ACORN and housing
In the comments on yesterday’s post, Sue asked about the claim "that ACORN had been part of some issues with the subprime mortage crisis." The short answer is no, not really. But the full answer is important, so I’m giving it its own post.
Promoting homeownership for low-income families is certainly one of the things that ACORN has worked on over the years. They’ve done this both through legislative work, primarily the passage of the Community Reinvestment Act (CRA), and through direct work with families. Let’s look at both of these.
CRA was a response to many banks’ historic practice of redlining — of refusing to make ANY home loans within certain areas, defined both on the basis of income and of race. I’m not 100 percent clear on the exact requirements, but the intent was to force banks that wanted things from the government (mostly approvals of mergers and acquisitions) to meet standards with respect to the number (or share?) of loans made in low-income and underserved communities. And from 1977, when it was passed, to the early 2000s, it caused a slow and steady increase in such loans.
Banks objected to the CRA, because they believed that they couldn’t possibly make money by issuing home loans in low-income areas. But CRA forced them to look at their criteria and do their best to distinguish between moderate-income people who were bad credit risks and ones who were actually pretty good. This is where the second part of ACORN’s work came in. They did a lot of financial education for their members, and negotiated with deals with banks where they’d provide reduced points, or other lower fees, for people who completed these courses. The banks benefited because it helped them make loans that met their CRA requirements, and because the people who were willing to complete the courses were in fact better risks than similar people who didn’t. ACORN benefited because these courses were a way to recruit members. And the low-income people benefited, because they were able to buy homes.
So, what happened in the 2000s? For one thing, people were convinced that home prices were only going to go up. So it didn’t really matter if people were bad credit risks, because if they defaulted, the banks thought they’d get houses that were worth more than they had loaned. For another thing, banks had come up with all these fancy ways to resell the mortgages they made, so they believed that they had made the risk go away. Suddenly, there was a ton of money to be made making loans to poor people. And lots of institutions rushed in — including things that weren’t "banks" and so weren’t subject to CRA.
My sense is that ACORN had pretty mixed feelings about this. On the plus side, lots of people were able to buy houses. But on the negative side, they could see that a lot of people were being given crappy high cost loans. But as a little nonprofit — and one that made people jump through hoops before helping them get loans — they had a lot of trouble competing with the sleazy mortgage brokers who were promising people easy loans and low monthly payments.
So, in the sense that banks experience under CRA taught them that it was possible to make loans to low-income people without losing money, I suppose you could argue that it "contributed" to the subprime mess. But that’s like saying if agriculture had never been invented, we wouldn’t have to worry about the spread of obesity.
But don’t take my word for it. Here’s Ellen Seidman’s explanation of why CRA isn’t the cause of the subprime mess. She ran the Office of Thrift Supervision under the Clinton Administration, among other things.
October 18th, 2008 at 1:55 am
In 2006, both current presidential candidates, Barack Obama and John McCain, gave ardent support to a bill that took away a select group’s access to no fax payday loans. The bill, which went into law in October of 2007, capped the interest rates that payday loan stores could charge military personnel at 36 percent. The reasoning behind such a measure stemmed from an increasing number of American soldiers in the Army, Navy, Air Force, Coast Guard, National Guard, and other branches, discovering that loans had been taken out, in their names, without their knowing. Sometimes, they wound up being victims of identity theft. Other times, their spouses took out loans in their names without their consent, and then defaulted on them. Even worse, claims were made and accepted by the public that members of the military, who traditionally are low-income folk, also have little to no fiscal know-how. Therefore, in the interest of preventing these folks from compromising their security clearance, the government ruled in favor of the measure. Now, Obama has gone on record, declaring that he supports a measure that would impose the same interest cap for everybody, thus driving the entire industry out of the country. With the option of financial freedom at stake, think about this before casting your vote.
Post Courtesy of Personal Money Store
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October 18th, 2008 at 8:17 pm
“For one thing, people were convinced that home prices were only going to go up.”
Elizabeth, come on. Do you really believe this? You’re around my age; we’ve seen housing booms and busts, economic ups and downs. Most everyone over the age of 5 here has seen a consumer fad come and go. Even in my town, which has remarkably steady prices bolstered by a huge student population, even renters know that simple shifts in crime and demographics change the housing prices in an area, up _and_ down. If people believed that housing prices were in a one-way fast elevator, I think it’s safe to say that most of them pretty much sold themselves on the idea.
