Underdogs Don’t Need Bailouts

Detractors of my columns continuously chide me a free-market zealot lunatic inebriated by capitalist ideology, unable to recognize criminals subjugating poor suckers, even when we catch them red handed.  Some of my Democrat friends (I actually have a couple) admonish my laissez-faire ideals and ask, Jim, don’t you root for the underdog?

I thought I was the underdog.

No college degree, no rich parents, no connections to wealthy influential businessmen or politicians who might aid my rise.  Only if I was a black woman lesbian, then I would have the whole package!

All this talk about the failure of the free-market, and I’m scratching my head, what free-market?

In the old days you needed twenty percent down to buy a house.  Reason was, if you didn’t pay, the bank could take back the house and resell it without getting screwed.   Pretty simple.  This is how banks stayed in business and protected depositor funds.  The policy also made sure home buyers had a little skin in the game.

Good business practices, however, gave way to irresponsible altruistic endeavor promoted not by home buyers at the bottom, or bank executives in the middle, but by politicians at the top.

The Community Reinvestment Act was passed in 1977 under President Jimmy Carter.   The act was designed to prevent lending institutions from redlining  A policy banks used to steer clear of neighborhoods more likely to default on loans.  While the policy penalized some minorities capable of meeting mortgage commitments, in its usual broad swath approach the government encouraged and guaranteed irresponsible and risky behavior.

In debate, the bill’s detractors lamented the legislation would create unnecessary regulations and burden banks, and ultimately lead to unsound lending.  Imagine that!

In 1989 the Bill was modified to give lending institutions ratings and publicly disclose them, allowing community groups to influence bank actions with political pressure.

In 1992, 1994, 1995, and 1997 further legislative changes snared Fannie Mae, Freddy Mac, and ultimately the big investment houses, Bear-Stearns, Goldman, Lehman, etc.

May 25, 2006, John McCain co-sponsored the FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ACT OF 2005 which was killed by irresponsible politicians in Congress.  In his support of the Act, McCain highlighted, Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were illusions deliberately and systematically created by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Act failed to pass.

Our financial meltdown has not resulted from too little regulation or a free-market run amok, it has resulted from criminal behavior cloaked by irresponsible altruism ignoring simple business realities that keep the free-market normally on track.   Politicians demanding bad regulations are at the nucleus of this meltdown.

If borrowers took on more house than they could afford, they need to lose them.  Crazy programs to buy down bad mortgages will just prolong the correction which will take place. Everything has intrinsic value and no amount of government intervention can maintain housing prices above that level indefinitely.  Arrogant politicians will now cover their butts by increasing America’s debt to indenture our children.

While our country flails under the weight of this financial catastrophe, the same politicians who created the policies which have destroyed us are hauling rotten CEO’s into inquisitions demanding answers.

The English language doesn’t possess words adequate to describe these proceedings, preposterous and ridiculous don’t cut it.

It’s like Charles Manson was summoned to preside over the trial of Leslie Van Houten, Susan Atkins, and Patricia Krenwinkle.

I asked my good Democrat buddies, How is all this going to help the underdog?

If the underdog is a guy who’s busting his butt trying to raise himself and improve his station giving it all he’s got, then you bet I’m rooting for him, and guess what?  That guy will do just fine without bad government regulations.

If the underdog is some crack smoking loser, three kids out of wedlock and not taking care of any of them, then no, I’m not rooting for him, and I don’t want the government forcing bad regulation down upon banks to give the jackass a house to live in.

That guy will sleep just fine in an old refrigerator box.

American opportunity exists to insure everybody access to success, not guarantee it.  By providing reward instead of demanding it be presented upon achievement, our politicians have perverted American business and encumbered free-enterprise a dubious distinction it had no hand in creating.

Copyright 2008 Jim Pontillo

34 thoughts on “Underdogs Don’t Need Bailouts

  1. We’ve gone over this before.


    “The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of high default rates. In this case, the rejection does not take the individual’s qualifications and creditworthiness into account.”

  2. Jim,

    You should remove the “nofollow” tags if you want others to link to your great site.

