Shifting the blame from subprime lenders and Wall Street to the victims

It’s to be expected.  Anti-government pundits and apologists for predatory lenders are spinning hard, trying to shift the blame for the mortgage crisis from bad lending policies brought about by Wall Street in cahoots with predatory lenders and onto the modest attempts by the government to deal with discriminatory home loan practices.

This argument was recently restated by Boston Globe columnist Jeff Jacoby.  Here is the heart of the argument from his recent column…

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and “redlining” because urban blacks were being denied mortgages at a higher rate than suburban whites. The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to “meet the credit needs” of “low-income, minority, and distressed neighborhoods.” Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

Everyone I know who has actually worked in home finance, banking and affordable housing laughingly dismisses the attempt to lay the blame for the subprime meltdown on the Community Reinvestment Act.  But, we have learned that even obviously fallacious attacks like this have to be taken on least they take root in conventional wisdom.

Nadine Cohen, an attorney at Greater Boston Legal Services representing low-income homeowners in predatory lending and foreclosure cases has written an effective rebuttal to Jacoby.  Here is her response.

Fair Lending Laws Not The Cause of Wall Street Meltdown
By Nadine Cohen

In a remarkable attempt to shift blame for their own failure to regulate the sub-prime mortgage industry, Boston Globe columnist Jeff Jacoby echoes Republican arguments that the 1977 Community Reinvestment Act, or CRA, is the cause of the current financial meltdown. Even a cursory review of the facts reveals that this is a groundless partisan attempt to shift the blame onto the victims of predatory lending.

The CRA is a law requiring those banks that are subject to government regulation to extend credit to low and moderate income communities, in accordance with “the safe and sound operation of such institutions”. The purpose of the CRA is to provide credit, including home ownership opportunities, to under-served populations and commercial loans to small businesses. The CRA was a response to the wide-spread practice of “redlining”, by which banks actually drew red lines on maps around communities of color, and prohibited their loan officers from making loans in those neighborhoods. This deliberate disinvestment contributed to the devastation of our inner city, predominantly African American neighborhoods in the 1960’s and 1970’s.

Boston was not exempt from redlining. In addition to the typical form, bankers in Boston developed their own version of redlining. Through the Boston Banks Urban Renewal Group, known as BBURG, a bank consortium created with city encouragement, targeted certain neighborhoods in Roxbury, Dorchester and Mattapan “within which, and only within which, blacks could obtain the federally insured housing loans….” according to authors Hillel Levine and Lawrence Harmon in their comprehensive book, Death of An American Jewish Community, describing the history of Boston’s neighborhoods. In fact this discriminatory lending program led to widespread real estate speculation, blockbusting, and appraisal and mortgage fraud, resulting in large numbers of African American borrowers losing their homes, leaving properties abandoned and whole neighborhoods destroyed.

The results of the CRA are in stark contrast. Successful CRA lending has led to the creation of businesses and jobs, economic development, decent and affordable housing for seniors, accessible housing for persons with disabilities and participation in the American dream of homeownership for many families, especially families of color. Much of this growth occurred two decades prior to the eruption of sub-prime and predatory lending. Despite the CRA and fair lending laws, discrimination in mortgage lending remained pervasive. In 1992, the Federal Reserve Bank of Boston found that qualified African American and Latino borrowers were denied loans almost 60% more often than similarly situated whites, even after controlling for all objective indicators of risk.

The irony of blaming the CRA for the current financial crisis is that 75% of all loans that have been foreclosed were made by unregulated sub-prime mortgage companies that were not subject to the Community Reinvestment Act. The banks that were regulated under the CRA did not make the bad loans. Just look at Bank of America, Citizens and Sovereign Bank. The disintegration of sound underwriting standards was overwhelmingly the product of a lack of regulation of sub-prime lenders and mortgage brokers, and the advent of “securitization” of mortgage loans which allowed everyone but the homeowners to get rich. In 1999 Congress repealed the protections in the depression era Banking Act of 1933, and passed in its stead the Gramm-Leach-Bliley Act enabling commercial lenders to buy and sell mortgages as mortgage-backed securities and collateralized debt obligations.

Supporters of the CRA opposed these changes, warning that it was this mixing of commercial and investment banking activities that led to the collapse of the financial markets in 1929. Advocates also warned of the dangers of the predatory lending activities of the sub-prime lenders well before our financial leaders understood what was going on. But despite a $700 billion bailout, on top of the billions paid to bail out Bear Stearns, AIG, Fannie and Freddie and other companies, Wall Street and their apologists, including the Boston Globe’s own columnist Jeff Jacoby, don’t want to accept any responsibility. They would much rather blame “minorities” with “weak credit histories” for the downfall of Wall Street, and “left-wing activists” who opposed “racism” and “redlining”, as well as Barney Frank. If commentators had a tenth of the smarts of Barney Frank we would all be better informed and spared the delusional theories that low-income homeowners of color are the cause of Wall Streets’ financial collapse.