Filed under: Capitalism, Economy, Law, Politics, Progressivism | Tags: Community Reinvestment Act, Redlining, Subprime Loans
New mortgage rules issued last week by the Obama administration will have the effect of forcing lenders to approve prime loans to borrowers who would normally only qualify for subprime loans carrying higher interest rates and fees to cover the added risk of default.
Banks are already under renewed pressure from federal prosecutors and regulators to make home loans to low-income borrowers with blemished credit as part of the administration’s stepped-up enforcement of anti-redlining laws.
Those two astounding paragraphs are from an editorial from Investors. The debate over the role that the Community Reinvestment Act played in the buildup to the Financial Crisis has been heated. Conservatives believe that The CRA is a classic case of government action leading to unintended consequences— in this case a lowering of normal prudent underwriting standards that have been a policy of good banking. The lowered standards led to a buildup of bad loans that poisoned the financial markets.
Liberals have typically disagreed, because they view getting low-income buyers into their own homes a societal good, so they have searched for other reasons for the financial crisis — usually settling on Bush’s two wars or waterboarding or some other Bush misdeed.
Here are the conclusions of “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?” by Sumit Agarwal of the National University of Singapore’s business school, Efraim Benmelech of Northwestern University’s Kellogg School of Management. Nittai Bergman of MIT’s Sloan School of Management, and Amit Seru of the University of Chicago’s Booth School of Business:
There is a belief on the left that you can increase the middle class by subsidizing things that middle class people have. If middle class people have houses, and go to college, then if more people own houses and go to college then the middle class will expand and poverty will disappear. But owning a home and going to college are not a cause of membership in the middle class, but a result. It’s called Reynolds’ Law. The ability to save, practice self-discipline, and deter gratification will help you to enter and remain in the middle class, not the other way around.
The CRA was added to, reinforced, and reemphasized over the years. That’s what Community Organizers did — organize low-income people to demonstrate and protest at banks, to accuse lenders of “redlining” when the actual matter was simply making loans on the basis that the customer could actually repay the loan.
Obama has repeatedly indicated that low-income people were preyed upon by evil bankers who made them take out loans that they couldn’t afford because they couldn’t understand the fine print.