The housing crisis is far from over. U.S. house prices remain about 30% below their mid-2006 peak. More than 3% of mortgage holders are in foreclosure, and another 9% are at least 90 days late on their payments.
Pundits have long since distributed blame for the mess, in proportions that suit their politics. Their list included greedy lenders, incompetent lawmakers and speculative borrowers.
Now, statisticians are getting around to parsing the data. Their early results suggest no shortage of guilty parties, but there's particularly striking evidence of a financial link between lenders and politicians.
That mortgage lenders spend money to influence politics is no secret. For example, at the end of 2007, The Wall Street Journal reported that Ameriquest Mortgage and Coutrywide Financial together spent nearly $30 million on political donations, campaign contributions and lobbying from 2002 to 2006. A paper from the International Monetary Fund circulating since December sheds light on which types of lenders were friendliest toward Capitol Hill during the recent bubble. The largest outlays on mortgage-related lobbying came from companies with high loan-to-income ratios, heavy securitization activity and fast-growing portfolios. In other words, risky lenders tried to buy the most influence.
The hotter the real estate market grew, the more targeted mortgage lenders seem to have become with their political spending. A new working paper from professors at U.C. Berkeley, the University of Chicago and the University of British Columbia shows that from 1994 to 2000, lenders' campaign contributions were relatively steady toward representatives in districts with high proportions of sub-prime borrowers. Beginning with the 107th Congress in 2001, contributions to these representatives shot higher. There was no such spike in contributions from non-mortgage financial companies.
The money appears to have talked. The study authors looked at hundreds of House votes on matters with subject terms that included "affordable housing," “homeownership," or "subprime." The fraction of votes for which campaign contributions showed a strong statistical link to voting patterns increased from 3% with the 104th Congress (1995 to 1996) to 20% with the 108th Congress (2003 to 2004). The proportion of sub-prime borrowers in a district also predicted voting patterns.
"Taken together, these findings suggest that politicians responded to both special and constituent interests when supporting policies related to the expansion of subprime lending," the authors wrote.
The result was a legal framework that permitted an explosion of loans made to borrowers who could ill afford them. From 2002 to 2005, growth in mortgage borrowing was negatively correlated with borrower income, the only such period in the past 18 years, two of the study authors show in separate research.
Skip ahead to 2008, when Congress passed sweeping bailouts of homeowners and banks in reaction to the mortgage bust. The American Housing Rescue and Foreclosure Prevention Act provided up to $300 billion in federal insurance for renegotiated mortgages and unlimited support for Freddie Mac and Fannie Mae, and the Emergency Economic Stabilization Act empowered the Treasury to spend up to $700 billion on bank equity and distressed securities.
The same researchers find that voting patterns on the borrower bailout are more correlated with the number of defaults in political districts than with the ideology of representatives -- especially in districts with closely contested elections. As for the bank bailout, its voting pattern lines up alarmingly well with the distribution of campaign money from the financial services industry.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
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