McCain’s Economic Plan: Blame Minorities

Fox News’ Neil Cavuto made news of his own this week by suggesting that the credit crisis was caused by loans made to minorities. 

On Fox’s “Your World” on September 18, Cavuto asked Rep. Xavier Becerra (D-CA), “[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership … Are you totally without culpability here? Are you totally blameless? Are you totally irresponsible of anything that happened?” Cavuto also said, “I’m just saying, I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’” 
 
This wasn’t the first time that Cavuto blamed loans to minorities for the credit crisis.  In an exchange with House Majority Leader Steny Hoyer (D-MD) on September 16, Cavuto said “[Y]ou wanted to encourage minority lending — obviously, a lot of Republicans did as well. There was a lot of — expand lending to those to get a home,” Cavuto then rhetorically asked, “Do you think, intrinsically, it was a mistake, on both parties’ part, to push — to push for homeownership for everybody?”  Unlike Becerra, Hoyer either didn’t understand what Cavuto was saying or simply rolled over. “I think clearly what happened,” Hoyer replied, “ is Fannie and Freddie got caught up in trying to do what the Congress wanted done.”

This is not just a generic attack on minorities.

What is going on here is an attempt by Republicans to deflect public outrage from the credit industry, the investment banks and their Republican deregulators and to place the blame for the crisis credit on the government and the Democrats. 

That’s why John McCain and his Republican apologists have focused their ire on the quasi-governmental institutions Fannie Mae and Freddie Mac rather than on the wholly private companies and individuals behind the credit meltdown.

Every time McCain or one of the Republican talking-pointers blasts Fannie Mae and Freddie Mac, the message is: “These are government institutions, run by Democrats. They caused the credit crisis by pushing the Democratic Party agenda, including homeownership for minorities who could not afford to buy homes and should have been content to be renters. Blame them, not us.”

But are they right?  How big a problem are loans to minorities?  And should any future regulation of the credit and mortgage industry eliminate the mortgages that allowed so many minorities to become homeowners?

The answer is No.

The facts show that there has been tremendous racial disparity in lending is growing, and that the subprime mortgage crisis has disproportionately affected minority borrowers. Banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites. During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites. Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites. A study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

So, yes, minorities were very much more likely to receive high-cost subprime loans than whites. Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they have cautioned against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor and Barack Obama economic advisor Austan D. Goolsbee in his essay in the New York Times entitled “‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.”

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, “Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market,” showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans.” “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

In the search for villains in the credit crisis, Congress should be careful not to  eliminate the mortgages that have opened doors for many who have historically been excluded from homeownership and the American Dream.

It is also important to recognize that it was the Bush adminstration that pushed for greater access to homeownership for minorities, and specifically tasked Freddie Mac and Fannie Mae with expanding home loans to minorities.

As CNN reported on June 17, 2002:

“President Bush touted his goal Monday of boosting minority home ownership by 5.5 million before the end of the decade through grants to low-income families and credits to developers. ‘Too many American families, too many minorities, do not own a home. There is a home ownership gap in America. The difference between African-American and Hispanic home ownership is too big,” Bush told a crowd at St. Paul AME Church in Atlanta. Citing data he used Saturday in his weekly radio address, Bush said that while nearly three-quarters of white Americans own their homes, less than half of African-Americans and Hispanic-Americans are homeowners. He urged Congress to expand the American Dream Down-Payment Fund, which would provide $200 million in grants over five years to low-income families who are first-time home buyers. The money would be used for down payments, one of the major obstacles to home ownership, Bush said. … Fannie Mae, Freddie Mac and the federal Home Loan Banks — the government-sponsored corporations that handle home mortgages — will increase their commitment to minority markets by more than $440 billion, Bush said. Under one of the initiatives launched by Freddie Mac, consumers with poor credit will be able to obtain mortgages with interest rates that automatically decline after a period of consistent payments, he added.”

