My esteemed Keloland Colleague, Cory Heidelberger, declares that the Community Reinvestment Act of 1977 , which encouraged home loans to minority persons, is not responsible for the current financial troubles. I am sure he is right about that. The roots of the current crisis go back to the 1990's, but they do arise from the same set of issues.
A quick Lexis-Nexis search of articles ("Minority Lending", Mortgages) produced about a hundred and fifty hits. Nearly all of them were articles declaring that African Americans were being treated unfairly by the mortgage industry. What they demonstrate is that tremendous pressure was brought to bear on such institutions to increase lending to minority home seekers. Steven Malanga, of the Manhattan Institute, has the best piece I have seen on this. From Real Clear Markets:
In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.
Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue—mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.
Now, maybe African-Americans were being treated unfairly by the mortgage industry, and maybe not. I couldn't help noticing that none of the articles I read said anything about average default rates for minority vs. non-minority mortgage recipients. That would tell, better than anything else, whether there was unfairness in lending. If it was really harder for Blacks to get home loans, their default rate should have been lower. I suspect that this is not the case.
What is clear is that the Press and government began to move to affirmative action lending. This means that the racial disparities were taken as sufficient evidence of racism, and the removal of disparities by any means was taken as a necessary remedy. What are the results of this kind of policy?
One result is that lenders began aggressively marketing loans to African Americans. Now if you going to be called a racist when you don't give out enough loans, either you get it just right (which is not the human way), or you err on the side of making bad loans. This means that a lot of minority home buyers were talked into loans that they couldn't afford. That resulted in a lot of misery for the people the policy was supposed to help.
But it also had serious consequences for the banking industry. Malanga describes how the Federal Reserve Bank of Boston invented Affirmative Action lending. Bankers were encouraged to revise tradition criteria for lending.
It instructed banks that an applicant's "lack of credit history should not be seen as a negative factor" in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to "consider extenuating circumstances" that might still make the borrower creditworthy.
Does all this mean that minority borrowers are to blame for the subprime mortgage crisis? Of course not. African Americans represent a significant block of borrowers, but probably not significant enough to trigger a financial breakdown. But here is the problem: it is very questionable, from an equal protection angle, to have a "two-class" lending regime.
The new federal standards couldn't just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry. In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government [my italics].
So the "dramatic weakening of underwriting standards for U.S. subprime mortgages" in Cory's citation began a lot earlier than 2006. It is not "scapegoating" to point this out. Nor is it "blaming the poor." The Federal Reserve Bank of Boston was not staffed by poor people.
I have no doubt that greedy lenders were the prime movers behind the subprime crisis. But being greedy is more or less their job. The affirmative action lending regime that began in the 1990's put them in a position where they would be called racists if they tried to be even a little bit responsible in their greed. So what outcome would you expect?
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