The thousands of mortgage defaults and foreclosures in the “subprime” housing market place (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make poor loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they may well not otherwise make based on purely economic criteria.
The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and had been typically rewarded for their support with government grants and programs like the CRA that they benefited from. These included a variety of “neighborhood organizations,” as they like to call themselves, such as “ACORN” (Association of Community Organizations for Reform Now). These organizations claim that over $ 1 trillion in CRA loans have been made, despite the fact that no 1 appears to know the magnitude with considerably certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $ 100 billion in such loans had been created in the initial twenty years of the Act.
So-known as “community groups” like ACORN benefit themselves from the CRA through a method that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these 4 bureaucracies if a CRA “protest” is issued by a “community group.” This can price banks excellent sums of cash, and the “community groups” comprehend this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as properly as promising to make a specific amount of bad loans in their communities.
A man named Bruce Marks became really notorious for the duration of the last decade for pressuring banks to earmark literally billions of dollars to his organization, the “Neighborhood Help Corporation of America.” He once boasted to the New York Times that he had “won” loan commitments totaling $ three.8 billion from Bank of America, Very first Union Corporation, and the Fleet Monetary Group. And that is just one “community group” operating in 1 city – Boston.
Banks have been placed in a Catch 22 circumstance by the CRA: If they comply, they know they will have to suffer from a lot more loan defaults. If they don’t comply, they face monetary penalties and, worse however, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can price a big corporation like Bank of America billions of dollars. Like most organizations, they have largely buckled under and have surrendered to their bureaucratic masters.
Consequently, banks in every single community in America have been forced to hold a portfolio of poor loans, euphemistically referred to as “subprime” loans. In order to compensate themselves for the added risk of extending these loans, several lenders have increased the lending fees associated with mortgage loans. This is merely an indirect way of performing what banks usually do – and what they should do to remain solvent: charging effectively higher rates of interest on riskier loans.
But this is discriminatory!, complained the “community organizations.” Therefore, if one browses the ACORN internet internet site, 1 can read of their boasts of getting “predatory lending laws” passed in many states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in creating forced loans to “subprime” borrowers.
These are cost control laws, and cost controls often cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue creating the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws consequently force the banks to “eat” the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.
Then of course there is the problem of the Fed’s monetary policy having designed the housing bubble, characterized by a spectacular escalation of actual estate values in every American city over the past decade or so. This developed a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain quantity of poor loans, but simply because of the Fed-developed explosion in housing rates, numerous thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.
The only way these borrowers could qualify for their mortgage loans (even ignoring their poor credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low very first-year rates in the three percent range, and at times lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Therefore, the combination of the Fed’s enforcement of the CRA (with the support of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting actual estate bubble and the “subprime” mortgage meltdown.
Don’t expect to read about this in the “mainstream media,” however, which normally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, specially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover numerous of the bad “subprime” loans. This will develop what economists call a “moral hazard” by encouraging even a lot more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA successfully guaranteeing the loan.
September 6, 2007
Thomas J. DiLorenzo [send him mail] professor of economics at Loyola College in Maryland and the author of The Real Lincoln: A New Appear at Abraham Lincoln, His Agenda, and an Unnecessary War, (3 Rivers Press/Random House). His newest book is Lincoln Unmasked: What You are Not Supposed To Know about Dishonest Abe (Crown Forum/Random Home).
Answer by Greg R
Good write-up.
Is there a question with it?
The only factor that I would like to point out is this phrase: “whilst the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover numerous of the poor “subprime” loans.”
Do not think for a minute that “covering bad loans” indicates that individuals who can not afford to pay their loans will be helped by the Federal Housing Authority which will “cover” their loans for them.
The above phrase in the article means that billions of dollars will be given to the Wall Street firms that are responsible monetary recklessness to begin with.
Many of these men and women had been getting 7 and even 8 figure salaries and bonuses. Yes, that’s 10 million.
And now taxpayer dollars have to be utilised to “cover” them.
Mercy teacups! That just is not proper. These individuals created milllions upon millions of dollars becoming deceitful, and now they get government “cover”???
And the poor souls who were tricked into teaser rates continue to shed their homes….
I didn’t read all that, and there isn’t a question in there.
Let me guess, you follow Art Bell too.