In the political battle over blame for the credit crisis, Democrats need to be careful both to counter claims that the crisis was caused by loans to minorities and also not to allow conservatives and Republicans to use the crisis as a pretext to scuttle these programs.

Has the Credit Market Thawed? Is it Freezing Up Again? And Are You Still Out in the Cold?

We’ve written before about the failure of the Fed’s policy of cutting short-term interest rates — seven times since September 2007 — to spur liquidity in the credit market. 

The good news today is that there is “significant improvement in the credit markets since late March,” according to the Wall St. Journal.

The bad news, also reported by the Wall St. Journal, is that this recent thaw in the credit market is not expected to last:

“‘Most of us are anticipating two steps forward, one step back and carefully watching where the markets can handle deals,’ said Tyler Dickson, who oversees capital raising at Citigroup.”

“‘There’s no question the tone in the market is getting better,’ says Jim Casey, co-head of leveraged finance at J.P. Morgan Chase.  He adds, however, that ‘there is some concern that this might be a short-term window of opportunity for issuers, since investors are still very focused on default rates and the potential severity of a recession.'”

“‘Risk tolerance is still pretty low,’ says Daniel Toscano, a managing director of leveraged and acquisition finance at HSBC Securities in New York.”

“Banks and debt investors are treading carefully,” the article said. “Investment banks, which incurred big losses after selling a lot of buyout debt at heavily discounted prices, are committing only to deals they can underwrite at a profit. And investors don’t want to be caught wrong-footed if corporate defaults spike.”

We think that the report of a credit thaw is premature.  For most businesses and individuals, the credit market is still frozen solid. 

Blackstone Group LP President Tony James appears to agree with us.  James told Bloomberg News that banks are mistaken if they think credit markets have begun a sustained recovery. 

Rather than a real break in the dismal credit forecast, James said that this little patch of sunshine may be “the eye of the hurricane.”

There is clearly no de-icing of the credit market that would significantly impact the housing crisis or allow Fed Chair Ben Bernanke to sleep without getting the chills at night.

 

 

Who is Still Against Federal Foreclosure Legislation?

As the Congress comes closer to passing legislation to help homeowners facing foreclosure, it is worth taking a look at the opposition to federal foreclosure aid.

Of course, there are those who strictly oppose nearly all forms of government intervention in the economy.  Congressman and presidential candidate Ron Paul and his free market libertarian supporters would be among this group.

Then are those who are opposed to market interventions in general, but will support some government interventions when the stability of the market is at stake.  Most Republicans fit into this group — including Federal Reserve Chairman Ben S. Bernanke.

That’s why it was significant that it was Bernanke who last week made the most convincing argument from a free market perspective for federal aid to homeowners facing foreclosure.

As we noted in an earlier post, Bernanke told an audience at the Columbia Business School that the foreclosure crisis posed the clear and present danger of wreaking economic havoc far beyond the housing market. “High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

What is at stake, according to Bernanke, is not merely the homes and financial well-being of hundreds of thousands of borrowers, but “the stability of the financial system.”  In this extreme circumstance, even staunch free market advocates, such as Bernanke himself, recognize the need for the government to intervene in the market.

We think, then, that the overwhelming vote in the House of Representives in favor of government intervention to stop the rising tide of foreclosures — legislation that now has the support of many free market Republicans — was rooted at least as much in the economic reality of averting catastrophe as the political expediency of government largess in an election year.

Who then is still opposed to foreclosure aid?

The answer is the apartment owners.

Behind any legislative process is a power struggle of conflicting interests, and very often these interests are economic.  In the case of foreclosure aid, there this now a growing consensus that the foreclosure crisis threatens not merely the borrowers and the lenders, but the economy as a whole and hence the economic interests of almost every sector of the economy.

Except apartment owners.

The National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) have consistently argued that the blame for the foreclosure crisis is what they have called the “misguided” national policy of “home ownership at any cost” and that “People were enticed into houses they could not afford and the rarely spoken truth that there is such a thing as too much homeownership was forgotten.”

