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This column discusses how the Community Reinvestment Act of 1977 compelled banking institutions to provide subprime mortgages to an increased number of customers failed to provide significant increases in homeownership in the years following its passage and created a crisis where the goal of enriching lives was replaced by personal political ambition.
In the market-driven economy of today, quid-pro-quo is often (if not entirely) the modus operandi. Unfortunately, not all transactions are fair in that the “benefit” one party receives is in fact harmful to them either immediately or over time. In drafting and eventually passing the Community Reinvestment Act of 1977, the United States Congress set the American people on the fast-track to homeownership by strong-arming banks into offering home mortgages to minorities and low-income groups. Questions of legitimacy, a false sense of security and a dubious backhanded attempt at further controlling the American people come into question in addition to whether or not homeownership is a ‘right.’
For starters, the Community Reinvestment Act of 1977 (‘CRA’ hereafter) was an approved Congressional bill that fell under the greater umbrella of a number of domestic policy initiatives pushed by left-winged Democrats during this time i. The purpose of the CRA was to “encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions” [1]. Of course, the “encouragement” that these banks received came in the form of oversight committees (vis-à-vis the HMDA ii) that expected a report on their mortgage lending practices [2]. Often, mortgage loans were given to borrowers that had “less-than-stellar credit levels” [3]. Subsequently, if lenders did not cooperate in offering excessive volumes of sub-prime mortgages, the federal government would most likely threaten these same banks with dire consequences, such as withdrawing depository security given by the Federal Deposit Insurance Corporation (FDIC).
Is homeownership a right? The Constitution grants “life, liberty and the pursuit of happiness” as integral parts of American culture; it does not grant happiness itself. If the notion that homeownership is a right, this would then mean that every American citizen (disregarding immigration quibbles for the time being) should own a home. If a buyer is unable to pay for a home in full and up-front, they are likely to take out a mortgage; the mortgage undoubtedly has an annual interest rate attached to it. By virtue of that, the person is then obligated to pay back the mortgage and its interest; the overall cost of the home (mortgage + interest) may exceed the original cost of the house itself. When you factor in government-assisted home ownership, the following may happen: The government forces banks to loan mortgages to those who normally (disregarding the CRA) do not “deserve” (by virtue of their credit rating or their neighborhood – “redlining”) them, but by virtue of the CRA, these banks dole out loans and the opportunity for homeownership arises in step with the “American Dream”. The federal government then (legitimately so) finds the need to increase taxes in order to fortify such insurance agencies like the FDIC to account for those with low credit scores holding mortgages and/or those whose jobs do not allow them to repay their mortgage and interest within a set time – usually 30 years iii. However, if the federal government deems agencies that have enough government-mandated power to manage certain issues (EPA, DMV, etc.) are insufficiently addressing the needs at hand, it may proceed to create additional programs and bureaucracies to ‘assist’ those already created. If these same individuals possessing sub-prime mortgages are responsible enough to account for the terms of the sub-prime mortgages, all is well in that they are able to work with the income and credit they have to pay back the mortgage and ensuing interest; this is the ideal resolution. If those same individuals (for whatever reason) are not able to repay the mortgage within the time frame agreed upon (in addition to its interest), the home then goes into foreclosure. Naturally, the bank will assume responsibility over the house and will attempt to sell it on the market in order to hopefully procure what money it lost by virtue of the borrower.
Homeownership is not a right; it is a privilege given to individuals deserving of its provisions. Just as not everyone is born to be the President of the United States, not everyone is meant to own a home. Unfortunately, the perfect is made the enemy of the good (Ron Paul is not alone in this). In creating such entities as Social Security, GSE’s like Fannie Mae and Freddie Mac (used to facilitate the availability of short-term low-interest rate mortgages, but went near bankruptcy in the housing market crash), a mandate is given to U.S. taxpayers that they must participate in assisting others (taxes used to pay for welfare) and themselves (Social Security) and in doing so, they lose the responsibility of their own money, forfeiting (albeit unwillingly) their rights to an ambiguous higher power – the federal government. Who is to say that any individual is required to be courteous to his or her neighbor? Virtue is not something absorbed through legislation by a haphazard Congress and Senate; it is something to be realized and understood at a unitary level. At the point where a government has the power to control the way individuals, groups of individuals, cities, counties and states live their lives (via taxes, laws enacted by empowered bureaucracies, etc.), one can be sure that those same people will lay the cause of their own demise on the people they ordered to act.
When an individual or family owns a home, it creates an environment where the family can say that it has control over a basic human need – shelter. When a feeling of control is present, it gives a sense of security and courage that (seemingly) anything is possible when you have a place to call home. Security and stability are what consumers gravitate towards. As a result, owning a home becomes one way to establish security and stability in one’s life. If a politician (as the people’s representative) is able to give people what they truly look for – stability and security, this politician would become the best thing since sliced bread. The politician that gives the individual what it needs is then praised for doing a great thing and lauded for giving true equality to all. Then, these same individuals and families find that due to unfortunate circumstances, they are unable to reciprocate the good given to them from the politician by contributing their part in the deal. As can be expected, the politician then becomes the one to hopefully rescue individuals and families from their circumstances, as the politician was the one to give them what they really wanted – a home. After (indirectly) agreeing to forfeit personal rights and liberties to the politician, the politician goes about to set laws and programs into effect that are supposedly used to improve the undesirable situation; “no pain no gain” becomes the motto. In accepting a politician as the bread-winner for the family, the fine print of the agreement makes itself visible as unforeseen strings begin to strangle those poor souls needing the most help.