And if they were complete market naifs? Born yesterday? Look, we don’t hide the market information here. (Last night, after hearing some comments about a failed merger from the perma-workers at my main client, I went looking for SEC docs, and from there for some info on their staggering junk-bond load, and within ten minutes found out that I’d better not count on my invoices getting paid past, oh, last month. My perma-worker friends have free access to the same info, and all of them can read and add. I hope they’ve got resumes out.) Again, if you’re incapable of reading and adding and handling your own affairs, fine. Otherwise….
“But on the negative side, they could see that a lot of people were being given crappy high cost loans.”
Once again, lack of agency. People were not “being given” loans. They took the loans. The banks offered, the people took.
I want to ask you, for how many screwups like this do you think people should be placed in the victim column? Because I bet there’s huge overlap here with people who’ve gotten themselves into trouble with credit cards, payday loans, community college deadlines, subscription programs, crazy brokerage deals, tax preparers.
I would be willing to give a pass to the entire pool, here, of tens of millions of people who were “put into bad loans by greedy banks”, if this were the last one they got. Make it a case of “fool you twice”. Yes, they were preyed on, victimized, you got it. But from here on in, when it comes to any contract presented to them by anyone without a gun, if they fail to read and understand the words and make some reasonable assessment before they sign, that’s their problem and no soup for you.
What do you say?
October 18th, 2008 at 8:44 pm
Amy, you can argue all you want that people *should* have known better, just as you can argue all you want that people *should* read all the forms they have to sign to get a mortgage, but that doesn’t change the fact that people didn’t know better and don’t read all the forms.
October 19th, 2008 at 1:15 am
Of course. But I’m asking you a question about your view of responsibility, and you’re dodging.
I’m saying, “Fine. Say they didn’t know to read. Babes in the wood. Not their fault. Evil bankers preyed on them. But — now they know. Now they know that when you sign a paper with lots of words on it, those words have meaning and can land you in serious trouble.”
Next time they get themselves into trouble, are you going to say they’re victims? And if so, is there ever an end to it? Does it take one dumb, ill-considered contract signing, or 20? Or are they permanent victims, in your view? People who “were given” bad deals, or “were convinced” that there’s pie in the sky?
At what point, given liberty, free public libraries, free school through secondary ed, volunteer literacy organizations, $3 calculators, the internet, and the unending advocacy of consumer groups, do adults become responsible for comign to the very simple formulation: “Do not sign a piece of paper unless you can a) read and understand; b) take it to someone you trust and understand; and c) weigh the bargain and see that it’s OK”?
October 21st, 2008 at 1:25 am
Ok lets be blunt, these people are dumb and the government should protect them. Now enough of your shrill invectives.
October 21st, 2008 at 4:49 am
That’s a lot of dumb people needing protection from their own dumbth. Especially when FHA already breaks it down for them at a 5th-grade level.
You know, they have here a thing called guardianship, which I know something about because I was married to a guy whose illness led him to do things like trying to remove himself from his own disability and health insurance while too sick to volunteer for two hours a week. He knew who and where he was, he posed no immediate threat to himself, and he was — as far as the state was concerned — competent to manage his own affairs. He’d gotten by all his adult life, and the damage from his problems had never gotten him into serious trouble. And, really, the state’s approach was understandable. You don’t want to assume in advance that a person’s incompetent. Let him drive himself into a wall a few times and prove it unequivocally. At that point you don’t absolve him of the problems he’s made for himself, but you do appoint a guardian.
If you’re talking about people who’re that ill, that impaired, fine. But call it what it is. A guardianship. Guardianships not only protect people; they remove certain powers from those people, and put them in the hands of the guardians. If people are really so dumb that they’re incapable of looking out for themselves, why let them sign contracts in the first place?
October 21st, 2008 at 8:21 am
Ok, in case anyone’s wondering, the last comment from Elizabeth was a different Elizabeth.
Amy, in spite of what you suggest, I’m not saying “these people were innocent victims, we should make them all whole in spite of their bad decisions.” But I’m not joining with you in saying “tough luck, they made bad choices, so they’ll learn from this and make better decisions next time.” I think there’s a lot of truth in Elizabeth Warren’s line that we wouldn’t let companies sell toasters that blew up and maimed 1/3 of their users, even if the manuals explained in detail the circumstances that would make them blow up.
I take moral hazard — the idea that people will make worse choices if they know they’re going to be bailed out if things go wrong — seriously. But I think it’s hypocritical to apply that standard to the little guys while letting the people who made literally hundreds of millions off the hook.
