Britannia Radio

One day the full story will be written - perhaps! (If the Large 
Hadron Collider doesn't get there first) .  But here a reader has 
sent me an American explanation of how it all went wrong - or rather, 
not so much HOW but WHY!   But first,  a more light-hearted approach 
to telling the same story.

Domestically of course its more Blair's fault than Brown's though 
it's a fine judgement!   Blair played the world stage leaving Brown 
in charge of the domestic scene .  He left him to squander all the 
vast reserves that had been built up in the Thatcher (and Major) 
years and all the pension funds which had been decades in their 
building .  When they were all gone he pushed off with exquisite 
timing leaving Brown the Wrecker to take sole charge without 
bothering to get the approval of the party members let alone the voters.

Brown has uniquely in the Western world landed his country in a 
crisis with no reserves to fall back on.  For the quarter of a 
century we have depended as a country on the expertise of The City of 
London.

What are we to live on now?

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A sub-head in one paper today asks 'Can Asia save us from the Credit 
Crunch?" . When  the leader of one major country is called "Who" and 
the other "When" I rather doubt it .  -  or should that be 'Hu' and 
'Wen' ?
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TELEGRAPH   18.9.08
(Super finance according to Bird & Fortune)
Imagine, if you can, an unemployed black man sitting on a crumbling 
porch somewhere in Alabama in his string vest and a chap comes along 
and says would you like to buy this house before it falls down and 
why don't you let me lend you the money?

Then this mortgage is bought by a bank and packaged together on Wall 
Street with a lot of other similar debts. Somehow this package of 
dodgy debts stops being a package of dodgy debts and starts being 
what we call a structured investment vehicle.

I buy it and then I will ring up somebody in Tokyo and say 'look I've 
got this package do you want to buy it?' and they say 'what's in it?' 
and I say 'I haven't got the faintest idea' and they say 'how much do 
you want for it?' and I say 'a hundred million dollars' and then they 
say 'fine' and that's it. That's the market.
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NEW YORK POST - (date ?)
THE REAL SCANDAL
By STAN LIEBOWITZ

PERHAPS the greatest scandal of the mortgage crisis is that it is a 
direct result of an intentional loosening of underwriting standards - 
done in the name of ending discrimination, despite warnings that it 
could lead to wide-scale defaults. At the crisis' core are loans that 
were made with virtually nonexistent underwriting standards - no 
verification of income or assets; little consideration of the 
applicant's ability to make payments; no down payment. Most people 
instinctively understand that such loans are likely to be unsound.

But how did the heavily-regulated banking industry end up able to 
engage in such foolishness? From the current hand-wringing, you'd 
think that the banks came up with the idea of looser underwriting 
standards on their own, with regulators just asleep on the job. In 
fact, it was the regulators who relaxed these standards - at the 
behest of community groups and "progressive" political forces.

In the 1980s, groups such as the activists at ACORN began pushing 
charges of "redlining" - claims that banks discriminated against 
minorities in mortgage lending. In 1989, sympathetic members of 
Congress got the Home Mortgage Disclosure Act amended to force banks 
to collect racial data on mortgage applicants; this allowed various 
studies to be ginned up that seemed to validate the original 
accusation. In fact, minority mortgage applications were rejected 
more frequently than other applications - but the overwhelming reason 
wasn't racial discrimination, but simply that minorities tend to have 
weaker finances.

Yet a "landmark" 1992 study from the Boston Fed concluded that 
mortgage-lending discrimination was systemic. That study was 
tremendously flawed - a colleague and I later showed that the data it 
had used contained thousands of egregious typos, such as loans with 
negative interest rates. Our study found no evidence of 
discrimination. Yet the political agenda triumphed - with the 
president of the Boston Fed saying no new studies were needed, and 
the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the 
Boston Fed, clearly speaking for the entire Fed, produced a manual 
for mortgage lenders stating that: "discrimination may be observed 
when a lender's underwriting policies contain arbitrary or outdated 
criteria that effectively disqualify many urban or lower-income 
minority applicants." Some of these "outdated" criteria included the 
size of the mortgage payment relative to income, credit history, 
savings history and income verification. Instead, the Boston Fed 
ruled that participation in a credit-counseling program should be 
taken as evidence of an applicant's ability to manage debt.

Sound crazy? You bet. Those "outdated" standards existed to limit 
defaults. But bank regulators required the loosened underwriting 
standards, with approval by politicians and the chattering class. A 
1995 strengthening of the Community Reinvestment Act required banks 
to find ways to provide mortgages to their poorer communities. It 
also let community activists intervene at yearly bank reviews, 
shaking the banks down for large pots of money. Banks that got poor 
reviews were punished; some saw their merger plans frustrated; others 
faced direct legal challenges by the Justice Department. Flexible 
lending programs expanded even though they had higher default rates 
than loans with traditional standards.

On the Web, you can still find CRA [?] loans available via ACORN with 
"100 percent financing . . . no credit scores . . . undocumented 
income . . . even if you don't report it on your tax returns." Credit 
counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out 
one paragon of nondiscriminatory lending, which worked with community 
activists and followed "the most flexible underwriting criteria 
permitted." That lender's $1 billion commitment to low-income loans 
in 1992 had grown to $80 billion by 1999 and $600 billion by early 
2003. Who was that virtuous lender? Why - Countrywide, the nation's 
largest mortgage lender, recently in the headlines as it hurtled 
toward bankruptcy. In an earlier newspaper story extolling the 
virtues of relaxed underwriting standards, Countrywide's chief 
executive bragged that, to approve minority applications that would 
otherwise be rejected "lenders have had to stretch the rules a bit." 
He's not bragging now.

For years, rising house prices hid the default problems since quick 
refinances were possible. But now that house prices have stopped 
rising, we can clearly see the damage caused by relaxed lending 
standards. This damage was quite predictable: "After the warm and 
fuzzy glow of 'flexible underwriting standards' has worn off, we may 
discover that they are nothing more than standards that lead to bad 
loans . . . these policies will have done a disservice to their 
putative beneficiaries if . . . they are dispossessed from their 
homes." I wrote that, with Ted Day, in a 1998 academic article. 
Sadly, we were spitting into the wind.

These days, everyone claims to favor strong lending standards. What 
about all those self-righteous newspapers, politicians and regulators 
who were intent on loosening lending standards? As you might expect, 
they are now self-righteously blaming those, such as Countrywide, who 
did what they were told.
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Stan Liebowitz is the Ashbel Smith professor of Economics in the 
Business School at the University of Texas at Dallas.
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