    Spread the link love. You can always delete the spammy ones.

  3. Let’s call it for what it has been! A shameless method by unscrupulous politicians to hook more people on the idea of a “free lunch” and buy more votes!

  4. So, once again I ask; what are these bad regulations? Forcing financial institutions to consider applicants based on individual merit instead of arbitrary discrimination?

    You see, redlining wasn’t just cutting out incredible borrowers. It was creating arbitrary zones that disallowed loans to otherwise credible applicants living in those neighbourhoods. The ban on redlining was not forcing “irresponsible” “bad business decisions,” it was forcing lenders to consider an applicant regardless of their neighbourhood, as long as they proved credible and reliable.

    You falsely characterise redlining as part of the Free Market myth you champion, which includes “opportunity for all” and nondiscrimination. You falsely characterise the banning of redlining as forcing bad business decisions, when it in fact only forces lenders to consider a case individually, rather than rejecting it on the basis of neighbourhood. Which of those sounds closer to the free market ideal? Arbitrarily denying opportunity to the creditable, or taking an individual’s credibility into account?

  5. Hey crumb,

    You can’t engage the argument can you.

    Jim admitted redlining was not justified but he also pointed out how all this government regulation you love has caused all of our problems.

    But no, you won’t talk about that.

    Redlining, redlining, redlining…

    You remind me of one of those guys who sets himself on fire cause your girlfriend dumped you for a guy who wasn’t insane.

  6. “The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of high default rates. In this case, the rejection does not take the individual’s qualifications and creditworthiness into account.”

    Rant on: The above is a politicized, prejudicial, statement of opinion masquerading as a definition. This has become a pet peeve of mine – the politicization of everything from language to law, to science to journalism and yes, definitions. It has grown progressively worse over the last couple of decades or so, and ever more annoying. It suppresses objectivity, suffocates civility, and cripples communication in common conversation.

    Red lining is the practice or policy of banks to limit or exclude loans in specific geographical areas.

    “Unethical” is someone’s opinion – not a part of the definition. “Making it difficult to obtain a mortgage or insurance…” may be a result of the practice – but not a part of the definition. “Because of high default rates” may be a justification for the practice – but not a part of the definition. “Does not take the individual … into account” is an assumption – not part of the definition.

    Rant off.

  7. “I thought I was the underdog.

    No college degree, no rich parents, no “connections” to wealthy influential businessmen or politicians who might aid my rise. Only if I was a black woman lesbian, then I would have the whole package!”

    Everyone wants to see themselves as the underdog, that way they can justify their views by imagining that everyone is against them. The question is how disadvantaged are you now?

  8. red·lin·ing /ˈrÉ›dËŒlaɪnɪŋ/ Pronunciation Key – Show Spelled Pronunciation[red-lahy-ning] Pronunciation Key – Show IPA Pronunciation
    a discriminatory practice by which banks, insurance companies, etc., refuse or limit loans, mortgages, insurance, etc., within specific geographic areas, esp. inner-city neighborhoods.
    Also, red-lining.

    [Origin: redline + -ing1, as if banks, insurance companies, etc., had outlined such areas in red on a map]
    Dictionary.com Unabridged (v 1.1)
    Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.

    I trust that Random House is not a COMMUNIST LIBERAL institution that exists only to lie?

  9. Regardless, you friends of redlining are missing out on the important issues and attacking the irrelevant side-bits.

    If the Free Market really does guarantee opportunities to advance in the world based on merit, then redlining is precisely anti-free market. It arbitrarily excludes individuals from loans based not on individual merit or lack thereof, but on who your neighbours are.

    Much more importantly, Jim et al have not proven their case that government regulation caused this financial meltdown mess. They have provided no evidence except the insistence that redlining somehow kept this market collapse at bay, and politicians destroyed the market by banning redlining.

    1. Why is it bad for the economy if banks consider applicants based on their merit/credibility rather than who they live near?

    2. Why is it wrong for politicians in the Jimmy Carter and LBJ eras to enforce the free market ideal of meritocracy, by requiring loan institutions to judge based on merit instead of an arbitrary line?

