It's the Culture, Stupid

Had the culture celebrated marriage and the government rewarded it, there would have been no subprime crisis, and all other tax-eating pathologies would have been contained. Allow me to explain.

In my new book, Popes and Bankers: A Cultural History of Credit and Debit from Aristotle to AIG, I have attempted to reverse-engineer our train wreck of an economy and see where exactly it went off the tracks. In the book, I begin my search at Deuteronomy, but a more proximate milestone on the path to understanding might be January 20, 1993, the day on which Bill Clinton was inaugurated. 

Inspired by James Carville's famed maxim, "It's the economy, stupid," number-cruncher extraordinaire Bill Clinton crunched his opponent with economic metrics right into the White House. Unfortunately, Clinton had been crunching the wrong numbers all along.

Central to the metrics Clinton assessed was the homeownership rate of 64 percent, which, astonishingly, was lower than it had been when Richard Nixon was inaugurated in 1969.  Eager to pump the numbers up, Clinton chose not to know why they had declined. Had he bothered to look, he would have seen that the problem was less an economic one than a cultural one.

In the 1950 census, "families" made up 89 percent of all American households. By 2000, that figure had dropped to 68 percent. But even this does not tell the whole story. "Family" figures include single-parent households, and this had proved the fastest-growing of family cohorts, from 10 percent of all households in 1970 to 16 percent in 2000. In that same period, the "traditional" family took the biggest hit. By century's end, married couples with their own children made up only 24 percent of all households, down from 40 percent just thirty years earlier.

Accelerating the transition has been the celebration by Clinton's party and the major media of the new family dynamic. One faux-objective feature after another has sneakily endorsed "the steady, profound change in Americans' concept of family." Unfortunately, all the People Magazine stories about Madonna or Rosie or Jodie do not help ordinary single mothers make their mortgage payments. This is not to suggest that "alternative" families are intrinsically prodigal, but pressure from the media and government to put them in homes of their own was making them so in great numbers.

Despite increasing prosperity, despite the growth in the condominium market, these cultural trends conspired to keep a lid on the homeownership rate. Yet across the political spectrum, everyone agreed that Americans had a veritable manifest destiny to own their own homes.  Indeed, presidents had been doing their damnedest to boost the numbers since Herbert Hoover.

The numbers, however, were frozen. The decline in two-parent families was offsetting the increase in prosperity. How could it not? In 1993, when Clinton took office, the average income for households headed by divorced women was 40 percent that of married couples; for unmarried women, it was only 20 percent.   

As the numbers suggest, many of these women could not manage homes of their own. Homeownership rates for female-headed households struggled to stay above 50 percent. For married couples, they hovered consistently in the 80th-percentile range. 

With blacks overrepresented among single parent families-- -- by 1993, 57 percent of black children were growing up in a single-parent household, as compared to 21 percent of white children -- white homeownership rates inevitably outstripped those for black homeownership. In the early 1990s, that gap was at least 25 percentage points, typically around 70 percent for whites and in the low 40s for blacks.

The Clintons and their allies, however, refused to acknowledge family breakdown as a problem, let alone as an explanation for the disparity in homeownership rates. Their preferred explanation for just about everything unpleasant was the inevitable "racism." This they could and would freely impute to less enlightened Americans, especially the business classes. Ignoring all contrary evidence, they found what they were looking for in a 1991 study by the Federal Reserve.   

According to the study, 61 percent of blacks had been approved in their quest for government-backed home loans as compared to 77 percent for whites. Bingo!            

The study conceded a lack of information about "the creditworthiness of applicants" as well as "the adequacy of the collateral offered," but for the media, these limitations were mere quibbling. They wanted to believe that lenders in late-century America would willingly sacrifice their own profits to keep the black man down, and they were not about to let facts stand in the way.         

"Getting turned down for a mortgage may have more to do with how you look than how much you make," led a USA Today editorial.  A front-page story in the Wall Street Journal began, "When it comes to buying a home, not all Americans are created equal."

To make the racism storyline work, the media had to ignore another significant set of data: namely, default rates. In 2004, the Department of Housing and Urban Development did a comprehensive study of FHA loans that originated in 1992. The sample size was substantial: nearly 250,000 loans. Given that the FHA insures only modest loans for low- and moderate-income people, the cross-racial comparisons were for comparable properties.

