The foundation for the housing crisis was laid with the Community Reinvestment Act in 1977, where the government took it upon itself to encourage home ownership by pressuring banks to lend to lower-income buyers, often to meet arbitrary racial quotas. Obviously they haven’t learned a thing from where that got us.
Would it surprise anyone to learn that as a lawyer, Obama sued banks to force them to issue subprime loans? Â He also worked for ACORN, which specialized in using the Community Reinvestment Act to shake down banks and pressure them to loan money to low-income minorities or face “discrimination” charges.
According to the Washington Post, the Obama administration is pushing big banks to make more home loans available to Americans with bad credit â€“ the same kind of Â government guidance that helped blow up the housing market:
In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs â€” including those offered by the Federal Housing Administration â€” that insure home loans against default.
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.
Think about this statement. The administration is asking banks â€“ banks that Washington bails out; banks that Washington crafts regulations for â€” to embrace risky policies that put the institution and its investors (not to mention, all of us) in a Â precarious position. So precarious, in fact, that banks have to ask government if they can be freed of any legal or financial consequences.
What could possibly go wrong?
These types of government policies initially emerged the mid-1970s, when â€œprogressiveâ€ Democrats in Congress began a campaign to help low-income minorities become homeowners. This led to the passage, in 1977, of theCommunity Reinvestment ActÂ (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 strictÂ quota systemÂ 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 CRAÂ ratingÂ from theÂ FDIC. This, in turn, could derail the bankâ€™sÂ effortsÂ to expand, relocate, merge, etc.Â From a practical standpoint, then, banks had no recourse but to drasticallyÂ lower their standardsÂ on down-payments and underwriting, and to approve many loans even to borrowersÂ with weak credit credentials. As Hoover Institution Fellow Thomas Sowell explains, this led to â€œskyrocketing ratesÂ of mortgage delinquencies and defaults,â€ 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) developedÂ rulesÂ encouraging lenders to dramatically hike their loan-approval rates for minority applicants and began bringingÂ legal actionsÂ 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, HUDÂ pressuredÂ 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 mortgagesâ€”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-socialistÂ ACORN. ByÂ accusingÂ banksâ€”however frivolously or unjustlyâ€”of having engaged in racially discriminatory lending practices that violated the mandates of the CRA, these groups commonly sued banks topreventÂ them from expanding or merging as they wished. Barack Obama, ACORNâ€™s staunch ally, was strongly in favor of this practice. Indeed, in a 1994 class-actionÂ lawsuit against Citibank, Obama represented ACORN in demanding more favorableÂ termsÂ for subprime homebuyer mortgages. After four years of being dragged through the mud, a beleaguered Citibankâ€”anxious to put an end to the incessant smears (chargingÂ racism) that Obama and his fellow litigators were hurling in its direction (to say nothing of its mounting legal bills)â€”agreed to settle the case.
ForbesÂ magazine puts itÂ bluntly: â€œObama has been a staunch supporter of the CRA throughout his public life.â€ In other words, he has long advocatedÂ the very policies that already have reducedÂ the real-estate market to rubble. And now he is actively pushing those very same practicesÂ again.