Table 1 (Click to Enlarge): Subprime loans in summary. Taken from "Banks Building Markets by Building Communities," by the Federal Reserve Bank of Dallas
Graph 1 (Click to enlarge) - Homeownership rates from 1901 - 2008
The question of CRA’s legitimacy then comes into question. Are the individuals that are lent a sub-prime mortgage really better off? If the argument is made (and it often is on the political Left), that banks are heartless corporations looking for a quick buck, why would these same lending institutions provide charity loans to borrowers who most likely will not be able to pay back the loan they took? Table 1 shows that as of December 31, 2007, banks gave out more than 3.5 million subprime mortgages. Graph 1 then shows that the years following the passage of the CRA only increased homeownership by 2%-3%, then dropped a few percentage points during the 1980s; this is not the exact version of the CRA that Left-winged politicians had in mind. Even if the argument was made that homeownership reached the 70% mark during the 1990s, the fact still remains that as of late, mass foreclosure has plagued the housing market as of mid-late 2008 (note the slight drop in homeownership in Graph 1).
If these same banks chose to give mortgages out to undeserving recipients (assuming their free will in the matter), they would suffer grave consequences and forfeit opportunities to conduct business with preferred borrowers that have trustworthy credit security. Yet an oligarchy of individuals commonly known as “elected officials” decide what “good” and “bad” is, and orchestrate banking practices accordingly. Again, this goes back to the idea of making the perfect the enemy of the good; in forcing banks to give loans to undeserving recipients, the assumption is made that these corrupt banks denied mortgages to whom they did out of an ulterior motive of keeping the underprivileged where they are and promoting the dignity and success of their own kind. Such a farcical concept flies in the face of conventional free-market banking protocol; individuals and businesses alike surrender their savings and checking accounts with those banks, yet this trust in proper management of their capital is brought to nothing when banks engage in such a manner that their decisions on how to conduct their business escapes their jurisdiction.
Without a doubt, those who drafted the CRA did so with the best intentions in mind; there was (and still is) an unfortunate percentage of individuals and families who do not own a home. Unfortunately, many Americans forfeited their own rights to politicians with the hope that their elected officials could solve their problems; the irony is that those elected only made the problem worse by affecting other areas of American life that were uninvolved before the fact. What we saw in the initial stages of the housing meltdown was the result of excessive government oversight and control over an everyday thing – homeownership. While it was good for a substantial number of individuals and families to own a home for however long they did before foreclosing, it benefited the politicians even more in that they assumed more power and authority to clean up their own mess. This then sets the precedent for future elected officials to assume power over an individual citizen’s financial issues not yet addressed in Washington. Who knows what great authority politicians will wield 50 years from now.
Notes
i. Former President Lyndon B. Johnson’s “Great Society” gave birth to entitlement programs (Medicaid, Medicare, Social Security, etc.) that attempted to address many of the social questions that plagued Americans; a number of these programs continue to enrich the lives of millions of Americans today. Note: Entitlement Programs are government programs that target a particular section of the population to receive specific social benefits.
ii. The Home Mortgage Disclosure Act of 1975 (HMDA) “[required] federally regulated banks, savings and loans, and credit unions to report annually the number and dollar amount of mortgage loans they make by census tract in all metropolitan areas.
iii. Sub-prime mortgages allow the debtor to pay significantly lower monthly fees (compared to a regular mortgage). Unfortunately, this amount increases over time as to not cause the bank to lose money relative to the terms of standard mortgages – in comparing the amount to be paid back between a sub-prime mortgage and a standard mortgage, there is little or no difference, but the initial amounts paid back at the beginning of a sub-prime mortgage loan starts off much lower followed by a much higher finish.
Works Cited
Autry, Gene, and Samantha Coplen. “Banking and Community Perspectives.” Federal Reserve Bank of Dallas. Ed. Kathy Thacker. N.p., n.d. Web. 19
Oct. 2009. <http://www.dallasfed.org/ca/bcp/2009/bcp0901.cfm>.
[3]. “The Subprime Mortgage Market: What You Should Know, Why You Should Care.” AARP Financial. AARP, n.d. Web. 24 Nov. 2009. <http://www.aarpfinancial.com/content/Learning/investments_re_subprime.cfm>.
[2]. Home Mortgage Disclosure Act. 3 USC. Sec. 301-311. 1975. Federal Deposit Insurance Corporatoin. N.p., n.d. Web. 24 Nov. 2009. http://www.fdic.gov/regulations/laws/rules/6500-3030.html.
[1]. Community Reinvestment Act, 31 Fed. Reg. 6988.25 (1977), fdic.gov (Federal Deposit Insurance Corporation)
“U.S. Homeownership Rates, 1900-2008 (in percent).” Image. FACTS on POLICY: Homeownership Rates. Hoover Inst., 19 Aug. 2008. Web. 24 Nov. 2009. <http://www.hoover.org/research/factsonpolicy/facts/26963064.html>
Original Appearances of External Data Visuals and Media
3) Graph 1 was taken from the Hoover Institution’s “FACTS ON POLICY: Homeownership Rates”
