Cleaning Up the Liberal Lending Mess

GUEST COLUMN

BY ANTON KAISER

In the year 2000, during the Clinton administration, a report was prepared on the affects of subprime loans in Boston. Subsequently, similar reports were done for Atlanta and Chicago but they all said the same thing:

• “Loan originations by subprime lenders grew by 435 percent between 1994 and 1998, compared to the growth of all loan originations by 119 percent.”

• “The share of all originations accounted for by subprime lenders more than doubled between 1994 and 1998, starting at less than 2 percent and climbing to 4 percent.”

• “The growth in subprime lending was much more significant for properties in low-income and minority neighborhoods than for properties in other kinds of neighborhoods. Between 1994 and 1998, subprime lending grew by 1,075 percent in very low-income neighborhoods (where the median household income is less than 50 percent of the metro area median) and by 827 percent in low-income areas (where median income is between 50 percent and 80 percent of the metro area median). In neighborhoods where more than half the residents are minority group members, subprime lending increased by over 1,000 percent.”

• “The share of foreclosures by subprime lenders grew rapidly in Boston neighborhoods of all income levels and have come to account for between 10 and 12 percent of all foreclosures.”

• “Foreclosures by subprime lenders were also most common in majority minority neighborhoods. In 1999, the share of foreclosures in these areas attributable to subprime lenders was 14 percent, compared to about 10 percent in other areas.”

Remember, this report was in 2000. So early on we knew that subprime loans were a serious problem, but how did they happen?

First Johnson enacted the “Fair Housing Act of 1968” designed to combat racial discrimination. Fair enough. But second came Carter’s “The Community Reinvestment Act (CRA) of 1977” giving “banking institutions a strong incentive to make loans to low- and moderate-income borrowers or areas.” And third came Carter’s “1980 Depository Institutions Deregulatory and Monetary Control Act” which “eliminated all usury controls on first-lien mortgage rates, permitting lenders to charge higher rates of interest to borrowers who posed an elevated credit risk.” Nevertheless, these new financial tools remained dormant until 1994 (notice that all the data above begins in 1994, and for good reason).

These Carter tools - incentives and deregulation - were resurrected when the Democrats found themselves with a newly elected president in 1993. So, “After 12 years of inaction or worse under the Reagan and Bush administrations . . [the Democrats] sought to have HUD and federal agencies that regulate lenders take a more active and interventionist stance” concerning fair housing.

Thus, in 1994, Clinton established the President’s Fair Housing Council and by executive order directed “the Secretary of Housing and Urban Development and the Attorney General and, where appropriate, the heads of the Federal banking agencies to exercise national leadership to end discrimination in mortgage lending, the secondary mortgage market, and property insurance practices.” And so emerged the preeminence of subprime loans, primarily to minorities.

The results between 1994 and 1999 from this new council can be seen in the 2000 report above, and this is the reason so many of the housing foreclosures began shortly after 1994 and continue to this day, sharply increasing after periods of low interest rates. In fact, low interest rates, seemingly a good deal, actually exacerbated the problem, expanding the available capital, increasing the number of subprime loans, inflating home prices, and winding the spring on this financial trap ever tighter. In 1997, Al Gore actually issued a press release bragging that “Between 1993 and 1996, Fannie Mae and Freddie Mac purchased over one million mortgages made to low- and moderate-income homebuyers.” And so it all began.

Thus, a well intentioned social program in 1968, slowly grew from its roots in the halcyon days of Johnson’s Great Society to wrap its socialist arms around Carter’s concerns for the poor and Clinton’s ideas of minority equality. Add creative financing and accounting and, despite federal oversight, by 2008 the system had mushroomed and was out of control, threatening the nation’s entire financial system.

There is no better example than the current housing crisis for limiting government social programs.

As with the increase in terrorism, the housing crisis grew out of the Clinton administration (and the data shows it), and now we have another liberal mess to clean up.

Anton Kaiser was born in Aberdeen, South Dakota, and retired in Rapid City after serving twenty-seven years as a U.S. Army infantry officer. He is a graduate of the United States Military Academy, West Point, and holds Masters Degrees in Business and in Public Administration from Webster College, St. Louis, MO. He is also a veteran of Vietnam, Berlin, Operation Just Cause (Panama) and an honor graduate of the Command and General Staff College, Fort Leavenworth, KS.