26 November 2007

Pandering Ends; Minorities Hardest Hit

From my reading of this article "Many factors fed housing breakdown", about the causes of the mortgage sub-prime market hysteria, it basically boils down to two factors: greed and social engineering.

If you're like me, you're not shocked by the first, but amazed by the second.

Greed

Market speculators wanted a higher return. Who doesn't? So, this pressured lenders into accepting more risk.

A smart lender would examine this equation and say "more risk for me might not be a good trade, even with higher loan revenues". Other lenders might say "Screw risk! Higher returns, baby!"

Huge losses and hilarity ensue.

Social Engineering. Or, the World As We Wish It Were, Instead of As It Is

The Federal Reserve wanted to increase rates of home ownership among minorities, which are apparently historically lower.

But hold on, you might say. Why were they historically lower? Is it because the mortgages were deemed too risky? If so, then does it make sense to just ignore that risk in hopes that somehow they won't be risky any more? And wouldn't that just be plain old "wishing and hoping"? And aren't lenders of other people's money are supposed to be a bit more rigorous than that?

Apparently, being a loan officer is a little more whimsical than I'd previously thought.

I also hadn't realized that the Fed was now in the business of fine-tuning home ownership rates by race instead of by creditworthiness. Who knew?

So there you have it.

Old Fashioned Greed, united in common cause with Helping a Brotha Out. Making folks feel good *and* returning higher cash flow!

Until that ugly risk kicks in the door. Ugh. Bummer.

So this would explain then, at least in part, why minorities are "hardest hit". They were also being pandered to, and over-qualified by their lenders. Set up for failure, in other words.

As past credit checks had apparently predicted, if reality counts for anything these days.