Team McCain: Afraid of the facts

James Pethokoukis begins a sentence with this remarkable statement: "Here is what Team McCain is telling me . . ." Campaign staffers actually talking to a reporter -- wow.

What the campaign staffers actually say is, of course, a total bummer: John McCain is afraid to place the blame for the mortgage crisis where it belongs:

There is a racial component to criticism of the Community Reinvestment Act that can make it sound like you are scapegoating minorities for Wall Street's problems.

Via Michelle Malkin, whose "ugh" speaks volumes. A government policy that promotes lending to people with bad credit histories is a bad policy. Look at this chart:

Mortgage Delinquency Rates, 2003

Prime:

• 30 days 2.26%
• 60 days 0.58%
• 90 days 0.64%
• Forclosure: 0.48%

Subprime:

• 30 days 6.75%
• 60 days 2.12%
• 90 days 3.98%
• Forclosure: 3.38%

So, the total percentage of prime mortgage loans that were at least 30 days in arrears is less than 4%, compared to more than 16% for subprime mortages. When you combine the number 90 days past due and the number in foreclosure status -- i.e., what the Federal Reserve Board classifies as "serious delinquency" -- the total is 1.12% for prime mortagages, versus 7.36% for subprime. Thus, subprime borrowers are more than six times as likely to be in big trouble on their payments, compared to prime borrowers.

Now, who are subprime borrowers? About 7% of white homebuyers and 9% of Asian homebuyers, according to the FRB, compared to 16% for Native Americans, 19.6% for Hispanics and 27% for blacks. In other words, compared to whites, Native Americans are 2.3 times as likely to be subprime borrowers, Hispanics 2.8 times as likely, and blacks 3.8 times as likely.

Let us make some facts clear: The overwhelming majority of homeowners of every race (e.g., 73% of black homeowners) qualify for prime mortgages, and the overwhelming majority of homeowners of every race also make their mortgage payments on time, whether their loans are prime or subprime. And no homeowner who makes his mortgage payments on time is to blame for the current crisis, whatever their race.

However, a policy that encourages banks to increase the number of home loans to minorities (and threatens to penalize banks that don't comply) will necessarily have the effect of increasing the number of subprime loans. QED. And because subprime loans have a six-fold greater rate of foreclosure, such a policy will necesarily increase the number of foreclosures. QED.

So, what happened under the Clinton administration, which used the Community Reinvestment Act as a weapon to force lenders to make more home loans to minorities? Between 1994 and 1997, the total value of new mortgages that were subprime increased from $35 billion (4.5% of all new mortgages) to $125 billion (14.5% of all new mortgages). The percentage of subprime mortages shrank thereafter, falling to 8.8% by 2003, but the Bush administration, eager to promote the "ownership society," did nto reverse the Clinton policy.

This massive expansion of subprime lending sparked a rise in foreclosures. According to one study, more than 16% of subprime mortgages issued in 1999 had entered foreclosure within five years. Of subprime mortgages issued in 2000, 12 percent entered foreclosure within two years.

As troubling as that rise in foreclosure rates might have been, it was not a major financial hazard so long as home prices also kept rising. If someone took out a $120,000 loan in 1999 to buy a $130,000 house and then defaulted in 2004 (as 16% of subprime borrowers did), the rising housing market meant the bank could still recoup the full loan value. Once the housing bubble burst in 2006, however, most of these short-term foreclosures involved borrowers who were "upside down," owing more principle than the house could bring at resale.

Liberals have blamed all this on "predatory lending," but it was federal policy, begun under the Clinton administration, that encouraged such practices. By enforcing what were, in effect, racial quotas for the mortgage industry, this policy encouraged lending to a greater percentage minority clients with shaky credit and smaller down payments, who could not possibly qualify for regular mortgages and instead ended up with adjustable rates, "balloon payments," etc.

To speak bluntly about these facts is not, as McCain staffers told Pethokoukis, "scapegoating minorities," most of whom pay their mortgages on time. It is bad policy that is to blame, and the fact that this bad policy was intended to benefit minorities ought not make it exempt from criticism.

This is certainly not the first time that liberals pursuing good intentions have enacted bad policies and then tried to blame the failure on conservatives. And unless conservatives stand up to such tactics -- which is what the McCain campaign is afraid to do -- liberalism triumphs, Democrats win and more bad policies will be the result.