Remember the housing bubble and the mortgage lending crisis of 2008? Well guess what – the Democrats want an encore.
Investors Business Daily explains.
Bankers warn the administration’s new “disparate impact” home-lending regulation will wreak havoc in credit markets, replacing merit standards with political correctness.
The Department of Housing and Urban Development issued the controversial new anti-discrimination rule earlier this year. Now enforced by every federal regulator dealing with banks, it has the effect of criminalizing credit standards used to qualify borrowers for home loans.
Last week, the Mortgage Bankers Association and Independent Community Bankers of America jointly filed a Supreme Court brief arguing that under the new HUD rule:
“Virtually every lender in the United States could be sued for using non-discriminatory credit standards simply because variations in economic and credit characteristics produce different credit outcomes among racial and ethnic groups.”
In their 33-page brief, filed in support of a landmark housing case pending before the court, they complain that HUD recently launched 22 separate investigations against lenders alleging that their policies of requiring minimum credit scores “had a disparate impact on minorities in violation of the Fair Housing Act.”
Dozens of similar actions have been brought against lenders by Attorney General Eric Holder. He is basing claims of bias on statistics showing differences in loan outcomes by race while ignoring racially neutral credit-risk factors that explain those differences.
Under disparate impact’s low standard of proof, the government doesn’t have to show lenders intentionally discriminated against borrowers.
For the first time in history, businesses are being ordered to justify the necessity of a certain level of return on investment given the racial impact resulting from the use of credit-score thresholds.
The mortgage trade groups argue the formalized disparate-impact rule also effectively criminalizes other legitimate business practices, including minimum down-payment requirements, sliding loan rates and the charging of brokers’ fees.
Banks today face increased litigation risk simply by complying with sensible lending standards for hedging against risk.
[…]The social engineers and race demagogues in this administration are trying to enforce a balance in financial outcomes that risks another collapse of the housing market. The Supreme Court must put an end to a scheme so reckless, unfair and unconstitutional.
Does that sound familiar? Yes. In the last recession, the government forced banks to make risky loans in order to increase home ownership. That is exactly what gave us the 2008 recession.
[Democrat] Congressman [Barney] Frank, of course, blamed the financial crisis on the failure adequately to regulate the banks. In this, he is following the traditional Washington practice of blaming others for his own mistakes. For most of his career, Barney Frank was the principal advocate in Congress for using the government’s authority to force lower underwriting standards in the business of housing finance. Although he claims to have tried to reverse course as early as 2003, that was the year he made the oft-quoted remark, “I want to roll the dice a little bit more in this situation toward subsidized housing.” Rather than reversing course, he was pressing on when others were beginning to have doubts.
His most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.
At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007.
[…]It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit. This continued through the 1990s and 2000s until the housing bubble–created by all this government-backed spending–collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government. When these mortgages failed in unprecedented numbers in 2008, driving down housing prices throughout the U.S., they weakened all financial institutions and caused the financial crisis.
Reduced lending standards caused the last recession, and now the same party that pushed for reduced lending standards are pushing for reduced lending standards again. Hold onto your hats, there’s a storm coming.