The fact is that in sharp contrast to other sectors of the real estate market, the apartment industry has not suffered as a result of the current housing crisis.  Rather, as we’ve noted before, the real estate crisis is forcing the lower end of the single-family housing market back into multi-family rental apartments.  People have to live somewhere — if they can’t afford to live in a house that they own, they will be forced to live in a house that someone else owns, such as multi-family apartment units. As homeowners suffer, apartment owners benefit.

The apartment industry has some very powerful supporters in Congress, including Senator Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking Committee.   Senator Shelby,  who has opposed federal intervention to stop foreclosures, has made millions as a landlord and is the owner of a 124-unit apartment complex in Tuscaloosa called the Yorktown Commons. 

“I want the market to work if it can, and most of the time it will, but not without some pain,”  Senator Shelby has said.

This time, the pain appears to be too great, too wide-spread, and too dangerous, for most other members of Congress, as well as most important players in the economy, to allow it to continue unabated.

Indeed, Shelby has already signaled that he would support a version of the legislation — and that the White House would sign the bill into law.

“I think if we reach a compromise,” Shelby said, “it would be acceptable to the White House because, as a Republican and former chairman of the committee, I’m going to do everything I can, work with the administration, to make sure that the program works for those it’s intended to do and make sure we can afford it as a nation.”

In this crisis, even Senator Shelby has other, larger, and more important economic interests at stake than helping the apartment industry.

 

 

Fed Chair Bernanke Warns Foreclosures Could Sink US Economy — Is He Threatening Lenders?

In a speech today at the Columbia Business School, Federal Reserve Chairman Ben S. Bernanke issued his strongest warning to date about the danger of the rising tide of home foreclosures sinking the US economy.

“High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

Bernanke began by detailing some of the nasty numbers of the foreclosure crisis:

• About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure.
• Foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006.
• The rate of foreclosure starts is likely to be even higher in 2008.
• Delinquency rates have increased in the prime and near-prime segments of the mortgage market.

He then warned that the catastrophic effects of these millions of foreclosure proceedings will extend far beyond the parties to the mortgage:

“It is important to recognize,” Bernanke said, “that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender.  Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues.  At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general.” 

“In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system.”

The real threat that the foreclosure crisis posed to the overall economy, Bernanke said, was “the declines in home values, which reduce homeowners’ equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.”

The responses to the foreclosure crisis specifically endorsed by Bernanke were nothing new —  working with community groups trying to acquire and restore vacant properties; encouraging lenders and mortgage servicers to work with at-risk borrowers; developing new lending standards to prevent abusive lending practices; working with the Bush administration’s Hope Now Alliance; expanding the use of the Federal Housing Administration (FHA) and government-sponsored enterprises such as Fannie Mae and Freddie Mac to address problems in mortgage markets.

But we think that the tone and perspective of his speech signaled that he was far more ready than the current administration to endorse a wide-ranging federal program to aid homeowners who are in default.

Bernanke came close to saying as much:  “Realistic public and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.”

We think by “traditional foreclosure avoidance strategies” Bernanke meant voluntary procedures undertaken by the financial market itself; the “non-traditional foreclosure avoidance strategies” that Bernanke suggested might be necessary would then be mandatory procedures imposed on the market.

We therefore think that Bernanke’s speech contained a threat to the very financial institutions that the Fed has been so generous toward for the past six months.

So far, lenders have been asked to voluntarily help stem the foreclosure crisis by working with homeowners.  Now it appears that Bernanke may be close to supporting mandatory restraints on foreclosures.

We think Bernanke may have been saying this to the lenders and the leaders of the financial market: “We’ve made billions of cheap dollars available to you, so that you could stay afloat and so that you could make this money available for new borrowing and refinancing to prevent foreclosures.  You have not kept your end of the bargain.  If you don’t move much further along this path soon,  it is in the interest of the US economy overall to force you to do so.”

