Some Greed and Some Corruption, but Mostly Social Activism

Everyone is running around and pointing fingers at each other over who's to blame for the sub-prime mortgage mess that's theatening a major meltdown in the economy. The politicians are blaming each other and the greed and corruption of Wall Street magnates, and certainly there was some of that, but if you want to get to the core of the crisis, you have to look back to the 90's and the housing and lending policies that were brought about because of social activism:

While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn't too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.

"Home mortgages have been a political piñata for many decades," writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.

Liebowitz puts forward an explanation that he admits is "not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown."

In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country's financial foundation to achieve its goal.

"In an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s," Liebowitz writes. "The decline in mortgage underwriting standards was universally praised as 'innovation' in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists."

He continues, "Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise."

"As homeownership rates increased there as self-congratulation all around," Liebowitz writes. "The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership."

An article in the Los Angeles Times from the late '90s praised the sudden surge in homeownership among minorities, calling it "one of the hidden success stories of the Clinton era."

John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.

According to Lott, the Federal Reserve Bank of Boston produced a manual in the early '90s that warned mortgage lenders to no longer deny urban and lower-income minority applicants on such "outdated" criteria as credit history, down payment or employment income.

Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and praised lenders – like Countrywide and Bear Stearns – for adopting the slackened policies toward minority applicants.

"Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac," writes Lott, "the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising."

Liebowitz' contention that lenders were under pressure to loosen their standards for racial and political goals was confirmed years ago by the companies at the heart of today's crisis: Fannie Mae and Freddie Mac.

The bailout bill that's being finalized will end up costing taxpayers $700 billion dollars as the government buys up all this bad debt. But will there be a change in lending practices? Once the decks have been cleared of this bad paper, will the newly-capitalized lenders go right back into the same bad practices that brought this crisis on?

Yes. Why? Because the race-baiters and social activists will not give up and the government won't dare restrict lending lest it be called "racist". More bad loans will be poored into communities that can't afford them. History will repeat itself despite the promises of the government.