This is among the best, most exhaustive, detailed analysis I've seen (the first section of the David Horowitz Freedom Center's now booklet,
) in concentrated form, of the political and ideological origins of the "affordable housing" cause celeb among the Democratic Party and the Left I've yet seen. The CRA, while not the largest and most expansive of the subprime lending initiatives to come out of the federal government over the last 30 years, was both a template for and reflection of the plethora of integrated programs and policies, based upon the same faulty, bumbling attempt to solve yet another problem that essentially did not exist, that led, and could only have led, inevitably, to the economic catastrophe within which we are still struggling to extricate ourselves.
I. How Progressives Sold Homes to the Poor They Couldn’t Afford and Took Billions in Wealth from Black and Hispanic Homeowners
The David Horowitz Freedom Center
Because of the government-fostered collapse of the housing market, which began under Carter and metastasized under Obama, the median net worth of black and Hispanic households declined by 53% and 66%, respectively, between 2005 and 2009—the single greatest economic blow ever delivered to these communities.
In the mid-1970s, with Jimmy Carter in the White House and Democrats in control of Congress, progressives began a campaign to make home ownership a right. As in many other crusades, progressives used race to justify an attack on the home-loan protocols that experience had established as sound business practice. Charging the banking industry with racism in its lending standards, the left systematically undermined and then destroyed those standards. The result was the collapse of the housing market in 2008.
When progressives launched this campaign to end alleged racism in the lending industry, there was in fact no systemic racism in the lending industry, and there were no insurmountable obstacles to minorities seeking homes they could really afford. But facts were unimportant to the left, whose standard practice was to invoke statistical disparities as evidence of racism in order to achieve their political agendas.
Statistics did show that home ownership rates for African Americans and Hispanics were slightly above 40% while the rate for whites was near 70%.6 Since many factors are involved in getting a loan to buy a house, this was no evidence of actual discrimination against minorities. But for progressives—and the Democratic politicians who responded to their call—no further evidence was needed to tar the housing industry with the racist brush.
The Party of Big Government saw the disparities as an opportunity to solve a “social problem” and strike a blow for “social justice.” The congressional point man for the “equal rights in housing” campaign was a McGovern Democrat named Henry Reuss, chairman of the powerful House Banking Committee. Reuss sponsored the Housing and Community Development Act of 1977, which contained a key section that became known as the Community Reinvestment Act (CRA).
The crucial line in the CRA “required each appropriate Federal financial supervisory agency to assess … [each] bank’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods.” This was a mandate for banks to seek out and lend to minority borrowers—particularly mortgagers—of meager to modest means, and more importantly to change bank lending rules to make this possible. The Reuss bill was passed with 87% Republican support and 97% Democrat support in the House, and 50% Republican support and 87% Democrat support in the Senate. It was signed into law by President Carter as a triumph for equal opportunity and civil rights.
Like many government policies, the Community Reinvestment Act began as a modest proposal but expanded dramatically once it became law.10 By the 1990s, officials in the Clinton administration had come up with radical interpretations of CRA that forced banks to abandon previous lending policies and undertake a wholesale restructuring of their lending guidelines. (Future president Barack Obama, then an activist with the “community” organization ACORN, was one of the people who played a leading role in building grassroots pressure to widen the scope of the CRA mandate.)
The new standards—if they could be called that—were designed to ensure that large numbers of low-income minorities who had no ability to repay the loans could nevertheless qualify for home mortgages. Owning a home would thus become a “right” even for those who could not afford one. The policy made no economic sense, and future financial collapse was written all over it. But no matter; it was justified by the canons of a political religion, which sanctified the provision of homes to those who couldn’t afford them as a matter of “social justice.”
The campaign to throw out the existing standards was given the imprimatur of the Federal Reserve Bank of Boston in a 1992 study showing that whites and blacks had been denied mortgages at disparate rates of 17% and 38%, respectively. The study attributed the disparity to race. Progressive journalists in the media accepted its presumptions and called them proof that racism was rampant in the mortgage industry. In the words of the Boston Globe, the Reserve Bank’s “landmark study” provided “the most damning evidence to date of racial hurdles facing minority homebuyers.”
