Affordable Housing Institute : US

Can you be narrowly right but broadly wrong?

Or false?

 

Human beings are binary: we see things as left or right, boy or girl, right or wrong.  In sports or politics, we tend to pick a side to root for, often on the basis of whom we dislike least.  [See Primary, New Hampshire, and Going Negative (Without Appearing To Do So). – Ed.] 

 

That win-by-attack philosophy is brilliantly described in the hilarious black-humor film Thank You for Smoking.

 

 

Joey Naylor: so what happens when you’re wrong?
Nick Naylor: -OK, let’s say that you’re defending chocolate, and I’m defending vanilla. Now if I were to say to you: ‘Vanilla is the best flavor ice-cream’, you’d say:
Joey Naylor: No, chocolate is.
Nick Naylor: Exactly, but you can’t win that argument… so, I’ll ask you: so you think chocolate is the end all and the all of ice-cream, do you?
Joey Naylor: It’s the best ice-cream, I wouldn’t order any other.
Nick Naylor: Oh!  So it’s all chocolate for you is it?
Joey Naylor: Yes, chocolate is all I need.
Nick Naylor: Well I need more than chocolate, and for that matter I need more than vanilla. I believe that we need freedom. And choice when it comes to our ice-cream, and that Joey Naylor, that is the definition of liberty.
Joey Naylor: But that’s not what we’re talking about
Nick Naylor: Ah! But that’s what I’m talking about.
Joey Naylor: — but you didn’t prove that vanilla was the best.
Nick Naylor: I didn’t have to. I proved that you’re wrong, and if you’re wrong I’m right.
Joey Naylor: But you still didn’t convince me
Nick Naylor: It’s that I’m not after you. I’m after them.”  [Points into the crowd]

“And freedom is what America is all about”
Such a technique – conviction of skullduggery by the parol evidence of campaign contributions, is on full display in a lengthy article on subprime lobbying in The Wall Street Journal:
 

During the housing boom, the subprime industry succeeded at more than just writing mortgages. It also shot down efforts by some states to curtail risky lending to borrowers with spotty credit.
 

As we will see, this is an oversimplification.  It was the broader lending industry, not just the subprime folks, and it was some efforts.

Executives at Ameriquest, based in Orange, Calif., acknowledge that the company lobbied heavily against state lending restrictions, but say that other subprime lenders did so as well. In fact, a host of subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp. and the Mortgage Bankers Association, spent heavily on lobbying and political giving.
 

Neither qualifier makes it right, but both are relevant.
 

Ameriquest Mortgage Co., until recently one of the nation’s largest subprime lenders, was at the center of those battles. Working with a husband-and-wife team of Washington lobbyists, it handed out more than $20 million in political donations and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws. 
 

Its Web site reports, “Ameriquest is no longer accepting loan applications.”

Actually, as the Journal’s article repots, the amount paid in each of those states is relatively small.
 

By itself that’s doesn’t cleanse the activity, but the scale is relevant.
 

Data from federal and state campaign-finance records, Internal Revenue Service filings, and the National Institute on Money in State Politics show that from 2002 through 2006, Ameriquest, its executives and their spouses and business associates donated at least $20.5 million to state and federal political groups. In comparison, over the same time period, Countrywide Financial, another large subprime lender, gave about $2 million in campaign gifts, and spent an additional $6.7 million lobbying in Washington, records indicate.
 

Note too the presumption that every dollar contributed by every one of these entities and people was focused on the sole issue of subprime loan regulation.  Maybe, or maybe some of them were just politically active citizens.
 

Washington lobbyist Wright Andrews and his wife, Lisa, coordinated much of the industry’s lobbying. Mr. Andrews’s firm, Butera & Andrews, collected at least $4 million in fees from the subprime industry from 2002 through 2006, congressional lobbying reports indicate. Mr. Andrews didn’t represent Ameriquest directly. He ran three different subprime-industry trade groups: the National Home Equity Mortgage Association, of which Ameriquest was a member; the Coalition for Fair and Affordable Lending, which spent $6.3 million lobbying against state laws before it dissolved earlier this year, according to federal filings; and the Responsible Mortgage Lending Coalition [not to be confused with the Center for Responsible Mortgage Lending – Ed.].
 

In lobbying, it sometimes helps to look like something else entirely
 

Consolidating lobbying activity into a single-issue trade association definitely increases the presumption that this was issue-oriented advocacy.  But it weakens the presumption that the whole thing was a cover for subprime.  
 

Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics of the industry contend.
 

Well, critics would contend, wouldn’t they?
 

We’re all contenders
 

Home loans made by Ameriquest and other subprime lenders are defaulting now in large numbers, roiling global credit markets and sparking debate about whether regulators and lawmakers should have anticipated the mess and taken action. A close look at Ameriquest’s lobbying and political donations shows how the subprime industry maneuvered to defeat legislation that might have contained some of the damage.
 

This is a big premise – would the mooted legislation have ‘contained’ some of the damage?
 

Federal lawmakers didn’t pose much of a threat to the subprime industry in recent years. Members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders, Federal Election Commission records indicate. They debated new oversight of the industry, but took no action.
 

