Are Illegals Responsible For the Economic Meltdown?

From the beginning of this whole subprime crisis, one of the first things that I wondered about was if there was any connection between illegal aliens and the subprime loan fiasco.  I mean, after all, illegals don’t live in holes in the ground – they gotta live somewhere.  Right?

It’s been on my mind for some time now.  One of those things buzzing around in my head.

So, along comes an article by Michelle Malkin, where she makes the direct correlation between illegals and the current financial bailout:

The Mother of All Bailouts has many fathers. As panicked politicians prepare to fork over $1 trillion in taxpayer funding to rescue the financial industry, they’ve fingered for blame regulation, deregulation, Fannie Mae and Freddie Mac, the Community Reinvestment Act, Jimmy Carter, Bill Clinton, both Bushes, greedy banks, greedy borrowers, greedy short-sellers and minority homeownership mau-mauers (can’t call ’em greedy, that would be racist).

But there’s one giant paternal elephant in the room that has slipped notice: how illegal immigration, crime-enabling banks and Bush open-borders policies fueled the mortgage crisis.

It’s no coincidence that most of the areas hit hardest by the foreclosure wave – Loudoun County, Va., California’s Inland Empire, Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for starters – also happen to be some of the nation’s largest illegal alien sanctuaries. Half of the mortgages to Hispanics are subprime (the accursed species of loan to borrowers with the shadiest credit histories). A quarter of all those subprime loans are in default and foreclosure.

Regional reports across the country have decried the subprime meltdown’s impact on illegal immigrant “victims.” A July report showed that in 7 of the 10 metro areas with the highest foreclosure rates, Hispanics represented at least one-third of the population; in two of those areas – Merced and Salinas-Monterey, Calif. – Hispanics comprised half the population.

The amnesty-promoting National Council of La Razaand its Development Fund received millions in federal funds to “counsel” their constituents on obtaining mortgages with little to no money down; the group almost got a $10-million earmark attached for itself in one of the housing bills passed in the spring.

For the last five years, I have reported on the rapidly expanding illegal alien home loan racket. The top banks clamoring for their handouts as their profits plummet, led by Wachovia and Bank of America, launched aggressive campaigns to woo illegal alien homebuyers. The quasi-governmental Wisconsin Housing and Economic Development Authority jumped in to guarantee home loans to illegal immigrants. The Washington Post noted, almost as an afterthought in a 2005 report: “Hispanics, the nation’s fastest-growing major ethnic or racial group, have been courted aggressively by real estate agents, mortgage brokers and programs for first-time buyers that offer help with closing costs. Ads proclaim: “Sin verificacion de ingresos! Sin verificacion de documento!” – which loosely translates as, ‘Income tax forms are not required, nor are immigration papers.’ ”

In addition, fraudsters have engaged in massive house-flipping rings using illegal aliens as straw buyers. Among many examples cited by the FBI: a conspiracy in LasVegas involving a former Nevada First Residential Mortgage Co. branch manager who directed loan officers and processors in origination of 233 fraudulent Federal Housing Authority loans valued at more than $25 million. The defrauders manufactured and submitted false employment and income documentation for borrowers; most were illegal immigrants from Mexico.

To date, the FBI reported, “Fifty-eight loans with a total value of $6.2 million have gone into default, with a loss to the Housing and Urban Development Department of over $1.9 million.”

It’s the tip of the iceberg. Thanks to lax Bush administration-approved policies allowing illegal aliens to use “matriculaconsular cards” and taxpayer identification numbers to open bank accounts, more forms of mortgage fraud have burgeoned. Moneylenders still have no access to a verification system to check Social Security numbers before approving loans.

In an interview about rampant illegal alien home loan fraud, a spokeswoman for the U.S. Government Accountability Office told me five years ago: “[C]onsidering the size of Los Angeles, New York, Chicago, Houston and other large cities throughout the United States known to be inundated with illegal aliens, I don’t think the federal government is willing to expose this problem for financial reasons as well as for fear of political repercussions.”

The chickens are coming home to roost. And law-abiding, responsible taxpayers are going to pay for it.