One of the huge lessons of behavioral economics is that even “smart” people behave in really dumb ways, and there are ways to improve the decision-making process without taking choice away from them. Last week, I went to a really interesting event where they made some suggestions about how to do this:
http://www.newamerica.net/events/2008/regulating_real_world
October 21st, 2008 at 9:23 am
Amy, That’s a great story about your husband
October 21st, 2008 at 10:51 am
ya right, a different Elizabeth. Thanks alot.
October 21st, 2008 at 12:08 pm
Real Elizabeth — that makes a lot more sense. I wondered what had happened, there. (And yeah, the stories, I got a million. Not a good thing, mental illness.)
I think where the Warren example breaks down is in the fact that the manual here was not detailed. FHA makes certain of that. So the problem is not that people don’t understand what the mortgage means; the problem is they make loony, self-delusional appraisals of their ability to meet it. I think this is really a question about whether or not we can or should trust people to read newspapers, absorb the information there, and estimate their own abilities — whether or not, say, they’ll be able to make the mortgage if they lose their jobs. This is a point Warren hammers on repeatedly, coming down on the “of course we should” side. I agree, except, of course, in cases like my ex’s. (The other part of that insurance-shedding story is that he believed he’d get a 6-figure team-lead job halfway across the country, and that they’d fly him back weekly to visit our daughter, during which time no one from work would call or page him.)
I would not dispute that bright, sane people make dumb choices. Or even that normally canny people make dumb choices. But you’ll notice that for the most part they make fewer seriously damaging choices than people who don’t do the math, don’t read the contracts, don’t ask a lawyer, don’t ask a wise and trusted friend, don’t pay attention to what they need to keep in order to get by. You, for instance, have a stable home, job, family. You have investments, you have — well, there you go. You have. I wouldn’t be at all surprised to hear that you had solidly middle- or upper-middle-class parents, some financial backup, early training in reading fine print, etc. But on the whole you and your husband are the ones making the choices, and no doubt you’ve made mistakes and learned quickly from them along the way. Just as my grandpa did — and he didn’t have any backup; he grew up on the Lower East Side and left school at 13. I made one disastrous choice, by the way: I had a child with a guy who had very serious problems. That choice will define my life for the next 15 years at least, possibly for all the years that are left. But because I don’t usually make mistakes of that magnitude, we do pretty well. No poverty, the kid seems to be OK, the career limps on, we stay insulated from the sorts of problems that snowball. I can’t afford more seriously bad choices now, though, so I’m far more careful, far more conservative, than I used to be.
I think the moral hazard here is that people _believe_ they’re going to be bailed out, or should be bailed out. You know we had a big flood here last summer; a few weeks afterwards, I saw one of the most dispiriting, abject sights I’ve seen while living in this town. I was watching a city council meeting; up comes a guy who’s been a pillar of the community, chairs human-services groups and city commissions, hands out state-funded help hither & yon, has a solid university job. He’s 60ish, has grown kids. A few years ago, he and his wife bought a house near the river, mere inches above river level. The river hadn’t flooded that particular spot, but we know that it floods regularly.
This man was utterly beside himself, in front of the council, waiting for someone to save him. The house was a total loss. I’m sure he couldn’t have defaulted on the mortgage without losing considerable savings, and I doubt he had time to make them up. It was a terrible loss of dignity, and I almost changed the channel just to look away, but as he talked…what hit me like a punch in the gut was the realization that he honestly believed that he could be _that dumb_ and expect to be saved. There was something completely armless and oddly confident in his approach. And what was tearing him down, just then, was that the council wasn’t moving to buy his house and pay off his mortgage for him. Now it’s possible I was watching something peculiarly Midwestern that I wasn’t tuned into and have misunderstood, but I thought, My God, he’s spent the last decades tossing out buckets of state and city money to people who show up and declare themselves needy, and now he’s needy and expects he’ll be taken care of too from the till, just like that, nevermind how he got himself into this fix.
I think this is more than a moral hazard. I think it’s a practical hazard. I see it in the undergraduates here, too — the kids who grew up with the “don’t make the soda machine fall on you, danger danger” stickers, who don’t really believe that anyone will ever give them a C, who expect someone will invent jobs and internships and study-abroad situations and winnable games for them. They get _angry_ when this doesn’t happen, and then they panic. Panic is not good. Panic plus inexperience in carefully assessing situations and making them work is even worse. And I think this is what we grow when we attempt to protect people to the extent you’re proposing — to the extent that we figure they really can’t gauge their own ability to keep their promises.