But this conclusion—shared by virtually all media accounts—ignored the facts provided in a second study conducted the same year, also by the Boston Fed. The new study refuted the previous claim. It showed that black loan applicants not only had greater debt burdens and poorer credit histories than their white counterparts, but also tended to seek loans covering a higher percentage of the property values in question. After correcting for these and other standard credit criteria—income, net worth, age, education, and probability of employment—the loan-rejection gap between racial groups largely disappeared.
The Federal Reserve Board in Washington also re-examined the original study and found its conclusions “difficult to justify.” Similarly, Nobel Prize–winning economist Gary Becker determined that the first Boston Fed study had “serious methodological flaws,” which made its results “of dubious value in formulating social policy.”
Various facts further discredited the claim of white racism in the banking industry. One was the fact that Asians were more likely than whites to be approved for mortgages. Another was that black-owned banks were even more likely than white-owned banks to turn down black applicants. Moreover, black homeowners had higher default rates than whites on their mortgage loans—a sure indication that lending institutions were not holding prospective black borrowers to stricter standards in awarding loans, but were probably already favoring them.
These facts did not deter the left from its prosecution. On the contrary, any challenge to its extravagant claims of systemic racism entailed risks of opprobrium that few were filling to take. Egged on by civil rights groups and an echo-chamber media, the Clinton administration pressed the attack on lending guidelines and the financial system they underpinned. Attorney General Janet Reno warned that “no bank” would be “immune” from the Justice Department’s determination to punish alleged discrimination in lending practices—a warning that extended far beyond the “subprime” loan market.
The comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee, “We have to use every means at our disposal to end discrimination and to end it as quickly as possible.” In this spirit, the administration proceeded to transform the CRA from a simple outreach effort into a strict quota system.
Under the new arrangements, if a bank failed to meet its quota for loans to low-income minorities, it ran a high risk of failing to earn a “satisfactory” CRA rating from the Federal Deposit Insurance Corporation.
Such failure could block a bank’s efforts to open a new branch, relocate a home office, make an acquisition, or merge with another financial institution. From a practical standpoint, banks had no recourse but to drastically lower their down-payment and underwriting standards, and to approve risky loans to borrowers who, experience told them, would likely not be able to pay them back.
Pressure to revise the lending procedures came from radical community organizations such as ACORN and the Greenlining Institute, which were able to create an intimidating atmosphere by accusing banks of discriminatory practices contrary to the CRA mandates. The accusations were routinely accompanied by threats of lawsuits and boycotts. To avoid the damaging consequences of such actions, banks routinely responded by pledging to increase loans to nonwhites whether or not they had the means to repay them.
As a result, banks’ CRA commitments grew geometrically to more than thirty times what they had previously been. From 1977 to 1991, subprime loans cumulatively totaled just under $9 billion. In 1992, they jumped to $34 billion. Over the ensuing sixteen years—right to the moment of the housing crash—they expanded to over $6 trillion.
The CRA was by no means the only government hammer employed to force financial institutions to “remedy racism” by revising their business practices. In the first year of the Clinton administration, the Department of Housing and Urban Development (HUD) developed rules pressuring lenders to increase their approval rates for loans to minority applicants by 20% within a one-year period.
HUD also began bringing legal actions against those mortgage bankers who turned down a higher percentage of minority applicants than white applicants, regardless of their reasons for doing so. The only way for lenders to escape punishment was to lower the down-payment requirements to qualify for loans, which eventually went to zero, and to drastically reduce income requirements for minority borrowers.
HUD also pressured the government-sponsored mortgage lenders Fannie Mae and Freddie Mac, the two largest sources of housing finance, to earmark a rising number of their loans for low-income borrowers. “For 1996,” the Wall Street Journal reported, “HUD gave Fannie and Freddie an explicit target: 42% of their mortgage financing had to go to borrowers with incomes below the median in their area. The target had increased to 52% by 2005.”