The lenders and financial institutions haven’t listened to threats from Congressional Democrats like Barney Frank or taken the voluntary actions requested by the Bush administration.

Maybe they’ll listen to today’s warning by Ben Bernanke.

We think they’d better.

 

 

The Fed Nears the End of the Rate-Cutting Line — Now its the Banks’ Move

After the Federal Reserve cut short-term interest rates on Wednesday for the seventh time since September 2007 — lowering the federal funds rate to 2 percent, from 2.25 percent, the lowest level since November 2004 — most analysts observed that the Fed’s move showed that it was more concerned with preventing recession than halting inflation.

We’re not so sure that it is a question of recession verses inflation that’s driving the Fed.

We think that the Fed’s real concern right now is neither inflation nor recession, at least not directly, but the lack of liquidity in the financial markets and the lack of funds that financial institutions are making available to borrowers.

So far, the Fed has pumped more than $400 billion into major U.S. financial institutions in the hope that these institutions would make this money available to borrowers. 

And, so far, they haven’t done so, and liquidity conditions in the credit markets have continued to deteriorate. 

Despite the Fed’s inceasing generosity for the past six months, it has been harder, not easier, for businesses (and individuals) to borrow money.

The Fed is nearing the end of its rate-cutting line.  If the financial spigot does not loosen for borrowers based on the latest cuts, there may be no more that the Fed can do, especially since, with rising fuel and food prices, fears of inflation are already starting to overtake fears of recession, in America’s living rooms as well as its Board rooms.

Two members of the Fed’s Open Market Commitee  — Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed — which is charged under federal law with overseeing national monetary policy — voted against lowering the rates this time.  And the criticism of the Fed’s policy of lowering interest rates and providing cheap money for the banks is getting broader, louder and more influential.

The banks and major lending institutions have been waiting for the Fed to cut interest rates as far as it possibly would before they start lending.

That moment has probably arrived.

Now it’s the financial market’s turn to make a move.

 

 

Judicial Nullification of Foreclosures Spreads to Bankruptcy Court

Back in March, we posted a blog on “judicial nullification” in mortgage cases. 

We titled it “Are “Deadbeat” Home Owners Beating the Banks Through “Judicial Nullification“?

Recent judicial decisions have proven us to be correct — and that “judicial nullification” in mortgage cases has expanded into federal bankruptcy proceedings.

When a jury refuses to follow the law or the instructions of the judge, and instead renders a verdict counter to the law but based on their sympathies or their sense of fairness, it is called “jury nulllification.” 

Judges too can refuse to follow the law when they believe it is unfair, or they can interpret the law so that the outcome favors the side that the judge believes to be morally right — even if that side would be legally in the wrong according to previous interpretations of the law.

We call that “judicial nullification.”

Now we hear that in an increasing number of cases, federal bankruptcy judges are refusing to stay bankruptcy proceedings to permit lenders to move forward with foreclosure actions, and even sanctioning lenders whose conduct seem to them to be abusive or improper.

According to the New York Times, “Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.”

The cases cited by the Times are from bankruptcy courts in Delaware, Louisiana and New York, and “each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.”

In a case in Louisiana, Judge Elizabeth W. Magner found that Wells Fargo was guilty of “abusive imposition of unwarranted fees and charges,” and improper calculation of escrow payments, among other things.  She found Wells Fargo negligent and assessed damages, sanctions and legal fees of $27,350.

The Times wrote that “The heart of the case is that Wells Fargo failed to notify the borrower when it assessed fees or charges on her account. This deepened her default and placed her on a downward spiral that was hard to escape. And Wells Fargo’s practice of not notifying borrowers that they were being charged fees ‘is not peculiar to loans involved in a bankruptcy,’ the court said. During a 12-month period beginning in 2001, for example, Well Fargo assessed 13 late fees totaling $360.23 without telling Ms. Stewart or her late husband, whose name was on the loan before he died. Even though the terms of the mortgage required that Wells Fargo apply any funds it received from the Stewarts to principal and interest charges first, the late fees were deducted first. This meant that the Stewarts’ mortgage payments were insufficient, making them fall further behind — and keeping them subject to more late fees.”

