies commanded the lion’s share of the subprime securities market. And contrary to popular wisdom, subprime investments weren’t profitable for Fannie and Freddie. The now-toxic twins took a $200 million-a-year hit subsidizing those riskier loans — and that was before the crash.

FP: So greed wasn’t a factor?

Sperry: Greed became a factor when high prices hid the risk, yes, but the main fault lies with government. If someone poisons a well, who’s more at fault for harming the villagers — the guy who poisons the well or the guy who distributes the water? The government poisoned the well.

FP: How much fault lies with borrowers?

Sperry: As artificial demand drove home prices higher and higher, and as lending standards were relaxed across the board, a lot of people got greedy and cashed out equity for toys and ended up with more debt than they could afford. Subprime borrowers knew they had to pay higher rates to cover their higher risk. They knew they had crappy credit and would get commensurately crappy loans. But they wanted the money. Nobody held a gun to their heads.

FP: What would you say to those who would argue that your position blames minorities?

Sperry: In fact, a lot of deadbeat borrowers were white, and I profile a few of the more egregious cases in the book. But no, I don’t blame minorities, I blame the politicians who pushed them into homes they couldn’t afford. They didn’t do them any favors — they’re worse off than ever now, and that’s the real tragedy and the real scandal here.

FP: What is the true record in terms of blacks being hustled into “predatory loans” with higher rates and fees?

Sperry: Yes, that happened, but they were hustled into them by HUD, which was the biggest “predatory lender” of all. HUD and other regulators advised lenders to actually “target” black neighborhoods and pay brokers higher commissions for minority loans or face various penalties. The Justice Department ordered the same thing through consent decrees.

Now, subprime loans charge higher rates and fees. But a little-noticed Fed study found that blacks and Hispanics defaulted on prime loans at the same rate as subprime loans. This indicates that the problem of all the busted subprime loans wasn’t so much the terms of the subprime loans, as the media would have you believe, as it was the uncreditworthiness of the borrowers, who happened to be disproportionately minority. On average, African-Americans and Hispanics tend to have the worst credit histories and the worst default rates on loans, according to the Federal Reserve, and that tends to be the case at all income levels — poor, middle class or rich. So they tend to get the worst deals on loans.

FP: How do we really know that banks don’t discriminate against minorities?

Sperry: Because, for one reason, banks tend to favor Asian loan applicants over whites. On average, Asian minorities get rejected least for credit, and they get the best deals on loans — and that’s simply because they tend to have the best credit, better than whites. In fact, studies show the poorest Asians tend to have even better credit than the wealthiest blacks. So it’s not even a matter of income level and propensity to pay. It’s a function of willingness to pay, and to pay on time. It’s a function of credit and culture, not color. The only color that matters in the lending business is green — unless of course the government decrees otherwise.

FP: What are your thoughts on the Financial Crisis Inquiry Commission, which was the official body set up by Pelosi and Reid to get to the bottom of all this?

Sperry: These Democrat-appointed “investigators” should be investigated for misusing $10 million in public funds to mislead the public. And their “authoritative” and “definitive” report should be moved over to the fiction aisle in bookstores. It frames Wall Street and exonerates Washington, including Fannie and Freddie. As I reveal in my book, FCIC chairman Phil Angelides ran a dirty investigation. He put trial lawyer cronies in key slots where they went gunning for the very same banks their law firms are suing. They even leaked preliminary findings to their partners. We’re not just talking cover-up, we’re talking major corruption here.

Jamie, this financial crisis is, in fact, a political scandal — the worst since Watergate — and now there’s a full-blown cover-up. And the real culprits in Washington are covering their tracks so they can get away with doing it all over again. And so far they are getting away with it.

FP: Paul Sperry, thank you for joining Frontpage Interview.

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  • http://libertyandculture.blogspot.com/ JasonPappas

    Paul Sperry has done his research. The details are confirmed in other books. Gretchen Morgenson, a New York Times reporter, details how Fannie Mae and the federal government led the subprime charge in the 1990s. Morgenson gets many of the details right, including the harmful government regulations, but absurdly blames "deregulation" because the regulations were the wrong regulations. Sperry gets the details right and the principle that summarizes the whole problem.

    Sperry misses one point (perhaps it is in his book). Fannie securities mortgages and protects the investors against loss. However, Fannie (and Freddie) also have proprietary trading operations in which they are the investors themselves speculating on mortgage securities. Many of the subprimes in the mid-00s weren't securitized by F&F but they were the customers that were buying these securities for their own portfolios. They were driving the market and continued to do so in 2007 when private investors were fleeing. They wound up with the largest portfolio of subprime mortgages after European banks (who are also government backed).

