Home Mortgage Affirmative Action

Supporters call it “financial services reform.” Yet the Restoring American Financial Stability Act of 2010 is far less about reform or stability than about central control over the ground rules of residential mortgage lending–and with a strong dose of racial entitlement. Its principal legacy may be an even worse rerun of the financial collapse of 2008.

By a 237-192 margin, the House of Representatives on June 30 passed the 2,300-plus-page conference bill which is designed to protect households from predatory practices by banks, subprime lenders, brokerages and other financial intermediaries. Yet in practice the measure is likely to invite a new generation of reckless lenders and unqualified borrowers. That’s because during House-Senate conference sessions, affirmative action zealots managed to insert a series of mandates whose implicit intent is to lower credit standards for nonwhites so as to boost their rates of homeownership.

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The driving force behind these amendments, by all accounts, is Rep. Maxine Waters, D-Calif. Congresswoman Waters, a member of the conference committee and the Congressional Black Caucus, used her clout to ensure that the final package delivers a cartload of favors to black and Hispanic mortgage borrowers, not to mention lending institutions that cater to them. Investor’s Business Daily recently surmised that the bill “could have been written by ACORN [the Association of Community Organizations for Reform Now], and probably was.”

Congresswoman Waters disavows any intent to create quotas. In a response to a critical June 14 Wall Street Journal opinion piece, she argued: “The Journal mischaracterizes both the intent and the effects of the legislation. It is absolutely not an attempt to politicize the Fed or any other agency or to allocate credit by race and gender. Nothing in the bill mandates lending to minorities or women. The provision does not even mention lending.” Yet elsewhere in her response, she implicitly contradicted herself. “Analysis documents the discrimination that women and minorities face compared to white men of similar educational background and age,” she wrote. “Data from the Office of Personnel Management shows the lack of African-American and Hispanic senior managers at the federal financial service agencies.” That’s the language of affirmative action advocacy.

{snip} The measure, in addition to giving the U.S. Treasury the authority to liquidate banks that pose a threat to financial stability (a mixed blessing at best), all but exempts lenders from shutdown if black and other minority borrowers account for high portions of their loan portfolios, especially in minority neighborhoods. The bill states: “The orderly liquidation plan shall take into account actions to avoid or mitigate potential adverse effects on low-income, minority or underserved communities affected by the failure of the covered financial company.” In other words, federal bank examiners should make every effort to keep a failing institution open so long as it underwrites lots of mortgages to the kinds of borrowers instrumental to the disaster in the first place!

{snip} The amended bill would create a Financial Stability Oversight Council headed by the Secretary of the Treasury to consider a struggling financial institution’s “importance as a source of credit for low-income, minority or underserved communities” before any takeover. The measure also would establish an Office of Minority and Women Inclusion within each of the Treasury Department, Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Securities & Exchange Commission, and the Federal Reserve System. Rep. Waters’ amendment is explicit: “Each agency shall take affirmative steps to seek diversity in the workplace of the agency, at all levels of the agency.”

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Civil rights leaders, not surprisingly, are complaining the new provisions don’t go far enough. They want the proposed diversity offices to enforce standards, not just promulgate them. “This is absolutely necessary,” said National Urban League President Marc Morial of punitive sanctions. “The evidence shows we haven’t overcome discrimination or the need to promote diversity or inclusion.” He added, ominously, “We have to make sure this agency has teeth.”

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Perhaps activists should consult empirical evidence revealing nonwhite borrowers to exhibit high incidences of default and foreclosure. Here are several examples:

* Economists Richard Anderson (Jersey City State College) and James VanderHoff (Rutgers University-Newark), examining a data base of active conventional mortgages during 1986-92, concluded that black households have higher marginal default rates, even when controlling for borrower and property characteristics.

* The Department of Housing and Urban Development looked at more than 240,000 loans insured by the Federal Housing Administration (Note: FHA is part of HUD) and underwritten during 1992-99, and found that whites, blacks and Hispanics had respective default rates of about 4 percent, 11 percent and 13 percent.

* In a lengthy 2007 report to Congress, the Federal Reserve System Board of Governors concluded that non-Hispanic whites and Asians posed lower risks of default than blacks and Hispanics.

* Two economists for the Federal Reserve Bank of Boston, Kristopher Gerardi and Paul Willen, analyzing the breakdown of subprime mortgages underwritten during 1998-2006 in Massachusetts urban neighborhoods, found that black and Hispanic borrowers had far higher foreclosure rates than whites. Among loans made during 2005, for example, the portion of black, Hispanic and white ownerships ending in foreclosure by December 2007 were 15.0 percent, 10.3 percent and 6.5 percent, respectively.

* This past June, the Center for Responsible Lending, a Durham, N.C.-based research and advocacy group, released a nationwide study estimating that among borrowers who took out mortgages during 2005-08, 8 percent of blacks, 8 percent of Hispanics and only 4.5 percent of non-Hispanic whites lost their homes through foreclosure. Adding to the mix those households at risk of losing their homes, the respective figures were 11 percent, 17 percent and 7 percent.

It isn’t as if opponents of affirmative-action lending have remained silent. “Under the Waters provision,” noted Rep. Ed Royce, R-Calif., “financial regulators will be required to ‘assess the diversity policies’ of every single institution they oversee, including every credit union and community bank.” These offices, he complained. “will again lead to regulators shifting their focus away from systemic risks and safety and soundness. This time it will be toward racial and gender lending when inspecting the institutions they oversee.” Sen. Richard Shelby, R-Ala., Ranking Minority Member of the Senate Banking, Housing and Urban Affairs Committee and also a conferee, similarly argued that to make exceptions for minority neighborhoods would defeat the purpose of reform, which is to protect American consumers as a whole.

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In the end, what must change, even more than the affirmative action mentality, is the very idea of a moral right to homeownership. {snip}

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{snip} In absence of a Senate filibuster, Congress is about to lay the infrastructure for another mortgage lending collapse and bailout. And Maxine Waters’ mandates for “diversity” will make the next round worse. Lenders will have every reason to remain reckless. After all, who wants to be a target of a civil rights lawsuit?

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