“Then there were the multiple inspection fees Wells Fargo charged the borrowers. Because its computer system automatically generates a request for property inspections when a borrower becomes delinquent — to make sure the property is being kept up — the $15 cost of the inspections piled up. The court noted that the total cost to the borrower for one missed $554.11 mortgage payment was $465.36 in late fees and property inspection charges.”

“From late 2000 and 2007, Wells Fargo inspected the property on average every 54 days, the court found. But the court also determined that inspections charged to Ms. Stewart had often been performed on other people’s properties. Of the nine broker appraisals charged to Ms. Stewart from 2002 to 2007, two were said to have been conducted on the same September day in 2005 when Jefferson Parish, where the Stewart home was located, was under an evacuation order because of Hurricane Katrina.”

“The broker appraisals were conducted by a division of Wells Fargo that charged more than double its costs for them, the court found. It concluded that the charges were an undisclosed fee disguised as a third-party vendor cost and illegally imposed by Wells Fargo. The bank also levied substantial legal fees and failed to credit back to the borrower $1,800 that had been charged for an eviction action but that had been returned by the sheriff because it never occurred.”

“While Wells Fargo claimed that the borrower owed $35,036, the judge said the actual figure was $24,924.10. The judge ordered Wells Fargo to provide a complete loan history on every case pending with her court after April 13, 2007.”

In a Delaware case, Judge Brendan Linehan Shannon refused to allow a lender to charge fees owing under the mortgage after the borrower had satisfied all obligations under a Chapter 13 bankruptcy.

Mortgage lenders argue that their contracts allow them to recover all the fees and costs they incur when a borrower files a Chapter 13 bankruptcy plan, even after a case is resolved.

“This cannot be,” the judge wrote. “If the court and the Chapter 13 Trustee fully administer a case through completion of a 60-month Chapter 13 plan, only to have the debtor promptly refile on account of accrued, undisclosed fees and charges on her mortgage, it could fairly be said that we have all been on a fool’s errand for five years.”

And in a recent case in New York, Judge Cecilia G. Morris refused to allow a lender to foreclose even though the borrowers had technically failed to make the required payments on their mortgage.

The Times reports that “The case involved Christopher W. and Bobbi Ann Schuessler, borrowers who had $120,000 of equity in their Burlingham, N.Y., home when their bank, Chase Home Finance, a unit of JPMorgan Chase, moved to begin foreclosure proceedings. The couple had filed for personal bankruptcy protection, which automatically prevents any seizure of their home. But the bank moved for a so-called relief from the bankruptcy stay, and claimed the couple had no equity.”

“The Schuesslers got into trouble because Chase had refused a mortgage payment they tried to make at a local branch. Testimony in the case revealed a Chase policy of accepting mortgage payments in branches from borrowers who are current on their loans but rejecting payments from borrowers operating under bankruptcy protection.”

“The Schuesslers did not know this. When Chase rejected their payment, they briefly fell behind on their mortgage, according to the court documents. Then Chase moved to begin foreclosure proceedings.”

“Without informing debtors, Chase Home Finance makes it impossible for JPMorgan Chase Bank branches to accept any payments,” Judge Morris wrote. “It appeared that Chase Home Finance intended to commence an unwarranted foreclosure action, due to ‘arrears’ resulting from Chase Home Finance’s handling of the case in its bankruptcy department, rather than any default of the debtors.”

We predicted in March that “that more judges will engage in ‘judicial nullification’ of mortgages unless Congress and the Executive Branch exercise their responsibilities and turn their attention to the mortgage and credit crisis in a far more comprehensive and meaningful way than they have so far.”

These recent cases are proving us correct.

