File this under “Unbelievable.” We now learn from the Washington Post that the Obama administration, in its relentless quest for “social justice,” is pushing banks to make more loans to people with weak credit ratings. It seems that Obama and his “economic advisers” have concluded that the current “housing rebound” is “leaving too many people behind”—most notably, undercapitalized first-time homebuyers and nonwhite minorities with low credit scores. To remedy this putative disaster, the administration wants banks to rely less on the time-tested, race-neutral lending criteria that have served as reliable barometers of credit-worthiness since time immemorial—income, net worth, credit history, etc. Instead, banks should “use more subjective judgment in determining whether to offer a loan” because, as Obama’s Federal Housing Administration (FHA) commissioner puts it, “there are lots of creditworthy borrowers … all the way down the credit-score spectrum.” And hey, if this policy ultimately causes borrowers to default on their loans, that’s no big deal. “Taxpayer-backed programs”—including those offered by the FHA—will magnanimously pick up the tab.
No, you aren’t in a time warp. This article wasn’t written ten years ago, before the housing-market crisis plunged the American economy into the proverbial sewer. Difficult as it may be to believe, the current president of the United States is actually prescribing precisely the same practice—government policies pressuring banks to lend money to unqualified applicants—that caused the crisis in the first place.
Let that sink in for a moment.
These types of government policies initially emerged the mid-1970s, when “progressive” Democrats in Congress began a campaign to help low-income minorities become homeowners. This led to the passage, in 1977, of the Community Reinvestment Act (CRA), a mandate for banks to make special efforts to seek out and lend to borrowers of meager means. Founded on the premise that government intervention is necessary to counteract the fundamentally racist and inequitable nature of American society and the free market, the CRA was eventually transformed from an outreach effort into a strict quota system by the Clinton administration. Under the new arrangement, if a bank failed to meet its quota for loans to low-income minorities, it ran the risk of getting a low CRA rating from the FDIC. This, in turn, could derail the bank’s efforts to expand, relocate, merge, etc. From a practical standpoint, then, banks had no recourse but to drastically lower their standards on down-payments and underwriting, and to approve many loans even to borrowers with weak credit credentials. As Hoover Institution Fellow Thomas Sowell explains, this led to “skyrocketing rates of mortgage delinquencies and defaults,” and the rest is history.
The CRA was by no means the only mechanism designed by government to impose lending quotas on financial institutions. For instance, the Department of Housing and Urban Development (HUD) developed rules encouraging lenders to dramatically hike their loan-approval rates for minority applicants and began bringing legal actions against mortgage bankers who failed to do so, regardless of the reason. This, too, caused lenders to lower their down-payment and income requirements.
Moreover, HUD pressured the government-sponsored enterprises Fannie Mae and Freddie Mac, the two largest sources of housing finance in the United States, to earmark a steeply rising number of their own loans for low-income borrowers. Many of these were subprime mortgages—loans characterized by higher interest rates and less favorable terms in order to compensate lenders for the high credit risk they were incurring.
Additional pressure toward this end was applied by community organizations like the pro-socialist ACORN. By accusing banks—however frivolously or unjustly—of having engaged in racially discriminatory lending practices that violated the mandates of the CRA, these groups commonly sued banks to prevent them from expanding or merging as they wished. Barack Obama, ACORN’s staunch ally, was strongly in favor of this practice. Indeed, in a 1994 class-action lawsuit against Citibank, Obama represented ACORN in demanding more favorable terms for subprime homebuyer mortgages. After four years of being dragged through the mud, a beleaguered Citibank—anxious to put an end to the incessant smears (charging racism) that Obama and his fellow litigators were hurling in its direction (to say nothing of its mounting legal bills)—agreed to settle the case.
Forbes magazine puts it bluntly: “Obama has been a staunch supporter of the CRA throughout his public life.” In other words, he has long advocated the very policies that already have reduced the real-estate market to rubble. And now he is actively pushing those very same practices again. The reason for this is not difficult to comprehend: The president of the United States is a socialist ideologue who reveres big-government interventionism and deplores the free market. For good measure, he also happens to be an economic illiterate who, in his pontifications about fiscal matters, has all the credibility of a pre-Copernican stargazer explaining precisely how the sun revolves around the earth.
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