Now, critics of Malkin cite the following facts:

Compliance Technologies, a lending-industry consultancy, last month analyzed more than 1.9 million subprime loans originated in 2006, the height of the subprimelending frenzy, and found that roughly 56 percent went to non-Hispanic whites. Affluent borrowers, those with annual income at least 120 percent of their given area’s median income, meanwhile, took out more than 39 percent of the loans.

“I was surprised to see that non-Hispanic whites received more subprime loans than all minority groups combined,” said Maurice Jourdain-Earl, a founder and managing director of Compliance Technologies.

The also generally tend to ignore the following data (from the same article):

Still, African-Americans and Hispanics received subprime loans in a greater proportion than whites. Whites made up 71 percent of the borrower population in 2006 and received 56 percent of the subprime loans originated that year. Blacks, meanwhile, made up 10 percent of the loan pool, yet received 19 percent of the subprime loans. Hispanics constituted 14 percent of the borrower community and received 20 percent of the subprime loans.

But more than two-thirds of those subprime loans — defined as mortgages with annual percentage rates at least three points higher than those given to prime borrowers — were made in predominantly minority neighborhoods. Depending on how well, or poorly, such borrowers handle their subprime mortgages, such neighborhoods could fare much worse than predominantly white areas.

Yep, that’s right: Hispanics made up 20% of the subprime borrowers.

The critics of Michelle Malkin also ignore one other convenient fact: not all illegal aliens are Hispanic.  Lots of illegal aliens come from Russia, the Balkans, Eastern Europe, Canada, and other “white” countries. 

Now, what’s funny is that in their race to condemn anything capitalistic, even left-wing bloggers are tacitly admitting that Michelle Malkin may be on to something here, as evidenced by this recent blog entry from the Huffington Post:

They allowed an $8 trillion housing bubble ($110,000 for every homeowner) to grow unchecked. People like Henry Paulson, Ben Bernanke, and Alan Greenspan repeatedly insisted that there was no housing bubble as house prices got ever further out of line with fundamentals. President Bush regularly boasted about record rates of homeownershipasthe sleazes at outfits like Countrywide, IndyMac, and New Century pushed predatory mortgages on moderate income families, many of whom were black or Hispanic.

“Predatory lending”, it’s called.  However, as is the case with most liberals, reality is often the inverse of what they believe to the true.  The real predators here may have been the illegal aliens.  Lenders didn’t hang out along darkened alleyways, pounced on unsuspecting blacks and Hispanics, and forced them into high-risk loans.  No, they gave them a contract – one that undoubtedly was never taken to a lawyer by the borrower for review – the borrowers signed it, and locked themselves into debt they were unwilling or unable to pay off.

All of this started when, in 1999, lending institutions started offering subprime loans to people who basically couldn’t pay the rates.  Ideally, when faced with payments they couldn’t make, a lot of these subprime borrowers walked away from their mortgages, and left the lenders holding the bag.  I suspect that there were other, more nefarious schemes to milk money from private institutions. 

Normally, when faced with foreclosure, the lenders could auction off the property to minimize losses or even make a tidy profit.  The problem is, the loans were made in a housing bubble.  The housing bubble deflated, and now the lenders are left trying to sell properties at far less than what they essentially paid for them.

The kicker to this is that the housing bubble was undoubtedly fueled by more and more people having easier access to credit.  And who started this trend?  Well, Bill Clinton was one major contributor (as I’ve documented in a previous post).  The Democrats in Congress certainly ran interference for lending institutions like Freddie Mac and Fannie Mae, who were doing something similar.  Consequently, what the Democrats use to demonize Republicans with – deregulation – was advanced by both Bill Clinton in 1999, and was heavily lobbied by Citibank via Robert Rubin.  As a result, places like Freddie Mac and Fannie Mae loosened lending restrictions.  It also allowed places like Citibank to merge their commercial and investment banking practices, which was forbidden under the Glass-Steagall Act of 1933.

One should also remember that after his stint with the Clinton Administration as Treasury Secretary, Rubin got a nice, comfy job at Citibank, and lobbied for the repeal of the restrictions of the Glass-Steagall act.  Consequently, it got passed.

But I did a little more research into what Malkin was claiming.  And, to be honest, there’s quite a bit of evidence that she may be correct in her assessment.  And that evidence comes from one of the most unlikely sources.

