Thursday, November 29, 2007

We Had Been Warned Before

Thousands have been hurt by the recent collapse of the subprime mortgage industry, however the conception of this industry during the Carter Administration, and enforced during the Clinton Administration came with clear warnings like this one in 2000 entitled "The Trillion Dollar Bank Shakedown That Bodes Ill for Cities."

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
The CRA's premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA's logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.

Those are some pretty strong words. African Americans were the most targeted for this act, and it was a valiant but flawed effort to help them off their feet. Fannie Mac did a study in 1999 looking at the credit reports of various groups of people. They found that a due to credit issues, African Americans making $65-70,000 per year had worse credit scores than whites making under $25,000 per year.

There was another article that came around as a warning in 2005, a mere 2 years before the subprime collapse.

After decades of redlining practices that starved many urban communities for credit and denied loans to racial minorities, today a growing number of financial institutions are flooding these same markets with exploitative loan products that drain residents of their wealth. Such “reverse redlining” may be as problematic for minority families and older urban neighborhoods as has been the withdrawal of conventional financial services. Instead of contributing to homeownership and community development, predatory lending practices strip the equity homeowners have struggled to build and deplete the wealth of those communities for the enrichment of distant financial services firms.

There are no precise quantitative estimates of the extent of predatory lending. But the growth of subprime lending (higher cost loans to borrowers with blemishes on their credit records) in recent years, coupled with growing law enforcement activity in this area, clearly indicates a surge in a range of exploitative practices. Not all subprime loans are predatory, but virtually all predatory loans are subprime. Some subprime loans certainly benefit high-risk borrowers who would not qualify for conventional, prime loans. Predatory loans, however, charge higher rates and fees than warranted by the risk, trapping homeowners in unaffordable debt and often costing them their homes and life savings.
...Here are some numbers to illustrate the extent of the problem: The Joint Center for Housing Studies at Harvard University reported that mortgage companies specializing in subprime loans increased their share of home purchase mortgage loans from 1 to 13 percent between 1993 and 2000. Economists at the Office of Federal Housing Enterprise Oversight found that subprime loans are concentrated in neighborhoods with high unemployment rates and declining housing values. Almost 20 percent of refinance loans to borrowers earning less than 60 percent of area median income in 2002 were made by subprime lenders, compared to just over 7 percent for borrowers earning 120 percent of median income or higher, according to research by the Association of Community Organizations for Reform Now (ACORN). The Center for Community Change reported that African Americans are three times as likely as whites to finance their homes with subprime loans; this is true even between upper-income blacks and whites. The Joint Center for Housing Studies has also revealed that race continues to be a factor in the distribution of subprime loans after other individual and neighborhood factors are taken into consideration.

And mind you those are reports from Winter of 2000, and then in 2005. And now after the fact, people are actually realizing what was happening.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.
It was a time bomb waiting to happen, and the clock finally reached zero.