Western International University Material

Axia College Material

Appendix B

Annotated Bibliography

Week ______

Article One: The Real Scandal: How Feds Invited the Mortgage Mess

Article or Web site reference: (Liebowitz, 2008)

Summary of Article or Web site:

In the article, Stan Liebowitz of the New York Post exposes the mortgage banking industry for its shoddy lending procedures. He ties it to loose underwriting standards meant to end discrimination.

In 1992, the Boston Federal Reserve Bank thought it had uncovered evidence of discrimination in loans that had been made by mortgage lenders. As a corrective measure, it issued a manual for mortgage lenders to use as guidance. The manual told lenders that when their underwriting policies contained criteria that would disqualify urban or low-income minority applicants, they were considered to be discriminatory.

The criteria that would be considered discriminatory included a comparison of the mortgage payment to income, credit history, income verification, verifying assets, requiring a down payment, and checking the savings history. It even went so far as to

ECO 205 state that a credit counseling program could demonstrate an applicant's ability to manage debt.

The regulators new rules, combined with the 1995 version of the Community

Reinvestment Act, only compounded the problem. These regulations required lenders to provide mortgages to poor communities.

Liebowitz acknowledges that minority applications in the past had been rejected more frequently than other applications, but research into those applications reveals weak finances that would have led to rejection of any application, whether minority or other race or ethnic group.

Liebowitz ' premise is that the relaxed regulations and shady lenders engaged in poor business practices, which led to the collapse of the housing market.

ECO 205 Article Two: The Long Road to Slack Lending Standards

Article or Web site reference: (Malanga, 2008)

Summary of Article or Web site:

Malanga traces the loosening of mortgage lending criteria to the media, who, through investigative reporting in the 1990's exposed what they believed to be discrimination by banks against minority borrowers.

Academic researchers were critical of the validity of the stories, and noted that they had relied on data that did not include a review of their higher debt levels, higher loan default rates, and other issues. Malanga asserts that this is because newspaper reporters and editors wanted to influence government interventions to end discrimination in the mortgage arena. Washington bought into it, along with the Federal Reserve Bank of Boston. The FDIC attempted to refute the data, but no one listened. Federal officials lobbied banks to lower their lending standards and make more minority loans. The Bank of Boston issued a manual in 1998 titled "Closing the Gap: A Guide to Equal

Opportunity Lending."

These government influencers encouraged banks not to use the debt-to-income ratio in evaluating a creditor's loan eligibility,and stated that the lack of a credit history should

ECO 205 not be seen as negative. If applicants had bad credit, Boston Federal Reserve told banks to consider other factors that would make the borrower creditworthy.

Compounding this issue was the fact that the Fed standards applied to everyone, not just minorities. The "no-standard-standard" became the rule in the industry. Some lenders were not subject to the CRA.

Lending standards from the Boston Federal Reserve Bank explained to the industry why loans based on the new standards were safer than the industry previously thought. These justifications became the basis for new values, including making no-down payment loans and loans to people with poor credit history or to those who were already overextended.

Malanga concludes that when we tried to eliminate discrimination, we sold our souls.

ECO 205 Find two sources to help you answer the following questions:

• Describe any current or past news events related to wage inequality.

In the early 1990's, according to an article by Stan Liebowitz in the New York Daily

News, the Boston Federal Reserve, under pressure to ease discrimination in lending, found what it thought were lending improprieties in eliminating minorities from consideration for mortgage loans (Liebowitz, 2008).

Around the same period, the media, according to an article by Steven Malanga, increased the pressure on the Federal government and lenders to end discrimination. As a result, the

Boston Fed issued a relaxed set of regulations for lenders to use in making loans. This was further compounded by the passage of the Community Reinvestment Act, which loosened the criteria even more. These criteria were lax and later resulted in subprime lending, which led to our current economic crisis (Malanga, 2008).

• What was the industry’s method for determining that there was an equality?

Explain.

The industry method for determining whether equality was present, eventually, was in the application of lax criteria to anyone, minority or majority, who applied for a mortgage loan. Where people who applied for a loan, no matter the race or national origin, in prior years were equally subjected to lending criteria that included validating debt-to-income

ECO 205 ratios, verifying income, verifying assets, and examining and including credit history an evaluation of a person's ability to repay the loan, under the relaxed guidance were not subjected to anything. Subprime lending resulted in no-down-payment loans, no- verification loans, and no document loans. The playing field for loans was level, but not prudent from a business standpoint (Malanga, 2008)

ECO 205 Works Cited

Liebowitz, S. (2008, Feb 5). The Real Scandal: How Feds Invited the Mortgage Mess.

Retrieved March 26, 2009, from The New York Post:

http://www.newyorkpost.com

Malanga, S. (2008, October 01). The Long Road to Slack Lending Standards. Retrieved

March 26, 2009, from Manhattan institute for Policy Research:

http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_lendin

g.html

ECO 205