A new Acorn study found that African-Americans and Latinos are the groups hardest hit by foreclosures due to their exposure to high cost home purchase loans. During the past few weeks, politicians and the media have been covering the issue of the foreclosure crisis and in general tended to blame “unscrupulous lenders” or borrowers who did not know what they were getting into.
I do not think this is a matter of the level of education of the public, but a situation of rational decisions made in an irrational economic environment. Here is why: for different reasons, both groups have been historically left out of the American Dream of home ownership. I will not analyze here the validity, importance or wisdom of owning a home, but it should suffice to say that in American culture, homeownership is a desirable trait.
Let’s remember that less than a year ago, the same press (and in many cases the same commentators) that now are crying wolf were touting the ineffability of ever rising property values. With half a dozen TV programs devoted to the magic of real estate flipping and lenders peddling ARMs, with full support of then Fed Chairman Allan Greenspan, it was not stupid to take on an ARM, it was a completely rational decision.
Let’s remember what the real estate climate was back then. In February 2004, “Federal Reserve Chairman Alan Greenspan said, ‘American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage’.” And guess what happened: Wall Street did just that, used the green light of the Fed Chairman to go after the few sectors of the American population they still did not have as customers, coincidentally, those who have been historically excluded from the American dream.
As I mentioned before, this was possible because banks were (they still are, despite their claims to the opposite) awash in money thanks to immediate liquidation of real estate debt holdings in the form of CDOs. Of course, banks knew that they were taking higher risks when giving these subprime loans, and they hedged their bets by transferring the inherent risk of these loans to the buyers of the CDOs. However, in 2005, they recognized that the market was starting to top and they pushed for bankruptcy reform to make it harder for borrowers to keep their homes by declaring bankruptcy. My contention is that they did so to be able to concentrate large pieces of real estate in the hands of a few “trustworthy” owners, and that they used the real estate bubble and the sectors of the population that historically were not able to own property to re-distribute the land.
By the way, if you were still buying real estate in 2005, following the hype, too bad for you. You should have listened to what Bernanke had to say this week about the real estate market in that year. Talking at the Federal Reserve Bank of
That was the climate in the housing market then, and not one, but two Fed Chairmen took care of providing fuel to the fire.
Therefore, we have some forces that reinforce the bubble climate:
- Banks with excess liquidity
- A government with a twisted Keynesian recovery plan based on both public and governmental fueling of the inflationary machine
- “The market” that will take every opportunity to try to produce as much money as possible (most of the time in the most irrational manner)
If you belonged to any group which historically was kept outside of the American dream, it would have made sense to you to take this opportunity to finally become an owner. When the banks were literally knocking at your door to give you free money, you would have taken a subprime loan (the only kind offered to you) and now you would be facing foreclosure. Again, taking an ARM in those days was neither irrational nor based on financial ignorance. Of course, better education would have been great. Political education, that is.
Franklin @ September 5, 2007