    Redlining is plainly counter to meritocracy and by extension the Free Market ideal/mythology. It also makes no sense to claim that redlining in any way protected the economy from financial failures, as the removal of redlining only forced banks to take on more credible customers.

    Where, in any of this, were banks forced to loan money to those who were not credible? Certainly not in redlining. And yet, it is the only issue you have any substantial argument regarding. What is this other supposedly corrupt legislation? Public ratings for banks? Ambiguous statements about legislation in the 90’s? The failure of regulation to pass? None of this supports the claim that regulation forced the banks to give loans to the incredible.

    So, are you going to provide any evidence, or just cite dates and act like your belief is proof enough?

  10. I agree Jim! I saw homes in my neighborhood sell to people I knew couldn’t afford them…why didn’t the banks know? The greedy mortgage brokers and lenders knew and laughed all the way to the bank with their incomes and record profits. Who’s laughing now?

  11. Well Crumb, you came up with a much better definition and then proceeded with a gratuitous comment to demonstrate you are unable to grasp the distinction between an objective definition and an idealogical position statement masquerading as one.

    Good show!

  12. The free market does guarantee opportunity. It does not guarantee outcome. Nor does it guarantee everyone the exact same seat on the bus. Differing personal circumstances often result in differing opportunities.

    Redlining is not anti-free market unless you believe that lending institutions should not be free to make decisions based upon what they believe is best for their business. Redlining is not about who your neighbors are. It is about RISK. You conveniently forget (or perhaps you didn’t know) it is not only the credit worthiness of the buyer applying for a loan that is considered, it is also the current value of the asset being used for collateral, and its likelihood to retain enough value to allow the lender to offset his liability should a default occur, that is evaluated.

    By the way, the most credible of persons can still be “not credit worthy.”

  13. Crumb,

    1. Why is it good for banks to loan money to ANYONE in an area where property values are declining while bankruptcies, foreclosures, and abandonments are rising?

    2. Why is it right for politicians to insist banks (or any business) conduct their business according to arbitrary political edict rather than their own considered interests?

  14. Crumb – for your edification:

    The Fair Housing Act, 42 U.S.C. 3601 et seq., prohibits discrimination by direct providers of housing, such as landlords and real estate companies as well as other entities, such as municipalities, banks or other lending institutions and homeowners insurance companies whose discriminatory practices make housing unavailable to persons because of:

    race or color
    national origin
    familial status, or
    (later amended to include sexual oreintation)

    Congress adopted the Community Reinvestment Act (CRA) (P.L. 95-128, 91 Stat. 1147) in 1977 to combat (according to the bill’s statement of intent) “redlining,” defined as the “systematic denial of credit to persons living within a certain area.” CRA required REGULATED financial institutions to show that each of their facilities met the “convenience and needs of the communities in which they are chartered to do business.”

    Congress’s intent was to improve the banking services in poorer communities, realizing the probable beneficiaries would be racial minorities. The law was vague and pooerly written. Until 1989 CRA required banks to show a good faith effort in “adequately meeting the needs of the communities they served.” That good faith effort was measured by twelve specific assessment factors.

  15. In 1992 the Clinton administration proposed changes to the CRA. While the intent may have been to allow the banks to focus more on lending and less on bureauocracy, the result was the replacement of the objective assessment factors by quantitaive measures. In other words, a bank’s compliance was no longer measured by its policy and process, but by the number of loans made that in the opinion of the government, met CRA requirements.

    This allowed Janet Reno’s justice department to arbitrarily threaten regulated lending institutions with dire legal “consequences if the government didn’t like the numbers.”

    as bank ownership shifted from
    local banks to multinational banks to megabanks, the nature of CRA
    compliance changed. And federally regulated banks found it
    harder and harder to lend in CRA- qualified zip codes.

  16. contnuing Crumb’s education:

    In order to meet CRA requirements, many banks found it necessary to reduce their lending standards, often making it unprofitable to comply.

    That’s where the unregulated mortgage lender comes in. Its lending practices are not subject to the intense federal scrutiny that a bank faces. Unregulated lenders also are willing to take on the greater risk of lending in an economically
    disadvantaged neighborhood through their loose network of brokers.