Remember, we’re talking subprime mortgages and illegal aliens here; the biggest block of illegals being Hispanics.  Do you remember places like Bank of America providing credit cards to illegals some time back?  Well, that was a federally-backed strategy by a government agency to “Americanize” the finances of Hispanics across the country.  And it was spearheaded by none other than the FDIC.

Yes, the same FDIC that is now working overtime to sell off failing banks to keep the economy from completely falling apart.

It all starts with the FDIC’s New Alliance Task Force, which was introduced some time in 2003, as per the agency’s press release:

I’m proud of the FDIC’s efforts to reach out to people throughout this country who have not used banking services. Our Money Smart financial education curriculum is well-known and gaining in popularity every day. Since we introduced Money Smart in 2001, this user-friendly educational tool has reached more than 300,000 consumers and resulted in the creation of about 40,000 banking relationships. We have established hundreds of partnerships with financial institutions, non-profit organizations, government agencies and others to reach a broad audience and leverage resources. We’re proud to have the NBA as our partner.

In September, we unveiled the latest version of Money Smart—a Computer Based Instruction, or CBI, version that enables users to take Money Smart with them in a CD-ROM, or to access it on the FDIC’s Web site. With the CBI version, we intend to reach a far wider audience than before. As always, Money Smart can be taught in the classroom—but now people can also use it to learn on their own—at home, at the library, or at the local community center. Even better, the CBI version is available in English and Spanish. Since its introduction, Money Smart CBI has been moving like hotcakes. So far, we have distributed more than 7,200 copies. I hope you will consider making Money Smart CBI available at your institution. It’s definitely a winner.

But we’re not resting on our laurels. This year, we’re considering expanding an initiative called the New Alliance Task Force to welcome more people to the banking mainstream. Under this pilot program, which is located in Chicago, the FDIC, the Mexican Consulate, more than 63 banks, credit unions, community organizations and government agencies have come together to form this New Alliance Task Force. The Task Force is an incubator for innovation and new products. One of its efforts is reaching out to persons who send money in the form of remittances to other countries, especially Mexico and countries in Central and South America. A large number of those remittance senders are unbanked, offering a tremendous business opportunity to attract new customers through efficient remittance services. About 15 of the 34 banks in the Task Force are now offering products with these features. As with any new program, there are areas banks must consider before implementation. With this initiative, we plan to also compile the various combinations of controls banks have initiated to limit the legal, compliance and operational risks associated with offering remittance products.

Bankers who comprise the Task Force also developed a new mortgage product intended for use by potential homeowners who pay taxes using Individual Tax Identification Numbers. The new product enables a bank to consider alternative credit information, such as references from a landlord, a parish priest or a minister; and phone or utility bills. The product also includes incentives or requirements for potential borrowers to participate in homebuyer education programs. The banks participating in this effort are reporting excellent performance, with a zero late payments rate and no defaults.

We’ve seen positive results from this pilot program. Since its inception in May 2003, the initiative has resulted in 50,000 new bank accounts, or $100 million in deposits, with an average account balance of $2,000. That’s an impressive record thus far, and we want to determine if it’s feasible to expand this program to other parts of the country.

Another way to broaden access to credit is to ensure that banks are able to offer programs that can make a difference. In August, the FDIC published for comment a proposal to amend the regulations that implement the Community Reinvestment Act. This proposal would not in any way exempt financial institutions from their CRA obligations—all banks, regardless of size, will be thoroughly evaluated. I believe that lending for community development is the right thing to do—from a human perspective and a business perspective. We have extended the comment period for this proposal to October 20 and encourage you to share your thoughts with us.

Our other efforts include helping minority and community development banks. As you know, in September we hosted a Community Development Conference to provide resources, guidance and assistance to more than 50 minority and community development banks, as well as industrial loan companies. I believe our conference was a great success, thanks to people like the NBA representatives and members, who played leadership roles.

