FP: What do you say to people who say deregulation, such as the repeal of Glass-Steagall, caused the crisis?
Sperry: Glass-Steagall had nothing to do with lowering mortgage underwriting standards, the central cause of the mortgage meltdown — though you could argue that the repeal of that regulation had the effect of strengthening antiredlining regulations. Glass-Steagall triggered a wave of bank mergers, which in turn helped regulators punish banks that didn’t make enough risky political loans. In order to get merger approval, they had to first pass CRA lending exams, which required banks practice “flexible underwriting.” The added desire to merge and expand gave regulators added leverage over banks.
Make no mistake: Overregulation was the problem, not underregulation. Banks came under siege by regulators who politicized their mortgage-underwriting decisions.
FP: So are you saying banks are blameless?
Sperry: No, but government deserves most of the blame. It’s quantifiable based on the 27 million bad loans in the system in 2008. Washington accounted for 71% of them by virtue of Fannie and Freddie, FHA and HUD and other entities controlled by the government. Obama and the Occupy Wall Street crowd have it wrong: It’s not the “1% economy,” it’s the 71% economy.
FP: Weren’t derivatives, CDOs & credit default swaps part of the problem?
Sperry: Mortgage-backed securities were nothing new. What was new was all the bad underlying loans and the bad underwriting — and that was a function of bad government.
FP: What about the credit agencies — aren’t they to blame?
Sperry: The reason they didn’t rate subprime securities as junk is because the underlying mortgage assets were underwritten by Fannie and Freddie and therefore considered safe as Treasuries. And Fannie and Freddie drove demand on Wall Street for those securities while trying to meet HUD’s hard lending quotas. By 2005, the government-backed mortgage agencies commanded the lion’s share of the subprime securities market. And contrary to popular wisdom, subprime investments weren’t profitable for Fannie and Freddie. The now-toxic twins took a $200 million-a-year hit subsidizing those riskier loans — and that was before the crash.
FP: So greed wasn’t a factor?
Sperry: Greed became a factor when high prices hid the risk, yes, but the main fault lies with government. If someone poisons a well, who’s more at fault for harming the villagers — the guy who poisons the well or the guy who distributes the water? The government poisoned the well.
FP: How much fault lies with borrowers?
Sperry: As artificial demand drove home prices higher and higher, and as lending standards were relaxed across the board, a lot of people got greedy and cashed out equity for toys and ended up with more debt than they could afford. Subprime borrowers knew they had to pay higher rates to cover their higher risk. They knew they had crappy credit and would get commensurately crappy loans. But they wanted the money. Nobody held a gun to their heads.
FP: What would you say to those who would argue that your position blames minorities?
Sperry: In fact, a lot of deadbeat borrowers were white, and I profile a few of the more egregious cases in the book. But no, I don’t blame minorities, I blame the politicians who pushed them into homes they couldn’t afford. They didn’t do them any favors — they’re worse off than ever now, and that’s the real tragedy and the real scandal here.
FP: What is the true record in terms of blacks being hustled into “predatory loans” with higher rates and fees?
Sperry: Yes, that happened, but they were hustled into them by HUD, which was the biggest “predatory lender” of all. HUD and other regulators advised lenders to actually “target” black neighborhoods and pay brokers higher commissions for minority loans or face various penalties. The Justice Department ordered the same thing through consent decrees.
Now, subprime loans charge higher rates and fees. But a little-noticed Fed study found that blacks and Hispanics defaulted on prime loans at the same rate as subprime loans. This indicates that the problem of all the busted subprime loans wasn’t so much the terms of the subprime loans, as the media would have you believe, as it was the uncreditworthiness of the borrowers, who happened to be disproportionately minority. On average, African-Americans and Hispanics tend to have the worst credit histories and the worst default rates on loans, according to the Federal Reserve, and that tends to be the case at all income levels — poor, middle class or rich. So they tend to get the worst deals on loans.
FP: How do we really know that banks don’t discriminate against minorities?
Sperry: Because, for one reason, banks tend to favor Asian loan applicants over whites. On average, Asian minorities get rejected least for credit, and they get the best deals on loans — and that’s simply because they tend to have the best credit, better than whites. In fact, studies show the poorest Asians tend to have even better credit than the wealthiest blacks. So it’s not even a matter of income level and propensity to pay. It’s a function of willingness to pay, and to pay on time. It’s a function of credit and culture, not color. The only color that matters in the lending business is green — unless of course the government decrees otherwise.
FP: What are your thoughts on the Financial Crisis Inquiry Commission, which was the official body set up by Pelosi and Reid to get to the bottom of all this?
Sperry: These Democrat-appointed “investigators” should be investigated for misusing $10 million in public funds to mislead the public. And their “authoritative” and “definitive” report should be moved over to the fiction aisle in bookstores. It frames Wall Street and exonerates Washington, including Fannie and Freddie. As I reveal in my book, FCIC chairman Phil Angelides ran a dirty investigation. He put trial lawyer cronies in key slots where they went gunning for the very same banks their law firms are suing. They even leaked preliminary findings to their partners. We’re not just talking cover-up, we’re talking major corruption here.
Jamie, this financial crisis is, in fact, a political scandal — the worst since Watergate — and now there’s a full-blown cover-up. And the real culprits in Washington are covering their tracks so they can get away with doing it all over again. And so far they are getting away with it.
FP: Paul Sperry, thank you for joining Frontpage Interview.
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