    Sometimes the only avenue for a bank to meet its CRA goal was to buy loans from low- and moderate-income census tracts, through unregulated mortgage brokers and as we are now learning, there was really no way to know whether those bundles contained subprime, even predatory, loans.

  17. Last installment:

    Jim Capraro of the Greater Southwest Development Corp., who was doing community development work when the CRA was created, says, “(Federally chartered banks) are buying dots on the map. The dots are conveniently originated by someone else, so they don’t get the
    originating cost. They are packaged up by the New Centuries of the world and then they are underwritten by the Lehman Brothers of the
    world. (and “securitized by the Fannies and Freddies of the world) Then they are put into tranches so the bad loans are spread out with the good, so that ultimately the cost to the investor is

    The way the portfolios of loans are passed down the line from bank to bank means that the dots would far outnumber the houses because the CRA credit from one mortgage can be shared by many banks.

    “Unfortunately,” Capraro says, “the victimization is not minimal at
    all. The cost to the borrow is not minimal at all. Neither is the
    cost to the neighborhoods around them.”

  18. A final word on redlining.

    Just because some or even many banks limited or excluded loans in a given area did not mean a credit worthy buyer could not buy property in that area.

    There were other banks, private lenders and mortgage companies that would loan. I know, because my partner and I bought and sold houses in redlined areas in the early to mid 70’s.

  19. Gbaker,

    Good show, however, I don’t think Crumb can grasp your logical and straight forward explanation. He certainly won’t engage it.

    “Redlining, redlining, redlining…”

    Did you know he lit himself on fire?

  20. Sake Mike,

    I suspect you are right. He will come back and insist it was the lack of regulation of the mortgage lenders and brokers that was the problem.He will dismiss the fact it was the CRA and heavy handed enforcement by the DOJ that forced banks to abandon tried and true practices and distorted the traditional role of mortgage brokers.

  21. “A positive lending cycle thus began in many communities once ignored by mainstream lenders. Under CRA, lenders know that other banks will be making loans to a community, reducing all institutions’ liquidity risk, speeding the gathering and dissemination of information, and producing positive information externalities. Increased lending by responsible originators to low-income communities has occurred under CRA and such responsible lending has not led to the kind or extent of excessively risky activity under taken outside of CRA’s purview.”

    “Between 1993 and 1999, depository institutions covered by the CRA and their affiliates made over $800 billion in home mortgage, small business, and community development loans to low- and moderate-income borrowers and communities.”

  22. “In a Federal Reserve Board survey of CRA-covered institutions, most responded that CRA lending was profitable or marginally profitable, and not overly risky. Pushing further into low-income markets under CRA has not weakened banks’ profitability and soundness. In the small “special programs” that serve as banks’ CRA laboratories, employing new and innovative strategies, most institutions reported low delinquency and charge-off rates. In fact, most institutions surveyed reported a net charge-off rate of zero for these programs.”

    “More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts. Although reasonable people can disagree about how to interpret the evidence, my own judgment is that the worst and most widespread abuses occurred in the institutions with the least federal oversight.”

    “The housing crisis we face today, driven by serious problems in the subprime lending, suggests that our system of home mortgage regulation, including CRA, is seriously deficient. We need to fill what my friend, the late Federal Reserve Board Governor Ned Gramlich aptly termed, “the giant hole in the supervisory safety net.”11 Banks and thrifts are subject to comprehensive federal regulation and supervision; their affiliates far less so; and independent mortgage companies, not at all. Moreover, many market-based systems designed to ensure sound practices in this sector—broker reputational risk, lender oversight of brokers, investor oversight of lenders, rating agency oversight of securitizations, and so on—simply did not work. Conflicts of interest, lax regulation, and “boom times” covered up the extent of the abuses—at least for a while, at least for those not directly affected by abusive practices. But no more.

  23. “Some subprime borrowers who could have qualified for loans from prime lenders end up in the subprime market, paying higher rates: Preliminary research suggests up to 35% of subprime borrowers could qualify for prime mortgage loans.”