The steps I have described represent our latest efforts to open doors for consumers. Their access to credit is critical if we are to enjoy a financial services industry that serves as many people as possible. In today’s healthy banking environment, access to credit is seeing some favorable trends. The percentage of households without a bank account decreased from 15 percent in 1989 to nine percent in 2001, according to the Federal Reserve’s last Survey of Consumer Finance. Still, nine percent is not a number we should be satisfied with. Obtaining a bank account is just a first step in many people’s ability to build assets and achieve wealth. We can do better, and we will.

Well, well well…the Community Reinvestment Act (created during the Carter Administration, and expanded under the Clinton era) raises its ugly head yet again.  Once more, government involvement in the markets starts a new, and dangerous trend: providing loans to people who only need to prove that they paid taxes (thus providing them with a  Individual Tax Identification Numbers, or “ITIN” for short) while living in the US.

Or, as some may put it: “breathing and with a pen (the pen being optional)”.

So what’s the big deal about this?  It is a way to provide loans to people who have nothing to put up for collateral, have no roots in the US, and who don’t even need to be US citizens to get a loan.  In short: illegal aliens.

Of course, the argument is made that these programs are targeted for “new Americans”, or newly classified US citizens, but that is bogus.  It takes months-to-years in order to become a US citizen, at which time most of these people work and reside within the confines of the United States.  During that period, they can establish a credit rating, build up some savings, and provide a down payment in the traditional sense.  No, the only target of this new financial “incentive” was the illegal alien crowd.  A group of people that had the “buying power” in the billions of dollars, but could walk-away from the US (and their debts) on a moment’s notice.

Anyways, so I did a little looking into the FDIC’s aforementioned New Alliance Task Force, and who should I find in there?  AIG and Wachovia, to name just a couple.  Want more damning evidence?  Consider the following FDIC fact sheet, presented in March, 2005 concerning Hispanic / Latino home banking incentives:

Bankers that offer liberalized loan underwriting standards or down payment assistance in tandem with financial literacy programs may have opportunities to tap into a higher percentage of the Hispanic market. As indicated in Table 2, these strategies typically have more risks and higher costs. Some recent literature suggests, however, that beyond the obvious Community Reinvestment Act benefits, there are other offsetting benefits to the higher risks and costs. For example, Order and Zorn analyzed the performance of a large sample of fixed-rate low-income and minority mortgages purchased by Freddie Mac in the 1990s. They found that these types of mortgages are generally prepaid more slowly than other loanswhen rates fall. (Loansthat prepay less rapidly when rates fall are more valuable to the holder of those loans.) The positive effect of the lower rate of prepayment for these types of loanswas found to offset the negative effect caused by the higher default rates for the same types of loans.

A number of large banks and mortgage companies have also concluded that the benefits of closing the information gap outweigh the costs. Merrill Lynch & Company’s 350-person Hispanic unit generated $1 billion-worth of new business nationwide in 2003, double its goal. Merrill planned to hire another 100 financial advisers (mostly bilingual) in 2004. Wells Fargo’s Los Angeles regional office reported that its efforts to reach out to the Hispanic community have resulted in the opening of 22,000 new accounts per month. One way Wells Fargo reaches out is by holding in-home seminars. A host invites 15 or so friends and family to his or her home, and a Wells Fargo branch employee joins them to talk about topics such as buying a house and establishing good credit. Washington Mutual has a national manager who is in charge of emerging markets and is reaching out to the growing Hispanic market with free business checking and flexible home-loan products. In 2003, Bank of America launched two ads in Spanish about mortgages with less paperwork as part of a campaign to acquire 7,000 new mortgages in its largest Hispanic markets.

In this one document alone, we have the FDIC – another entity set up by the federal government -forwarding the cause of “liberalized loan underwriting” (ala Fannie Mae and Freddie Mac), and justifying these types of loans with the notion that they are less apt to fall into default.

Up until now, that is.  Oops.

Want even more damning evidence?  Take a look at the institutions that the FDIC is praising for their participation in these “Hispanic outreach” programs: Merrill Lynch, Washington Mutual both of which had to be sold off.  Wachovia is presently on a downward spiral, and I don’t need to tell you the fate of AIG.

