By Fred Hubler
‘Disparate impact’ is a term used by the Justice Department and the courts when a mortgage lender fails to meet a certain minority quota in its lending practices. The bank is then deemed guilty of discrimination unless it can prove itself not guilty.
The 1977 Community Reinvestment Act (CRA) required mortgage lenders to make at least 30 percent of their loans to people whose income was less than the median income. Under President Clinton, the percentage was raised to 50 percent.
The federal government’s Financial Crisis Inquiry Report claims that the repeal of the Glass-Steagall act was not a factor in the 2007-08 financial crisis. New York Times reporter and author of Reckless Endangerment, Gretchen Morgenson, claims that regulations were in place that should have prevented the problem.
The report of the Senate Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, contains this statement in a footnote about one of the greatest offenders in subprime mortgages, Washington Mutual: “WaMu was evaluated 20 times by OTS and the FDIC, achieving the highest possible CRA rating of ‘Outstanding’ in each evaluation. … Regulations state that an ‘outstanding’ institution is one that not only meets the needs of its surrounding community, but utilizes ‘innovative or flexible lending practices.’”
The only thing wrong with financial derivatives was that they were all backed by subprime mortgages. As the above quote demonstrates, government regulators only found fault with them after the collapse of the mortgage market in an attempt to shift blame. That’s because both bankers and regulators were basing their opinions on computer models that assured them that derivatives were spreading the risk around. We were told Fannie Mae and Freddie Mac were financially sound, housing prices never decline, people would make extraordinary sacrifices to avoid defaulting on their mortgage and homeownership would instill pride in low-income homeowners.
Congress assumed that the solution for a failed government program is another government program, and passed the Dodd/Frank banking reform bill, which did nothing to reform Fannie Mae and Freddie Mac. Now bureaucrats are busy writing new rules to implement Dodd/Frank while bankers have added hundreds more attorneys to interpret it. President Obama insists CRA remain, but mortgagors that originate loans must retain some of the risk.
So mortgagors and bankers are just not making loans until the new rules are finalized and they can figure them out.
Moreover, the biggest offenders in the subprime mortgage mess were all big-time Democrat donors, including former Mondale campaign manager and Fannie Mae CEO James Johnson; Democrat campaign bundler Herbert Sandler; Countrywide CEO and grantor of VIP loans to Democrat senators, Anthony Mozilo; former Clinton Budget Director and Fannie Mae CEO Franklin Raines; and others.
This whole mess was a social engineering experiment on a massive scale that went horribly wrong. It has been said that “to err is human but to really foul things up requires a computer.” It could be added that to create a catastrophe like the subprime mortgage crisis requires a government.
Fred Hubler of Cedar Rapids is retired from 29 years as a Rockwell Collins electrical engineer and is an Air Force veteran. Comments: firstname.lastname@example.org