HUD further required 12% of all mortgages purchased by Fannie and Freddie to be “special affordable” loans, typically to borrowers with incomes at least 40% below the median for their area. The 12% figure had increased to 28% by 2008.32 Nonwhite minorities were far likelier than whites to be the recipients of these loans. In December 2006, the New York Times reported: “The most recent Home Mortgage Disclosure Act data from lending institutions show that over half of African Americans and 40 percent of Hispanics received subprime loans.”
There was no more important congressional promoter of the new lending practices than Barney Frank, the ranking Democrat on the powerful House Committee on Financial Services and later its chairman. In 2004, when the mounting danger was clearly visible, Frank dismissed critics’ concerns about the high-risk loans. Government, he said, had “probably done too little rather than too much” in pushing Fannie and Freddie “to meet the goals of affordable housing….”
Senator Christopher Dodd, the ranking Democrat on the Senate Banking Committee, agreed. As both institutions approached bankruptcy, Dodd referred to Fannie and Freddie as “one of the great success stories of all time.” Even as late as 2008, just days before the government was forced to bail out those firms, Dodd pronounced them “fundamentally sound and strong.”
Democrats were not the only politicians pushing for the lax lending standards and justifying them as an effort to benefit minorities and the poor. In 2002, the Bush administration pressed Congress to pass the American Dream Downpayment Initiative (ADDI) to subsidize the down payments and
closing costs of low-income, first-time homebuyers.
After ADDI was enacted in 2003, Bush also encouraged Congress to pass legislation permitting the Federal Housing Administration to make zero-down-payment loans at low interest rates to low-income people, on the theory that “those who can afford the monthly payment but have been unable to save for a down-payment should [not] be deprived from owning a home.”
In just a few years, the time-tested practices of the entire lending industry had been abandoned under government pressure. One in five mortgages were now financed by subprime loans, and loans with no money down had risen to nearly 14% of all mortgages. Denying the laws of financial gravity was not a practice that could go on indefinitely, and it soon led to a tidal wave of home foreclosures across the United States.
The primary victims, of course, were the very people the reckless lending practices were supposed to help—the poor and un-creditworthy—whose inability to pay the charges on the loans now cost them their new homes. From January 2007 through the end of 2009, there were 2.5 million foreclosures nationwide. In this tsunami, according to a 2011 report by the Center for Responsible Lending, “African-American and Latino borrowers [were] almost twice as likely [as whites] to have been impacted by the [housing] crisis.”
Among borrowers who had taken out mortgages in the three years leading up to the 2008 collapse, fully 8% of the African Americans and Hispanics lost their homes to foreclosure between 2007 and 2009. Among the less-favored white borrowers, the rate of foreclosure was a little more than half as high. When the Center for Responsible Lending issued a report in June 2010, it estimated that by then, 17% of Hispanic homeowners and 11% of black homeowners (as compared to 7% of whites) had already lost their homes or were in imminent danger of losing them. Those losses resulted from the “soft bigotry of low expectations” that President Bush had warned against but then succumbed to, under pressure from the left.
The disparities in foreclosure rates resulted from the fact that African Americans and Hispanics―because of their comparatively poor credit ratings―were disproportionately recipients of the subprime mortgages. Fifty-two percent of blacks (vs. only 16% of whites) had credit scores low enough to
classify them as subprime borrowers. Among all borrowers in 2006, 41.5% of blacks and 30.9% of Hispanics (as compared to 17.8% of whites) were recipients of subprime loans. Across the United States, the places where subprime loans were most prevalent also had the highest foreclosure rates.
As Thomas Sowell wryly notes, “Being granted loans because the bank needs to meet statistical targets―quotas―in order to keep federal agencies off their backs, rather than because you are likely to be able to repay the loans, is not unequivocally a benefit to a borrower.”