Those entities in the FDIC program – U.S. Bank / U.S. Bancorp, and Wells Fargo for example – who are NOT having problems avoided the subprimemarket altogether when providing loans to hispanics.  As evidenced by this The Oregonian article:

Chief Executive Richard Davis, a onetime bank teller who rose through the industry’s executive ranks, says U.S. Bank’s “simple” philosophy of offering straightforward banking services to customers helped it avoid the risky, high-interest subprime markets that got both lenders and borrowers into trouble.

In a telephone interview in advance of Tuesday’s meeting, Davis discussed the banking industry crisis and U.S. Bank’s roots in Portland. (Comments have been edited for length and clarity.)

U.S. Bank had relatively little exposure to the subprime markets. Was that by chance or design?

It was absolutely by design. The biggest issue a lot of people got in trouble on is that they originated subprime activities, they sold them in secondary markets, the secondary markets dried up, they then had to keep what they originated and it wasn’t good.

We have done none of the above. We originate a very small percentage of (subprime) loans. We keep them on our balance sheet.

Furthermore, when Wells Fargo started introducing its mortgage plan to Hispanics, it required more than a ITIN, but also required proof that the people were in the country legally.  The result?

When I was researching this story last summer, I talked with a spokeswoman from Wells Fargo Bank in Red Bank about their program. I don’t have her name handy, but she’s the “Emerging Markets” officer for this region, and she’s very knowledgeable. She told me that Wells Fargo set up their ITIN program in southern California as a pilot program and that they had expected to make hundreds of loans. They made less than 10. The reason is, Wells Fargo insisted that if someone was applying for a loan using an ITIN insteadof a Social Security number, they had to provide some proof that they were in this country legally. She told me that most people who are here illegally will get phony Social Security numbers to pay their taxes rather than use an ITIN. She also said that Wells Fargo was thinking of dropping the program.

I talked to a spokesman at the National Hispanic Mortgage Bankers Association, a group that had an agreement with Deutche Bank to fund these loans. If I remember correctly, the association was going to get its members to make these loans, and then the association was going to sell these loans to Deutche Bank who would securitize them–sell bonds secured by these loans. He was very enthusiastic about the program, but when I asked him to give me the name of a member or two in Central Jersey whom I could interview, he never did. He said he would, but he never did. Maybe they weren’t making any loans here anymore by that time.

All I can say is that by the end of August, the mortgage bankers who would talk to me were telling me loud and clear that the money had dried up for these loans and it was no longer a story.

Gee…I wonder why?  Could it be that it was clear to guys like Wells Fargo that something was wrong in pursuing loans for illegal aliens?

Bear Stearns, another financial institution who sold subprime funds from it’s EMC Mortgage entity, also appearently got screwed with “predatory lending” practices with Hispanics as well:

Dec. 10 (Bloomberg) — Bear Stearns Cos., the second- biggest U.S. underwriter of bonds backed by mortgages, and its EMC Mortgage unit were accused of predatory loan servicing that particularly harmed Hispanic and black borrowers.

“EMCroutinely and systematically mismanaged Hispanic and African Americans’ mortgage loans by charging them unauthorized fees,” four minority borrowers said in a complaint filed today in federal court in Connecticut. “Many borrowers were trapped into a downward spiral ending in foreclosure.”

It was the default rate (4%+) on these loans that caused two of Bear Stearn’s big hedge funds to literally collapse.  Consequently, as you can see, Hispanics were targeted as a market for subprime loans.  Remember, something like 44% of Hispanics adults are illegal aliens.

There’s more to the story, however.  Follow Bear Stearns to EMC Mortgage, and you get praises of the alt-A subprime market pre-2006, in articles like this:

SI USTED SABE LEER, LAS POSIBILIDADES FUTURAS DE TENER EXITO EN LOS NEGOCIOS SON MEJORES. Readers unable to understand this opening sentence in Spanish may be at a growing disadvantage, as the fate of many in business today increasingly is linked to what euphemistically is called These are up…”emerging markets.” markets made of minority consumers and the burgeoning immigrant population in the United States.

Largely composed of Asians, Hispanics and blacks, the tide of newly arrived immigrants (both legal and otherwise) to the United States is approaching flood stage.

Categorically, Asian-American households are expected to grow 94 percent by the year 2020, while Hispanic- and African-American households also are estimated to rise dramatically by the year 2020-111 percent and 64 percent, respectively.