Freddie Mac to Buy $10-15 Billion in Jumbo Loans — Move Hopes to Jump-Start Liquidity in Home Loan Market

Some relief may be in store for the battered residential real estate markets in California, New York, and other high cost states, as Freddie Mac announced on Thursday that it will buy jumbo mortgages in areas with high real estate prices from four of the largest U.S. mortgage lenders.

Freddie Mac’s purchase of conforming jumbo mortgages is restricted to 224 high cost markets where median home prices exceed Freddie Mac’s $417,000 loan limit.

Qualified borrowers in these states can now apply for an array of fixed-rate or adjustable rate conforming jumbo mortgages that will be less expensive than non-conforming jumbo loans in high cost markets.

Borrowers can use Freddie Mac conforming jumbo mortgages to finance up to 90% of a property’s value.

Freddie Mac said in a press release that it will purchase conforming jumbo loans from Wells Fargo, JPMorgan Chase, Citigroup, and Washington Mutual. 

It expects to finance between $10 and $15 billion in new jumbo mortgages in 2008.

The press release called the decison Freddie Mac’s “first large-scale effort to jump-start the stalled jumbo mortgage market under the Economic Stimulus Act.” 

The Economic Stimulus Act temporarily raised Freddie Mac’s conforming loan limit from $417,000 to as much as $729,750 through December 31, 2008.

The move is another is a series of federal actions that are meant to increase liquidity in the housing finance market.

Congress tried to ease jumbo loan rates in February, when it allowed Fannie Mae and Freddie Mac to guarantee bigger mortgages of up to almost $730,000 dollars.

But, so far, the banks has failed to respond to these new government guarantees by lowering interest rates or increasing liquidty in the home loan market.

The reason, accoprding to the banks, is that they need to sell their loans to investors, but investors aren’t buying.  Freddie Mac’s move is intended to free up the lenders’ balance sheets and allow them to concentrate their efforts on originating these loans.

“Purchasing conforming jumbo mortgages for our portfolio shows how we can bring new liquidity to markets other investors have all but abandoned and make full use of the new tools Congress gave us to help restore stability during the current housing crisis,” said Freddie Mac Chairman and CEO Richard Syron. “We initially expect conforming jumbo mortgages to have rates that are as much as half a percentage point below the jumbo market rate in many of these high cost markets.”

While specific product availability may vary by lender, Freddie Mac has said it will buy 15-, 20-, 30- and 40-year fixed-rate, fully amortizing conforming jumbo mortgages; 30-year fixed-rate mortgages with 10-year interest-only periods; fully amortizing 5/1 adjustable-rate mortgages (ARMs) and 5/1 ARMs with 10-year interest-only periods. Qualified borrowers can also obtain cash-out refinance conforming jumbo mortgages that provide a maximum cash-out of $100,000.

Minorities Most Affected by Subprime Crisis — But Minorities Also Benefited From Mortgage Innovations

The evidence of racial disparity in lending is growing, as is the evidence that the subprime mortgage crisis has disproportionately affected minority borrowers.

The most recent evidence is the study released yesterday showing that banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

The study found that Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites.

During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites.

Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites.

Although the recent study is getting far more press coverage than earlier reports, the idea that the subprime mortgage crisis has hit minorities harder than whites isn’t new.  A similar study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they caution against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance, and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

While it is now clear that the subprime mortgage crisis has disproportunately impacted minority borrowers and that this was sometimes the result of racism, we agree with Professor Shiller that the financial innovations created by the mortgage and banking industries in the past decade have delivered benefits to all Americans, “including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor Austan D. Goolsbee in his essay in the New York Times entitled ‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market, showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that, contrary to the current hysteria about the mortgage industry, “the mortgage market has become more perfect, not more irresponsible” and that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

We share the hope of Shiller and Goolsbee that when the governmental regulators begin to search for villians in the subprime mess and rewrite the rules for mortgages, they will preserve many of the finiancial innovations created by the mortgage and banking industries that have opened doors for so many of the excluded and allowed so many to achieve the American Dream.