    Overall, Sperry has done great work. Read Peter J. Wallison's columns in the Wall Street Journal for ongoing coverage.

  • Loupdegarre

    The name glaringly omitted from all the articles on the Goldman Sachs Fraud case is George Soros who was feeding at the same Abacus trough as John Paulson. I know for a fact that Paulson and Soros used these products and had the portfolios stacked with CDO’s from Ameriquest. Why? Because they knew that Democratic presidential hopeful Eliot Spitzer was going to go after Ameriquest and the bonds written on their CDO’s were bound to drop drastically. I also believe all parties involved knew this would collapse the mortgage market. Why do I believe this? Ask yourself, how did Herb and Marion Sandler who owned World Savings the inventor of and the biggest writer of Adjustable Rate Mortgages and huge donors to liberal left wing causes know to sell their company just before the whole thing went south? I do believe this is just the tip of the iceberg and you will see class action suits on behalf of employees of several mortgage companies that were run in to the ground purposefully to make Soros, Paulson and GS billions, while they lost income, homes and savings.

  • Asher

    No wonder the Housing market collapsed. The Left and Acorn forced the banks to give out loans to those who couldn't afford to pay their mortgages, eventually failing on their payments and when the economy went sour, even more homeowners went belly up on their responsibilities. You see it is the perfect storm, Collapse the economy, open the borders so more people are freeloading off the legal tax payers, create chaos, OWS, sue companies and organizations, (libel Lawfare), and create class warfare between people and political parties so nothing gets done…Put one of your own in the White House who appeases your enemies…..

  • G Dub

    One needs to go back even further to the second worst POS in our history: Carter.
    In 1977, the Community Reinvestment Act was THE chicken and egg of the housing market collapse.

    • http://libertyandculture.blogspot.com/ JasonPappas

      Sperry does include the Community Reinvestment Act as part of the problem. However, he goes the extra mile and explains how. Many argue that the CRA loans weren't that many to create a problem. True. It was not just loans labeled CRA that were the problem. During the late 1990s when banks were allowed to expand across state lines and grow to huge proportions, permission for mergers and acquisitions could be denied to banks that didn't satisfy lending according to the letter or spirit of the CRA. Thus, the government breed a new type of bank–one with a disposition to loose lending standards. With Fannie and Freddie will to buy the loans and take them off the banks books, the process was set in motion.

  • James Morgan

    The question now is what are we (YOU!) going to do about it? VOTE OBAMA AND ALL DEMOCRATS OUT OF OFFICE IN 2012!

  • xios

    This article pretty much sums up how I experienced it. I am an appraiser and provided reports for many different brokers, lenders, and credit unions in the boom years. These institutions are audited federally and by the states every 6 months. If you had any complaint filed against you by a minority client you risked having your license revoked, so these companies toed the line and made countless "stated income" loans to people they knew were lying. Also instrumental in driving up property values artificially was the collusion between real estate agents, home sellers, and loan officers. In the DC area, Hispanic agents would pick the (inflated) sale price, there was no bargaining by the Hispanic buyer, the loan package would be prepared by the Hispanic loan officer, and the overage beyond what the seller asked for was split between the agent, loan officer, and seller. Appraisers were hooked in by legal agreements in the sales contracts which effectively stated-"We don't care what the appraiser comes up with, the buyer will still pay the contracted amount". Done deal. I know this probably went on with other groups of people, but I saw this first hand in the DC area Hispanic community.

    • http://libertyandculture.blogspot.com/ JasonPappas

      Quite interesting. One commentator noted that the biggest bubble states that blew-up and had the most defaults have a large hispanic community: California, Arizona, New Mexico, and Florida.

      Another explanation I saw for these states was the long-standing restrictions on land usage. Greater demand pushes up prices on a constrained supply. Put the two effect together …

  • http://apollospaeks.blogtownhall.com/ ApolloSpeaks

    Sperry's research simply underscores the fact that we have an reckless, incompetent, leftist loon in the White House who has learned nothing from the 08 housing crash. Made deaf, dumb and blind by the egalitarian ideal he is starting the subprime bubble all over again-but this time it includes small minority owned businesses.

    • 2maxpower

      lol …obama learn anything from the 08 housing crash.

      he is all for that kind f thing. it isn't just obama. he is nothing without the entire marxist group that has been in the government since the early 1900's

  • http://apollospaeks.blogtownhall.com/ ApolloSpeaks

    Correction

    we have a reckless, incompetent, leftist……….

  • 2maxpower

    …and the crooks carry on. the rule of law was finished before Clinton left office.

    I don't see a solution that doesn't include a civil war.