Report: Government is responsible for housing bubble, not banks

Neil Munro White House Correspondent
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Banks’ unfair treatment of African-Americans and Hispanics did not cause the housing bubble that crashed the economy in 2007, a new economic study found.

Claims of racism are undercut because “black and Hispanic homeowners had much higher rates of delinquency and default in the downturn,” even when they had similar credit scores, according to the 41-page study titled “The Vulnerability of Minority Homeowners in the Housing Boom and Bust.”

“Our findings […] raise serious concerns about [government policies that boost] homeownership as a mechanism for reducing racial disparities in wealth,” said the report, which was authored by three university professors.

The question of who gets the blame for the housing bubble is increasingly important now because some politicians claim they can remedy the damage if they can continue stimulus spending and import tens of millions of new workers and consumers.

The housing bubble was inflated by federal policies created by President Bill Clinton, then expanded by President George W. Bush. The policies were supported by Senator and then President Barack Obama.

The policies were intended to help low-skilled Americans — especially African-Americans — and Hispanic immigrants gain housing wealth by pushing down mortgage requirements, such as down-payments.

But the government policy had the reverse effect, and the housing collapse after 2007 eliminated much of the wealth held by African-American and Hispanic families.

Since the 2007 crash, Obama and his Democrats allies have argued the crash was caused by greedy bankers’ unfair and illegal treatment of African-American and Hispanic borrowers.

Obama also used that argument to deflect media attention and public blame away from Washington policies that inflated the bubble after the mid-1990s.

Obama’s focus on the banks helped him pass new regulations in 2010 that extended government control over the banking sector.

This blame-the-banks strategy also helped justify Obama’s effort to revive the economy by spending more than $7 trillion in borrowed funds via the 2009 stimulus — dubbed the American Recovery and Reinvestment Act of 2009 — and other spending programs.

The effect of that policy remains contentious, partly because more than 20 million Americans are still looking for full-time jobs or part-time jobs, and the national debt has risen past $17 trillion.

“In the four years since the recession ended in June 2009, the economy has added 5.3 million jobs, thanks to the resilience of the American people and policies like the Recovery Act, which helped bring the recession to an end and put us on the path to recovery,” said a June 5 statement from Alan Krueger, chairman of Obama’s Council of Economic Advisers.

Obama and his deputies are now arguing that an influx of new immigrants can help the economy recover from the housing bubble.

The Senate’s controversial rewrite of immigration law “will drive growth by bringing highly skilled scientists, engineers, and entrepreneurs to the United States… [and] create a new wave of consumers who will fuel demand and generate economic activity,” Treasury Secretary Jacob Lew claimed June 3 during a naturalization ceremony.

“The effect will be enormous. More new businesses. More new jobs, and more exports,” Lew said.

“We have always been a nation of immigrants… It is what makes our society and our economy so vibrant,” he said, downplaying the role of Americans in the American economy.

Lew’s exhortations notwithstanding,  the United States is not a nation of immigrants. In fact, native-born Americans comprise 87 percent of the population in 2013. That’s down from 92 percent in 1980, but far above the 83 percent projected by 2033 if the Senate bill becomes law.

The claim that an influx of immigrants will improve Americans’ economic prospects has been widely praised and criticized.

If enacted, the bill would expand the economy by boosting immigration to roughly 46 million people — the vast majority of whom would be low-skilled — over the next 20 years. The bill would also double the inflow of low-cost blue-collar and university-trained guest-workers.

But a June 16 report by the Congressional Budget Office said the report would reduce average education levels and wages, would increase unemployment for a decade, and would shift more of the nation’s annual income from wage-earners towards investors and owners for at least two decades.

The new report about the housing-bubble was published by the National Bureau of Economic Research, by authors Patrick Bayer, Fernando Ferreira and Stephen Ross.

“More than 1 in 10 black and Hispanic homeowners in our sample had a delinquent mortgage by 2009, compared to 1 in 25 for white households, and a similar pattern held for foreclosure rates,” said the report.

However, “racial and ethnic differences in foreclosure are tiny for homes that were originally purchased from 1998 to 2003 [when the bubble was beginning], but substantial for homeowners who originally purchased their homes between 2004 and 2007,” the report said.

“These results call into question the [government policy] of encouraging homeownership as a general mechanism for reducing racial disparities in wealth… [because] such a push may backfire, leaving vulnerable households in a difficult financial situation and adversely affecting their wealth and credit-worthiness for years,” the report concluded.

Advocates for greater federal control of housing criticized the report June 4.

“The paper suffers from serious methodological flaws,” claimed Debbie Gruenstein Bocian, an analyst at the Center for Responsible Lending.

The authors used a poor technique to analyze the statistical data, and ignored critical details, such as whether the borrowers inflated their income or wealth, or took loans with “risky product features, such as prepayment penalties, teaser rates, interest-only or negative amortization payment schedules,” Bocian wrote.

The authors didn’t consider whether the 2007 bust was unique, and they didn’t consider the value of home-ownership to poor Americans, she wrote.

“Even if default rate disparities were found, the proper policy response would be to identify and address the root causes of such disparities, such that all racial and ethnic groups and communities could fully achieve the benefits of homeownership,” she wrote.

That policy, however, would be contentious, because it would require more regulation of the housing and financial sectors.

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