    “Some minority borrowers may have been improperly “steered” to higher cost lenders by brokers or real estate professionals. Even after accounting for neighborhood and borrower characteristics that influence lending decisions, there is “a strong geographic concentration of subprime lending in those neighborhoods where there is a large population of African American homeowners” and “African-American borrowers, regardless of the neighborhood where they are located, have relatively high likelihood of obtaining a subprime compared to a prime loan.””

    “Some brokers have made home mortgage loans without regard to the borrower’s ability to repay. These so-called “asset based” loans often were made by brokers who earned high fees and were less concerned about their reputations among lenders. In other cases borrowers have testified that “unscrupulous mortgage brokers, lenders, home improvement contractors, appraisers, and combinations thereof” engaged in “outright fraud” as well as “deceptive or high-pressure sales tactics,” and often “prey[ed] on . . . the elderly, minorities, and individuals with lower incomes and less education.””

  24. Last one
    “CRA has not yet done enough to integrate the prime and subprime markets, as evidenced by these problems.25 In some ways, CRA is well positioned to help overcome the bifurcation between the prime and subprime markets by enhancing competition from banks and thrifts. Overcoming that bifurcation would improve market efficiency, reduce racial discrimination, and speed the process of correcting other market failures. Competition from banks and thrifts can help to drive out abusive practices and improve price transparency in these markets. However, given the large role played by independent mortgage companies and brokers, bank and thrift competition under CRA is not enough, on its own, to drive out bad practices. In recent years, there was intense competition among mortgage market participants to provide harmful products. Further federal regulation is thus also necessary to combat abusive practices, prevent a race to the bottom in bad lending behavior, and restore integrity to our housing markets. We need to ensure that all participants in the mortgage process have the right incentives to engage in sound lending practices and are subject to the right kind of regulatory oversight.”

    From “Prepared Testimony of Michael S. Barr Professor of Law, University of Michigan Law School Before the Committee on Financial Services U.S. House of Representatives Hearing On “The Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain” February 13, 2008”

  25. So yes, GBaker, I guess I am going to side with the Professor of Law and former treasury official and agree that there needs to be regulation on mortgage brokers and small lenders. But you’re wrong about one thing: the CRA regulation is actually PROFITABLE and safe, and it WAS the mortgage brokers who caused the subprime mortgage mess.

  26. Ok Crumb. You stick with your law professor and I’ll stick with my guy who has worked with CRA and lending institutions day to day on a practical level for more than 35 years.

  27. Crumb, This is how it works:

    A bank makes a CRA loan directly and charges fees to make the loan, or works through a broker who also charges a fee for his service, or buys the loan at a discount from another direct lender.

    Then the bank bundles several CRA loans (and maybe some others ) into a block. This block is then sold at discount to the LM’s, BS’s, or FM’s of the world or maybe another bank.

    Of course the loan is profitable. The bank has collected fees on the front end and recovered their capital on the back end. Further more, they have removed a potential liability from their balance sheet. (It now belongs to some one else). Of course the net charge off rate is zero. The investor who buys the loan takes the hit. The only way the bank gets hurt is if they hold the loan too long.

  28. Crumb,

    Lets try a little critical thinking test:

    For 60 years or so, our lending institutions and financial markets have ticked along with a stability that was the envy of the world. They weathered credit crunches, inflation, and even the stagflation of the Carter years without coming proximately close to the current melt down.

    What changed? When?

    What specific lending practices contributed to the current financial mess?

    Were those practices prevalent in previous decades? If not, what prompted their evolution?

    If so, why did they become detrimental and when did they do so?

    Answer those questions objectively and you will not only arrive at the core of the problem, you will discover a myriad of secondary contributory factors.

    You will also discover a common thread among those factors.

  29. Gbaker,

    Crumb can’t do critical thinking.

    Just say it. The Dems jacked the system, and some stupid Republicans went along and didn’t hold Fannie Mae and Freddy Mac to account.

    McCain and others called it two years ago.

    Now because Americans don’t pay any attention, we are about to elect that shithead Obama who supported the GSE corruption.