Incidentally, I don’t think we should be letting the big boys off the hook, either. Nor am I scared by all this financial cave-in mau-mauing. The financial implosion will happen anyway because the situation we have is not sustainable. The last few months are a period of historic dumbth, and I bet it takes us 30 years of very careful dancing to undo the damage of nationalizing banks in this bizarre, half-assed manner.
Coda to the husband story: While he was off trying to liberate himself from the crutch of health insurance, I called the social worker and begged her to talk sense to him. He was enrolled in what was supposed to’ve been a very good, federally acclaimed “parenting while mentally ill” support program, complete w/ social worker. The social worker said, “Well, maybe getting off the insurance is what he needs to do.” I recovered consciousness, then explained that if he were hospitalized twice without insurance, even as a day patient, that would be the end of the kid’s college savings account and my retirement account. “Well,” said the social worker, “it’s more important that she have a father who’s healthy than for her to have college savings. Lots of kids don’t have college savings.” At this point I realized the lady was not a friend to my family. You don’t pay for parental insanity or stupidity by robbing the young and giving them more trouble to carry.
But that is exactly what we’ve done on a grand scale over the last couple of decades, and we dug the knife in more over the last few months with bailouts, whether those bailouts are for investment bankers, or dummies who sign mortgages they can’t stick to, or a citizenry that failed to throw the bums out. The one who pays is the kid. That’s why it’s self-destructive to try to absolve adults of responsibility.
October 21st, 2008 at 12:49 pm
This thread is sort of flirting with what I think is one of the most slippery issues out there, partial agency. We do very poorly with this: people who are half competent to make decisions. We have a gradual assumption of adult responsibilities: my oldest is walking to school now, has a key. In a few years he can get a learner’s permit. Then vote. Then (three years later!) drink. Make a contract.
Our lawyer was doing our wills – lots of of people do trusts which give the money when the recipient is 25, 30. Again, assumption of rising agency. We have procedures to scrutinize peoples’ ability to drive when they get very old. You can sue to get conservatorship on your aged relatives. But in between? basically the old phrase was ‘free, white, and 21’ – you can get yourself into as much trouble as you want.
Some cracks in that: three-day backout provisions for consumer debt. You can’t take out a payday loan which carries an interest rate greater than X.
But it’s an issue, I think, and not carefully thought about.
October 21st, 2008 at 1:31 pm
Amy, I am a little surprised with your logic. I have been reading your comments on this blog for a while and you seem to want the government to stay out of your home. At the same time you think an individual should not make decisions for himself in regard to health insurance, regardless of mental capacity or illness, so someone has college money or retirement savings. Needless to say, things are gray, not black and white.
The bottom line is that whatever a group of individuals does or does not take responsibility for affects everyone. We are so interconnected and globalized at this point. Personally, I am sick and tired of people pointing fingers at groups over who was at fault for this mess. Instead of pointing fingers, someone should be smart enough to have a solution.
October 21st, 2008 at 8:07 pm
“Amy, I am a little surprised with your logic. I have been reading your comments on this blog for a while and you seem to want the government to stay out of your home. At the same time you think an individual should not make decisions for himself in regard to health insurance, regardless of mental capacity or illness, so someone has college money or retirement savings. Needless to say, things are gray, not black and white.”
urbanartiste,
This is the other Amy. Is it really so inconsistent to think that able-bodied persons of sound mind should be treated differently from the mentally ill? Of course, as dave s. points out (and I’m sure you agree), where we get into trouble is in the grey areas. A lot of guys seem to get a bit soft in the head in middle age, without being definitely mentally ill. (We women also have our own issues, but it’s a distinct phenomenon, and generally temporary–never, ever argue with a pregnant lady or a new mommy. She’ll eventually snap out if it, but if you argue with her, you’ll have an enemy for life.)
October 21st, 2008 at 10:27 pm
urbanartiste, I have never claimed that there no people who are genuinely helpless, insane, incompetent, etc. There certainly are. I don’t know of too many people who’d say they ought to be left to eat dirt in the yard. But the standards of proof of helplessness and inability to look after oneself are very high, as they should be. If the school district had to meet a similarly high standard to prove, say, that I’m unfit to teach my child, or that they needed to send the teacher to my house, I’d be satisfied. Mostly because there’d be so little incentive for them to try.
In the end, by the way, the solution to protecting her opportunities from his illness was a legal one: divorce.
And sure, there’s a solution to the economic problem. It’s called “Take your lumps.” If you believe, as I do, that the most valuable assets are intangible, & that we have enough madly energetic and bright people here to pick up again, you figure we’ll come out of a truly suck-ass period stronger and wiser, and knowing our checkbook balance.
