sub-prime mortgages III: the racial angle

And then, there’s the racial angle…

Thomas DiLorenzo at LewRockwell.com points to the blame that the federal government must shoulder in trying to manipulate the market along racial lines…

The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad 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 might not otherwise make based on purely economic criteria…

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.


from Bob Tedeschi with the New York Times (reproduced in the C-J)…

A lawsuit brought by the National Association for the Advancement of Colored People accuses 11 major mortgage lenders of singling out African-Americans for costly subprime loans…Since then, Ms. Ciccolo and Mr. Tighe said, three separate offices set up to field lending discrimination complaints have continued to receive “a significant number” of calls from African-Americans who said they had been given high-cost loans when they could have qualified for prime mortgages at lower rates.…many of those who held such mortgages were not aware that they could have taken out far less costly ones.

Does this open the door for people to go back on previous purchases-- when they could have found a lower price?! What is the responsibility of the seller in informing the consumer about their options?

The suit, filed in Federal District Court in Los Angeles, cites studies from three different organizations suggesting that blacks received high-cost subprime loans at least 30 percent more frequently than whites with similar qualifications. It contends that lenders, in doing so, “engaged in institutionalized, systematic racism,” in violation of the Equal Credit Opportunity Act, the Fair Housing Act and the Civil Rights Act…

"With similar qualifications"...that sounds nice, but to be something beyond conjecture and anecdote, it must be based on rigorous statistical analysis-- a rare thing. It also flies in the face of assumptions about greedy businesses. If they want to make so much money, why don't lenders jump in there and provide competitive services/prices to this niche in the market? Either they're not so interested in money or they're morons. It takes too much faith for me to believe either of those...