Excerpted from IBD: ” Good Intentions Paved The Road To Subprime-Stoked Meltdown”, September 23, 2008
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You need to go back — way back — to 1977, and the Jimmy Carter presidency.
It was then, for the best and purest of reasons, that well-meaning members of Congress brought the Community Reinvestment Act … “to eliminate the practice of redlining by lending institutions.”
In the 1970s, redlining” was widely seen as the cause of housing disparities between white and black Americans.
The redlining theory: Banks set up shop in low-income areas, took deposits, then lent the funds to richer areas — leaving poor and minority communities starved of housing and capital.
President Carter saw CRA as a way to end the supposed practice of redlining … nd bringing African-Americans into the American dream.
Unfortunately, this well-intended law eventually led to a housing boom based on shoddy loan practices, a subsequent bust, and the financial mess we are in today.
Initially, the CRA was supposed to not just lend to poor areas, but to do so “consistent with safe and sound lending practices.” That latter key proviso was ignored as CRA was implemented.
The CRA forced banks and savings institutions — then, far more heavily regulated than today — to make loans to poor, often uncreditworthy minority borrowers.
Banks were required to keep extensive records of their minority lending practices. Those that didn’t pass muster could be denied the right to expand their branches, merge with other banks, or boost lending in new markets.
If a community group decided a bank was operating in bad faith, it could affect the bank’s “CRA rating” — the scorecard for how well it was doing as a minority lender.
Banks became pliable, easy targets. No bank CEO wanted to be maumaued as an enemy of the poor.
Later, in the Clinton era, Fannie Mae and Freddie Mac got involved — buying up bad loans from banks, and securitizing them for sale on world markets. The seeds of the subprime meltdown were planted.
As of last year, the homeownership rate among all Americans was 68.1% — up from 63% in 1970. For black Americans, it’s up from just below 42% in 1970 to 47.2% last year. It’s still below 50%, and still the lowest of any minority group.
Full editorial:
http://www.ibdeditorials.com/IBDArticles.aspx?id=307061229501695#
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