Dave, I agree with you completely. 20 years ago I’d have been more in favor of protecting people from themselves. As I go, though, I see more value in letting people screw up, especially early in life before they’ve taken on significant responsibility. It teaches like nothing else. What about chronics? People who wander into middle age buying lottery tickets and shares in pyramid schemes, putting themselves in the hospital with “herbals” and hooking up with creeps who rob them? This is a PITA approach, but surely there’s some way of quantifying & working out something that’s some unsatisfactory mix of humane and cost-effective? I mean I’d guess we could take a stab at what percentage of the population makes up “chronics” — say, I don’t know, 8% — and figuring what, on average, they’re likely to cost over a lifetime to bail out repeatedly. You rack up enough markers — DV calls, fraud payouts, bankruptcies, etc. — and you get a letter giving you a choice that’s the financial equivalent of clean needles for Depo. In other words, a form of guardianship. But build it like a roach motel — easy to get in, tough to get out.
Keep in mind, btw, that age trusts are a private solution, and have to do with the rich old person deciding what to do with his or her own money. That money isn’t the heir’s till the ROP says so. Other kinds of private trusts turn out to be remarkably difficult or impossible to design if you’re trying to calibrate for semi-competence. Again, this is something I know about because I went far down the road of funding an ILIT for my daughter. The idea was that if I died, the ILIT would allow my ex to live in this paid-off house, be taken care of if necessary, and have nothing to worry about but being a daddy. There was money for household staff, legal and financial services, etc. Money to live on, money for college. The upshot would be that my daughter wouldn’t grow up taking care of her aged and frightened grandparents while her sick father came & went, or bounced around from relative to relative. The problem was that he’d still be her guardian, and still be in charge of hiring staff — or not. No one would be able to make him do that. I could recommend people to help him with that, but not hand over the job for him. The only decision in the hands of the trustees would’ve been “is this expense for the child’s benefit, yes/no?” But no one could stop him from living here with her in squalor and depression while she essentially took care of him alone. In the end I decided it’d be better to buy insurance for her that’d roll into a trust, and have good local friends with children around my daughter’s age, friends who’d be willing to step up if I died and my ex preferred to let them take over the custodial role — just because it was easiest.
Having been through the divorce machine, by the way, I can see why courts and legislatures would want to stay out of gray areas. Going there immediately turns them into a target, and it increases their already-unreal workload tremendously. This population, and this number of people — you’re talking about poor-people law. And nobody wants to spend the kind of money on mass poor-people law that would let judges sit and ponder the details of each case in all its snowflakey uniqueness.
October 22nd, 2008 at 11:53 am
Story on more (but different) impropriety at ACORN. Best howler from the article:
She also found problems with governance of Acorn affiliates. “Board meetings are not held, or if they are, minutes are not kept, or if minutes are kept, they never make it into the files,” she wrote.
My college chess club was more professionally run than that.
October 22nd, 2008 at 11:58 am
Whoops, forgot the link:
http://www.nytimes.com/2008/10/22/us/22acorn.html?scp=2&sq=acorn&st=cse
October 22nd, 2008 at 12:30 pm
karen, that’s par for community groups. In general you don’t want to lift the cover when it comes to social services. Not enough money, not enough people, and when it comes down to it — and this is the unfortunate part — they don’t think it’s important.
I’m very glad, by the way, that these studies have come out saying that the benefits of head start programs appear to be gone by 3rd grade. Not because that’s a great thing, or because head start is terrible (it may be; I don’t know), but because now you can see that it’s not magic, and that by itself it’s no good. It may be that these kids need continual boosters; it may be that the programs simply don’t matter and should be discontinued altogether, except insofar as they allow the parents to work. But either way you can see that there’s research to do and changes to be made.
When I served on a county human-services board, I tried to get the local school district to provide data for a very similar study of the effectiveness of preschool programs we were funding. We were, after all, pouring big bucks in, and who knew whether it did any good. So I asked for the schools to track the kids — track the kids in the biggest program and a control group of waiting-list kids who didn’t get in, but were presumably from a similar demographic. Just put a tag on their files so they could be compared down the line, say at 2- or 3- year intervals. Get a local university group to do the comparison, they’ve got the interns looking for projects. No no no, said the district administration, this would take up far too much secretarial time. Now we were talking about, maybe, 200 kids in a district with 11K kids, but no, this was too hard.
I rather suspect that the district just didn’t want to open up the possibility that we’re running programs that sound good and do bupkes, or that serve only to boost kindergarten testing scores.
Anyway. Notes, procedure, not really a big thing for social services.