Mortgage lending took that “reckless and unsustainable turn” because of regulation – regulation driven by liberals and progressives, not free-market “deregulators.”
Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices.
The mortgage market was humming along just fine when, in the late 1980s, progressives decided that it needed to be “fixed.” Their complaint: Some ethnic groups got approved for mortgages at lower rates than others.
. . .
The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. By 1991, critics were using that data to paint lenders as racist by showing that minority applicants were approved at far lower rates. Banks were “Shamed By Publicity,” as one 1993 New York Times headline put it.
In fact, they found a racial disparity only by ignoring relevant data on applicants’ ability to make mortgage payments – such as their assets and credit history.
But the political pressure was intense – with few in politics or media eager to speak the truth. And then, in 1992, came a study from four researchers at the Boston Fed, which seemed to bear out the critics’ contentions.
That study was, in fact, based on quite flawed data – but the authors’ political, media and academic protectors stifled most serious criticism, smearing the reputation of one whistleblower and allowing the Boston authors to avoid answering serious academic challenges (mine included) to their work. Other studies with different conclusions were ignored.
The very next year, the Boston Fed announced new requirements for banks – rules that have now turned out to be monumentally catastrophic: Adopt “relaxed lending standards” or risk being labeled as racists, and face serious penalties under the federal Community Reinvestment Act.
Gone (as “arbitrary” and “outdated”) were traditional lending requirements such as requiring a down payment or limiting mortgage payments to 28 percent of income. (Of course, the loosened lending standards weren’t limited to poor and minority applicants – that would be discriminatory.)
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