TCS Daily

Eliot Spitzer, At It Again

By Jay Bryant - May 9, 2005 12:00 AM

New York Attorney General Eliot Spitzer has been compared to Tony Soprano in that, as Stephen W. Stanton has put it, "He breaks the law. He lies. He intimidates. He makes his own rules, and he gets what he wants. And yet he remains a very popular guy. "

Responsible Attorneys General don't behave like this, of course, but the actions of an aggressive AG like Spitzer -- whom The Economist called "publicity hungry" -- are indistinguishable from extortion. In recent years, Alliance Capital, Merrill Lynch, and GlaxoSmithKline, among many others, have felt the sting of Spitzer's whip. So when he sent out letters last week to some of the nation's biggest banks to find out if they discriminated against minority groups in setting mortgage rates and fees, recipients had to take notice (see related news articles in the LA Times and Baltimore Sun ).The banks questioned all have subsidiaries that operate in the sub-prime lending business, and it would appear to be this activity that has Spitzer exercised.

A sub-prime lender does not loan money below the prime interest rate. Exactly the opposite, in fact. What these lenders do is make mortgage loans -- at relatively high interest -- to people who can't qualify for mortgages at lower rates. "The development of the sub-prime market has made mortgages (and home ownership) available to a segment of the population that otherwise would have been shut out of the market," says Wharton Professor and highly respected mortgage columnist Jack M. Guttentag.

Retiring Federal Housing Administrator John Weicher agrees, noting that although there is overlap, many sub-prime mortgages go to borrowers considered too risky for government-backed FHA mortgage insurance.

Both Weicher and Guttentag point out that there are problems with some lenders in the sub-prime industry, including overly aggressive marketing and the unwillingness of some brokers to inform clients that they might qualify for better rates with another lender.

But Weicher confirms that the sub-prime lenders deserve a share of the credit in today's highest-ever rate of home ownership, a fact President Bush found significant enough to mention over and over again in last year's campaign.

Suppose then (and it is undoubtedly the case) that minority families are disproportionately represented among those unable to qualify for the "A" rating which is the standard for the best rates. They also want to own their own homes. But past credit problems, lack of assets, inability to make substantial down payments and other factors make them a greater risk. Without the sub-prime lending industry, they would be unable to get a mortgage, and forced to continue renting, with all that means for their inability to build equity and otherwise improve their financial situation. Remember, for many who have poor credit, or even no credit, the Federal government even considers the risk too high to guarantee the loan.

Note also that the kind of problems experts like Guttentag and Weicher cite are not those associated with discrimination -- which seeks to rule people out of consideration. Rather, they are problems associated with an excessive zeal to bring people into consideration. So any statistical discrimination is just that -- a statistic independent of the actions of the lenders.

But if Spitzer's ominous letters are any indication, he is about to insert himself and his publicity-seeking machine into the sub-prime lending industry, and if he's not careful, he could destroy it. What he may be more likely to do is to negotiate some sort of face-saving agreement that will damage the industry, reduce the number of people it can profitably serve and scale back the growth rate in home-ownership.

As former Senator Sam Hayakawa famously observed, you can't expect people to climb the ladder of success if you kick out the bottom rungs. That's the central point about home ownership: that it provides, for people of modest means, the best opportunity they will ever have to build equity. For a great many of them, this equity will mean that before long they will be able to refinance their mortgage at a better rate, their newfound equity having served to improve their creditworthiness. They will, in other words, have moved up the ladder a few rungs. This sort of movement happens all the time.

(It is also worth noting that the term "high interest" is an extremely relative, time-sensitive, concept. For millions of baby boomers who were trying to buy their first house in the late 1970's, the rates charged by today's sub-prime lenders would have appeared almost miraculous.)

If Spitzer wanted to do some good in the process, he could use his office to increase awareness among consumers of the value of comparison shopping, in regard to mortgages or anything else, for that matter, and a healthy skepticism about sales offers that come in over the transom, particularly the virtual transom of email. That would be a consumerist act with significant benefits for the people he supposedly cares about.

The threat Spitzer represents is very real, but its victims are not the ones he pretends to threaten. If the bankers who got Spitzer's letters don't make money by sub-prime lending, you may be sure they will find another way to make it. But whether the low-income family trying to climb the ladder to prosperity through home ownership can find another way to make it -- that is a much less likely proposition.


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