Wednesday, May 18, 2011

Here We Go Again

UPDATE: below.

On the one hand, lefties and lawyers blame the housing crisis on fraudulent lending practices that forced loans on poor borrowers unable to afford the payments. This wrongly inflates the relatively small contribution of out-right criminality.

Instead, I've faulted the easy-money practices of Fannie and Freddie, which were manipulated for political purposes, becoming "too big to fail"--until they did, costing taxpayers over $350 billion. At the same time, I've not blamed the Community Reinvestment Act's preference for minority lending.

But I'm alarmed by the Obama Administration's latest idea--forcing increasing mortgage loans to minorities:
The Federal Reserve has cited one of the group's targets, Midwest BankCentre, a small bank that has been operating in St. Louis's predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. Although executives at the bank say they don't discriminate, Midwest BankCentre's latest annual report says it is in the process of negotiating a settlement with the U.S. Justice Dept. over its lending practices.

Lawyers and bank consultants say regulators and the Obama Administration are scrutinizing financial institutions for a practice that last drew attention before the rise of subprime lending: redlining. The term dates from the 1930s, when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending. Congress later passed laws banning lending discrimination on the basis of race and other characteristics. "The agencies have refocused on redlining because, in the wake of the subprime explosion and sudden implosion, they are looking at these disadvantaged neighborhoods and not seeing any credit access," says Jo Ann Barefoot, co-chair at Treliant Risk Advisors in Washington, D.C., which consults with banks on regulatory issues.

The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year.

At the Justice Dept., a new 20-person unit dedicated to fair lending issues received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, according to a recent agency report. Potential penalties can reach into the millions of dollars. "We are using every tool in our arsenal to combat lending discrimination," Thomas E. Perez, the assistant attorney general for the Civil Rights Div., told a conference of community development advocates in Washington in April.
This is wrong for several reasons. First, while minority borrower mortgage loans have declined, that is consistent with the drying up of sub-prime/Alt-A/interest-only loans. Studies have shown that the correlation between higher interest rates and race reflects risk, not discrimination as sometimes claimed. (Contrary studies often are flawed by considering only income and credit score, not wealth.)

Second, in the wake of the mortgage meltdown, promoting stricter lending practices should not be discouraged. Why encourage another crisis? Especially if the actions are, again, prompted by politics?

Third, as MaxedOutMama observes, stepped-up CRA enforcement will disproportionately impact small banks serving near minority markets. Large, nationwide banks can "average" over a bigger population and area. Advantage: too big to fail!

I would never condone discriminatory lending. But mere differences in interest rates or number of loans aren't proof. If easy money was a problem, more credit isn't the answer.


A_Nonny_Mouse in comments, "it was never about Hope and Change, it was all 'Hoax and Chains'." And MaxedOutMama on her blog:
The original focus of CRA was to prevent banks from opening branches, taking deposits, and moving the money outside the area to where it could be lent for higher returns. That would be terribly harmful!

This article describes a very different tactic - forcing banks to open branches in areas in which they would not normally choose to do so as a price of opening branches where they want to.

It's the Boeing thing all over again.


Kurt said...

Why encourage a crisis? It's easy. This is one of the fastest ways that the Obama administration knows to redistribute wealth: force the banks to make bad loans, then either bail out the banks when they fail, or punish them for making bad loans and set up programs for loan forgiveness for the delinquent borrowers.

A_Nonny_Mouse said...

We have about a year-and-a-half until Election Day, 2012.

If the herd occupying power in Washington is still in power after that day, "good-bye, America".

Please talk to your friends and family and explain that it was never about Hope and Change, it was all "Hoax and Chains".

wv- "inoncent" .... I'm inoncent I tell ya!!