What the study revealed, among other results, was that after the seven prosperous years from 1992 to 1999, blacks were defaulting on their loans more than twice as frequently as whites, and Hispanics were defaulting three times more frequently -- the latter in a worrisome 13-percent range. If minorities had been held to tougher loan standards than whites, then their default rates should have been lower than whites', not higher.

Another in-depth study on the years 1991 to 1996 concluded that divorced women were "significantly more likely to default than divorced men and married households." By the end of that period, the default rates among divorced women had more than doubled from 1991.  This breakdown fed the surge in bankruptcies. Housing officials had to know this. They simply chose not to share this information, and the media chose not to request it.

This backdrop made the story of a subprime poster child like Boston's Ashley Smith* all but inevitable. Were Ashley to die unrepentant, which seems likely, she might well find herself in the fourth circle of Dante's Inferno, the unholy site to which he assigned the "prodigals."

Prodigals have not changed much over the centuries. What did change was the media's willingness to oblige them. Writing 23 centuries ago, Aristotle sniffed out the prodigals' timeless ambitions:

They become apt to take because they wish to spend and cannot do this easily; for their possessions soon run short.  Thus they are forced to provide means from some other source. At the same time, because they care nothing for honor, they take recklessly and from any source.

Unfortunately for the rest of us, Smith had the sympathetic David Koeppel of MSN Money to chronicle her tale, not the judgmental Aristotle or Dante Alighieri. As Koeppel tells it, in 2004, Smith contracted to buy a $470,000 home in Boston's Dorchester section with no down payment. She claims to have been looking for an apartment, but those that suited her fancy cost about $5,000 to $6,000 a month. At that time, the amount was more than she could afford. Landlords, after all, demand rent. Lenders can be more flexible. Ambitious beyond her means, Smith heeded their siren song.

The first question the obliging Koeppel asks her in a recorded interview is, "Was your loan a predatory loan?" Smith answers without hesitation, "It definitely was." To swing the deal, she took out a fairly standard 8.5-percent loan on 80 percent of the purchase price. Lacking the traditional 20-percent down payment, she took out a second loan at a "whopping" 12.5 percent. Her combined monthly payment ran roughly $3,500 a month to begin and more as the loan adjusted.

Historically, lenders would not have allowed that size of a payment for anyone making less than about $200,000 a year, presumably more than Smith earned as a part-time teacher. But lenders in the first years of this new century were encouraged by every arm of the government and the media to accommodate people like Smith.

To rally the base a week before the 2000 election, the Clinton administration announced "historic" new regulations that would put a further squeeze on Fannie Mae and Freddie Mac. "These new regulations will greatly enhance access to affordable housing for minorities, urban residents, new immigrants, and others left behind, giving millions of families the opportunity to buy homes," said HUD Secretary Andrew Cuomo.

The new regs upped Fannie and Freddie's "affordable housing" quota from 42 to 50 percent. Responded Fannie's CFO, Timothy Howard, "making loans to people with less-than-perfect credit ... is something we should do." Although a good deal more soberly, the Bush administration kept the pressure on.

Given the reigning politics, Smith got her money. Still, she claims that her lender told her that she could soon refinance into a lower-cost, fixed-rate mortgage. "That is where it became predatory," she reassures herself and Koeppel.

To fix her innocence, Koeppel asks Smith no questions about her elusive husband, her income, her seeming inability to save money, her job prospects, the alleged cost of rental housing, or any potential plans she might have had to surf the rising tide of real estate prices and flip the house for a profit, plans that would have been swallowed in the subprime riptide.
Much to her misfortune, Ashley Smith had no Dante in her life, no Virgil, no guide through Boston's unmapped moral terrain. And that has proven costly for all. 

"Society cannot exist unless a controlling power upon will and appetite be placed somewhere," said the Anglo-Irish political philosopher Edmund Burke more than two centuries ago, "and the less of it there is within, the more there is without." The denouement of the Smith case and the millions of cases just like hers show how intrusive and expensive that controlling power can be when imposed from without.   

*Real story, changed name.
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