Smith is quick to point out that despite the apparent leniency of some features of these loan programs, SouthStar’s borrowers all have FICO scores in the high 600s, generally regarded as good credit risks by much of the secondary market, which has been powering the surge in such product offerings. Asked about the performance of such loans, Smith says, “[The secondary market] wouldn’t be buying them if they weren’t performing.”

Smith says, “Sophisticated markets are putting more emphasis on score and less on more traditional methods for judging creditworthiness.”

It’s no coincidence that alt-A’s growth at companies such as SouthStar is coming from states such as Florida, Texas and California, as well as cities like Atlanta, which Smith calls “a diverse international market.” And, he notes, demand for alt-A loans is being driven by more than just immigrant or minority populations. “It’s occurring in almost every major city, and it’s not just Hispanic; it’s anyone who is first-generation,” he says, noting the maturation of earlier immigrant waves.

Smith says the most noticeable missing players are the GSEs, which have been eclipsed by private-sector buyers like Lehman Brothers Bank FSB, Goldman Sachs Mortgage Co., EMC Mortgage Co. and UBS Real Estate Securities Inc. Smith notes that the GSEs could be more effective in buying loan products that assist emerging market-type borrowers. He claims that “the products they offer [to emerging markets] are not effective.”

In defense, Fannie Mae’s Lundsays, “We’re seeing that begin to change. Institutionswill be required to commit to understand the markets they’re serving, how to penetrate those markets; I think that’s partly why you’re seeing the growth of the alternative markets, because they invested in these communities, understood the populations, their needs and how to sell to those communities. I think everyone needs to commit those resources.”

I guess we should feel lucky that Fannie Mae fell apart before they too expanded into the realm where they are, “…putting more emphasis on score and less on more traditional methods for judging creditworthiness.”

Notable in the quote is the presence of Lehman Brothers – yet another failed financial institution – as a mover and shaker in the ITIN-only subprime loan industry.  Also Goldman Sachs, who has now decided they just want to be a “conventional” bank.  SouthStar Funding also want belly-up in 2007.

Notice also the states mentioned in the aforementioned article: Florida, Texas and California.  According to 2007 data, Florida was ranked #2 in foreclosures, California #4, and Texas #12 (out of all 50 states, and the District of Columbia).  In 2006, these three states had the highest foreclosure totals.

So, given all of the information I’ve cited here, it seems that Michelle Malkin may be on to something.

So what can we take away from all of this?  Well, let me sum it up for you:

  1. The Community Reinvestment Act – created under the Carter Administration and expanded under the Clinton Administration – was the driver for both the public (Fannie Mae and Freddie Mac) and private lending institutions to provide low-cost loans to people who couldn’t afford to pay them back.
  2. A federal agency, namely the FDIC, spearheaded frivolous lending practices as a social engineering experiment.
  3. The “illegal alien” market was targeted as a way to provide “inclusion” for a bunch of people who could skip town in the blink of an eye.
  4. After years of being abused by people who are basically criminals anyway, the lending market collapses.
  5. Guys like Barney Frank (the guy who couldn’t figure out that a prostitution ring was being run out of his home) and Nancy (Stretch) Pelosi blame Republicans for “deregulating” the markets, when it was Democrat-led government-backed interference in the markets that caused the problem in the first place.
  6. People get to pile on Michelle Malkin for basically telling the truth.

Now, I’d like to point out here that while it seems that I’m dumping on Hispanics, I’m not.  Hispanics / Latinos happen to be the biggest block of illegal aliens out there.  It isn’t the race, but the illegal mentality that’s to blame, and the notion that we should somehow overlook their criminal status so we can get at their money.  There were lots of legal citizens taking out these mortgages and walking away as well.  However, they can’t go running to another country to escape their debts.  I seriously believe that when the smoke clears on all of this, people will be stunned as to the level of fraud involved with these subprime loans, and how a specific criminal element (Russian mob / Mexican Mafia types) cleaned up between 2003 and now.

But most importantly, here we have a shining example of the results of big-government, liberal social engineering: the near utter collapse of the lending market. 

Capitalism works. 

Socialism doesn’t. 

And Malkin was right.

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