This paragraph is a wonderful example of what I call Zoroastrian logic.
 

Please bring the sun back!

 

“The sun set,” say the villagers, “and we were afraid.  We paid the priests, and they prayed to Zoroaster for the sun to return.  The next morning, the sun returned!”
 

There are 435 representatives and 100 Senators.  If $645,000 is what they received in total, that’s about $1,200 per member. It would be truly discouraging if our elected officials could be bought so cheaply.
 

The states were a different matter. “What seemed to be developing in the states was that there was going to be a wave of legislation,” Mr. Andrews, the lobbyist, said in an interview.
 

In 2001, Georgia passed the Fair Lending Act. Among other things, it required lenders to be able to prove that a refinancing of any home loan less than five years old would provide a “tangible net benefit” to the borrower.  Ameriquest began lobbying the state legislature to remove that provision, arguing the standard was too vague. 
 

Note the Journal’s temporal compression: the Act in question was passed six years ago, and the corrective amendments were done five years ago.  The subprime mess blew up in 2007 or 2006, 3-4 years afterwards.  
 

Ameriquest was and is right – at least on this technical issue.  Every human being values things slightly differently.  Everyone has a slightly different need for money, and use for money.  
 

Some need more money than others
 

Other lenders also complained about the law, as did Fannie Mae, the giant buyer of mortgages.
 

To prove a tangible net benefit would impose on the lender an obligation to understand what the borrower was going to use the money for, and then to second-guess if that use was enough ‘net’ benefit to be ‘tangible.’  Meanwhile, Monday-morning-quarterbacks, aka trial attorneys, would be waiting with writs in hand.
 

“Ameriquest was very, very engaged,” recalls Georgia state Sen. Vincent Fort, who authored the law. Mr. Fort says that Adam Bass, a lawyer for Ameriquest, lobbied him directly. The state senator says he accused Mr. Bass of victimizing poor minorities, which angered Mr. Bass. 
 

Once upon a time, banks were thought too conservative, accused of red-lining whole neighborhoods, so in 1977 Congress enacted the Community Reinvestment Act, forcing them to put capital back into every community from which they take deposits.  I like CRA, particularly as it has become part of the financial ecosystem, because it motivates lenders to take slightly higher risks, or accept slightly lower returns, than they would if they were underwriting purely on commercial grounds.  On balance, that’s a good thing because banks are predisposed to caution.  To make it riskier for lenders not to lend to poorer communities or marginal borrowers – in fact, to give them a whole new risk, not of default but of tort litigation – would gut CRA and undoubtedly hurt poor and minority borrowers.
 

A spokesman for Ameriquest, speaking on Mr. Bass’s behalf, says the meeting “was a very candid conversation about complex policy issues.”
 

But there’s a nicer way to say it …
 

In October 2002, Ameriquest announced it would stop doing business in the state until the law changed. 
 

This is the second place where the lenders are utterly right, at least in the narrow sense.  When a state’s economic or legal environment makes it unprofitable to do business there, they can stop.  Capital is national and fast, property is local and slow, and government is always behind the private market.  This isn’t a boycott – Ameriquest is only one lender among many, and others were and are free to lend.  And this withdrawal of financial products is not unique to subprime loans.  I can remember hazard insurers pulling out of Florida, and energy producers threatening to stop selling in California.

[Sidebar: when government attempts to prevent capital from fleeing, its market-manipulative results can exacerbate the problems.  I seem to recall just such maneuvering as being a triggering event for Enron’s shenanigans.]

And don’t forget, what made people made about Enron was that they made huge sums.
 

Shortly thereafter, Standard & Poor’s Corp. announced it would no longer assign credit ratings to many mortgage securities containing subprime loans from Georgia. The ratings agency said that under the new law, such loans, if found to be in violation of the law, might carry legal risk, potentially tainting the securities. 
 

This was entirely foreseeable.  Capital is national; state-specific products are going to be inefficient and uncompetitive.
 

Without credit ratings, such securities are virtually unmarketable.
 

Ratings do more than just telescope decision-making.  They also indirectly influence the size of the asset pool, and larger asset pools can be more competitively priced.
 

The change raised the possibility that subprime lenders would simply stop making loans in Georgia.
 

One would have thought Georgia’s legislators would have considered this before they enacted the law.  Or did they think the lenders were simply crying wolf?
 

Don’t cry for me, I get the babes
 

Granted, crying work is standard operating procedure for stakeholders lobbying against new tighter legislation.
 

The subprime industry mounted a campaign against the Fair Lending Act. Within months, the Georgia Senate voted 29-26 in favor of a new law that eliminated for nearly all loans the tangible-net-benefit requirement opposed by the industry. The state House passed the law, 148-25.
 

So, in Georgia, the industry was narrowly right – right on the narrow question – and successfully headed off a bad piece of legislation.
 

The broader issue remained.  Customers were being under-informed, and making bad choices after having been under-informed.  And the legislators did not quit.
 

Are they talking about smoking or legislating?

 

[Continued tomorrow in Part 2.]

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