President-elect Donald Trump’s choice of Ben Carson to head the Department of Housing and Urban Development (HUD) provides the chance to rethink a great deal of what the 1960s-era agency has done. In many ways, HUD’s entire mission — based on the mistaken idea that government itself should rebuild neighborhoods, subsidize the housing market, and dole out aid to communities with all sorts of strings attached — has been demonstrated to be ineffective. Ben Carson, a man intimately familiar with poor, minority neighborhoods, has seen all that firsthand.
One idea, in particular, could signal that Carson understands the failure — not just in practice but philosophically — of the department he will head. He could push for the outright repeal of the Community Reinvestment Act (CRA), which mandates bank lending to low-income communities and low-income households. Implicated by some in the 2008 housing-finance crisis, the problem with the CRA — and its much further-reaching regulatory progeny, the affordable-housing goals of Fannie Mae and Freddie Mac, which are directly overseen by HUD — is not its cost but its theory that capital markets will, by their nature, not serve the poor, and that the poor and poor neighborhoods are better off when lending to both is required. Both ideas are wrong and ill serve those in whose name they are invoked.
Originally passed in 1977, the CRA stemmed from the then hot-button issue of “redlining” — the alleged denial of credit to credit-worthy neighborhoods and minorities by banks who held their deposits. If this was an issue in the past, it stemmed more from regulation than from bias: In the pre-interstate and Internet-banking era, banking was a far less competitive business. Today, we live in a wholly different banking environment — one in which the credit-worthy homebuyer turned away by a local bank can turn to Quicken Loans, with its cross-country reach, or one of its many competitors.
Nonetheless, the CRA has remained law. Directing what sorts of loans should be made and to whom not only distorts the allocation of capital, but it also sends the wrong message to households of modest means — all in the name of helping them gain shelter. Like so many redistributive schemes, efforts to help the poor undermine the habits that forge upward mobility.
Banks, in search of top-notch CRA ratings, are under pressure from regulators to make loans to low-income borrowers, regardless of whether they are repaid. Lower CRA ratings can be invoked by affordable-housing advocacy groups to block mergers and acquisitions. The message to the poor is pernicious: A borrower qualifies for a mortgage on the basis of “need” or zip code, rather than accomplishment and adequate income. Worse still, those who make good life decisions and keep current on their loans are at risk that their neighbors — who may have gotten loans simply to fulfill CRA rules — will not. The result: neighborhood decline.
Indeed, that effect was all but guaranteed by that other, closely related aspect of housing-finance regulation — the Fannie Mae/Freddie Mac affordable-housing mandates, which, though legally distinct from the CRA, share its core values. They are, notably, overseen directly by HUD’s Office of Federal Housing Agency Oversight — which will fall directly under Secretary Carson’s purview. Rather than seeking to ensure that credit-worthy customers can get mortgages, they share the premise that those denied credit are just as deserving of it as those who actually qualify. Specifically, the housing goals call on the government-sponsored mortgage-finance giants to purchase loans that fit select criteria: percentages of mortgages extended to low- or even very-low-income households, as well as, again, to low-income neighborhoods.
Guaranteeing mortgages to any and all comers only causes problems down the line.
There is dispute over how big a role this “CRA on steroids” played in sparking, through non-performing loans, the 2008 financial crisis. But there’s every reason to think that it was significant; Edward Pinto of the American Enterprise Institute has estimated that some $1.6 trillion worth of less-than-prime loans — from all sources, not just CRA-regulated banks — wound up on the government-backed books of the government-sponsored enterprises (GSEs), helping to precipitate their need for a $187 billion federal bailout. The victims, of course, were the poor and the working class, in foreclosure belts across the country.
The lesson here is that it’s important for some households — i.e., those not financially able to pay back the loans — to not to have access to mortgage loans. Guaranteeing mortgages to any and all comers only causes problems down the line.
It’s crucial to note that rolling back CRA and the affordable-housing mandates does not mean that less affluent households will have no access to housing they can afford. The advent of credit scoring, while imperfect, should give any household the chance, by establishing a good credit history, of access to credit; if it doesn’t, that can, and should, be the basis for violations of fair-housing law, just as surely as racial discrimination should be.
#related#To be sure, rolling back the CRA and the affordable-housing mandates will be a tough political sell. Indeed, the Obama-era push by housing advocates (who depend on the CRA for their financial lifeblood, often provided by banks themselves, seeking to stay in the groups’ good graces) had been to expand the reach of such rules — for instance, to extend CRA to insurance companies and other financial institutions. At the very least, however, new regulation can require that those extending CRA–type loans report — and be evaluated on — whether such loans perform well. Poor performance matters as much, if not more, than access to credit for its own sake.
Outright repeal is much to be preferred, however. If the CRA ever made sense, it no longer does. Rebuilding our inner cities, as promised by President-elect Trump, requires sound investments based on potential returns on investment, not yet another generation of dead-end subsidy and capital-allocation efforts. Ben Carson has demonstrated that he gets that. Now he has the chance to show it.