Sunday, October 12, 2008

the mortgage crisis is NOT because of the end of redlining

There have been nasty little comments and whispers by some - Republicans, naturally, so much for the Party of Lincoln - about how the whole financial crisis was caused by the Government telling banks they had to loan money to minorities.

That is a vicious rumor. And it is false. Michelle Singletary has a good column about the Community Reinvestment Act of 1977, which "seeks to ensure the provision of credit to all parts of a community, regardless of the relative wealth or poverty of a neighborhood."

The CRA didn't require lenders to give money to disqualified people - but it meant that just because Joe Blow lived in Neighborhood X you couldn't automatically refuse to lend him money. You had to look at Joe Blow's finances and credit history instead. And you had to give him terms the same as somebody else with his financial qualifications.

The CRA and other acts made it harder to be simply racist in refusing to lend to certain neighborhoods or people with certain kinds of names.

It did NOT, as a letter writer to Singletary mistakenly believes, "legalized the idea that lending institutions could not make loan decisions based solely on criteria such as income and ability to pay the loan back".

Singletary: No sir, it wasn't lending under CRA rules that took down the mortgage industry. It was greedy, reckless banking executives, lending officers and mortgage brokers who were supposed to properly screen borrowers and apply prudent loan underwriting standards. It was lax and inadequate federal and state regulation that allowed exotic and predatory mortgages to be sold to borrowers.

Further, a new study by the Bank for International Settlements, a very boring and sober group of people in Switzerland who are important to the global financial system, found that "the vast majority of the toxic loans stinking up mortgage-backed securities had nothing to do with CRA compliance."

So don't blame the bogus idea that banks were forced to make loans to unqualified minorities for the banking crisis.

Update: Another good article by Daniel Gross at Slate about the right's false demonization of the poor and minorities for what is a financial crisis provoked by the greed and recklessness of the rich.

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