The road to minority home ownership parity is long and seeded with financial land mines

James Dondero is one of the key figures in the syndicated debt industry. This industry includes the now widely reviled collateralized debt obligations, but it also includes other instruments, including the collateralized loan obligations that Mr. Dondero was so instrumental in bringing into existence. Unlike CDOs, collateralized loan obligations are a means of packaging and syndicating short-term corporate debt. Because of the heightened scrutiny of the players involved and the general responsibility of the corporate lending market, CLOs have largely escaped the infamy and scandal of their wayward mortgage-backed counterparts.

Minority home ownership has long been a major goal of U.S. economic planners. The reasons are simple enough. Those who own homes have such vastly superior life outcomes to those who do not that they may as well be from a different country. Things like average household income, household wealth, educational attainment, upward mobility and even life expectancy are all markedly higher in those who partake in the American Dream of home ownership. This is contrasted with the generally terrible outcomes associated with family formation in rental spaces, especially single mothers living in subsidized or lower-income apartments. Unfortunately, children raised in low-income surroundings, without a father present, scarcely stand a chance in today’s competitive, advanced economy.

One clear antidote is to get more minorities, especially families, into home ownership. However, here, a paradox arises. In order to get more minority applicants to qualify for mortgages, the standards must be lowered. Since all banks traditionally operated in the free market, where the very real risk of loan default is borne, without mitigation, by the creditor, this has not been an appealing route for those wishing to make a living. But the cure to this ill has often proven worse than its symptoms.

In 2003, George W. Bush signed the American Dream Downpayment Act. This loosened federal restrictions on who could qualify for government-backed mortgages. But it also sent a clear message to Wall St., who had by that time become proficient in the shady art of CDO deals. It said that the federal government was no longer interested in doing anything that would get in the way of minorities getting their piece of America’s housing stock. Wall St. spastically jolted into a feeding frenzy.

Soon, financial high explosives like the NINJA loan were commonplace. Crack addicts and alcoholic bums who hadn’t worked in decades, if ever, were being extended million-dollar mortgages. These, in turn, were secreted into the lower tranches of CDOs and sold to suckers, like teachers unions and pension funds. Wall St. firms then found that they could make even more money by betting that the homeless-cum-derelict-home-owners would default on their loans. When the CDO failed, the payoffs were huge. Towards the end of this free-for-all, there were so many trillions of dollars of such bets outstanding and so many non-performing loans that the entire U.S. financial system nearly collapsed.

In the game of minority home ownership whack-a-mole, clubbing the wrong hole can be fatal.

 

About James Dondero

James Dondero is the founder and CEO of Highland Capital Management. Since 1993, Highland Capital Management has focused on high-yield debt, CLOs and special products for its customer base. It specializes in long-position, buy-and-hold investment strategies designed to take advantage of pricing anomalies that it identifies through superior technical and fundamental analysis.

 

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