  30. I’m borrowing this from a guy named Texas in column 91.

    “How Bill Clinton caused the current housing slump From 1951 through 1997 the United States had a sound housing market based upon the sound tax policy put in place by Congress under President Truman. When homeowners sold one home to buy another, they deferred the capital gain tax from the first home sale. The result was that homes were basically valued for their rental value. People accumulated wealth in one house, sold it, and then transferred that wealth to the next house. Not only did the housing market boom, but people got richer.

    But in 1997, Congress, under the urging of President Clinton, put in place an unsound taxation policy that encouraged speculation in the housing market. Anyone who had lived in a house for 2 years of the past 5 years could sell the house tax free. The new policy encouraged people to gamble on real estate. If they saw that houses were going up in price, they would buy in hopes of getting a taxfree capital gain. The result was what economists call a “bubble” during which house prices rose way beyond their rental values. “

  31. Part 2 from Texas

    “Here is how Kenneth Harney described the effect of Clinton’s plan in an August 9 commentary in the Washington Post:

    [Property owners] can claim the exclusion [from capital gains taxation] even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses — particularly during the bubble years when values doubled in some parts of the country.

    Property owners in markets with high appreciation rates could sell their principal residences for hefty profits — pocketing the first $250,000 or $500,000 tax-free — and then move into their rental condo or vacation property for a couple of years and repeat the process.

    In effect, it was a form of financial alchemy where taxable profits could be magically transmuted into tax-free gains — at least up to the $250,000 and $500,000 limits.

    A few years ago, however, that bubble burst, as all price bubbles eventually do. Many of those who had bought homes at the artificially high prices of the bubble lost their life’s savings.

    Since World War II, we have had two kinds of Presidents. Some, like Harry Truman, were imbued with common sense and put into place policies that led to decades of U.S. prosperity. Others, like Bill Clinton, lacked common sense and put into place policies that eventually caused the U.S. economy to come close to economic collapse.”

  32. So, for thirty of those sixty years, the CRA was in effect for American financial institutions and everything was still hunky-dory.

    What changed? It appears that Clinton made it far too easy to gamble with houses, resulting in a bubble that just burst.

    I’m not sure what precise lending methods led to the current problems, but it is more likely that predatory subprime mortgages contributed to the enormous number of foreclosures. It is also evident that the CRA is not to blame for this recent collapse, given its security and success over thirty years.

    According to http://www.luc.edu/law/activities/publications/lljdocs/vol38_no1/painter.pdf

    “Before the 1990s, home mortgage credit was available to only the most creditworthy of borrowers. Beginning in the early 1990s, however, lenders began to emerge that were willing to extend credit to borrowers with riskier credit profiles. Since then, so-called subprime mortgage lending has become big business. Many commentators laud the rise of subprime lending: the dream of owning a home is now a reality for an ever-increasing number of borrowers.”

    “Although subprime loans, to the extent they service higher-risk borrowers, should compensate lenders for additional default risk and origination costs, subprime credit nevertheless appears to be costlier than necessary to compensate for these increased costs.”

    Apparently subprime mortgages began in the 1990s. As previously cited numbers indicate, non-CRA regulated lenders and brokers created the bulk of subprime loans [80% as of 2008]. The major, CRA-regulated institutions were wary of those with poor credit, but subprime mortgages were targeted at that demographic and were apparently predatory to boot. According to a quick wiki check [their source is down but it shouldn’t be difficult to find]:

  33. “Many companies entered the market when the prime interest rate was low, and real interest became negative allowing modest subprime rates to flourish; negative interest rates are hand-outs, the more you borrow the more you earn, something Alan Greenspan in 2000, 2001, and 2002 dis not realise. Others entered with the relaxation of usury laws. Traditional lenders were more cautious and historically turned away potential borrowers with impaired or limited credit histories. Statistically, approximately 25% of the population of the United States falls into this category.”

    “In the third quarter of 2007, subprime ARMs only represented 6.8% of the mortgages outstanding in the US, yet they represented 43.0% of the foreclosures started. Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.”


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