The American Spectator

Capitol Ideas

Crediting the Uncreditworthy

By Tom Bethell from the November 2008 issue

I bought my condo in Washington, D.C., 25 years ago, for a little over $100,000; two bedrooms, two baths, in a “good” part of the city (meaning safe, about a mile north of Georgetown). As a freelance writer I had no salary, but I qualified for a mortgage all the same. How come? Well, when I went to see the money lenders I brought along some letters, including one I had received from Ronald Reagan (written before he was president) and from one or two other political notables as well. I debated whether to include my Nixon letters (written after he was president!) and can’t right now recall whether I decided they would impress these gentlemen more than they would frighten them.

I was deemed qualified. But rest assured, Reagan or Nixon had little to do with it. By far the most important consideration was that I had put up 50 percent of the purchase price. In cash. That no doubt persuaded the moneylenders that I had every intention of repaying the loan. Which I have done (well, almost).

I have been thinking about this in light of our credit woes today. It amazes me to read that, until recently, people have been allowed to borrow the full purchase price of a house without showing they could repay it. By 2006, the median down payment for first-time home buyers, once 20 percent, had sunk to a mere 3 percent, probably with a variable-rate mortgage. I wonder how many of these borrowers even knew what that meant. Some thought of the loan as something that they wouldn’t ever have to repay. They would just walk away if the value of the house declined.

How could supposedly intelligent people have believed that house prices would keep climbing forever? That’s just one of the mysteries. The then Fed chairman, Alan Greenspan, contributed to the problem by holding interest rates too low for too long. He forgot that maintaining a stable dollar was by far the most important part of his job. It will permanently stain his reputation for wisdom.

But I would like to bring up one of the least discussed roots of the crisis. The idea somehow took hold that poor neighborhoods in inner cities were deteriorating because they were being denied credit. Bankers should “affirmatively help” meet “community credit needs.” So Congress enacted a new law, the Community Reinvestment Act (1977). It was dreamed up by Sen. William Proxmire, massaged by Walter Mondale, and signed into law by Jimmy Carter. It declared “redlining” to be illegal.

Redlining means denying a mortgage because the applicant lives in a particular geographic area. An insinuation of the law, unstated, is that lenders are inclined to be racist.

When “redlining” came over the political horizon, I was living in a communal house on Embassy Row. Our most famous tenant was Judy Miller, who was then with the Progressive magazine. Soon she joined the New York Times. I do have Judy Miller  stories, along with Nixon correspondence stories, but I guess they will all have to wait. As Times newcomers must, Judy went to the metro desk—this was many years before she became a famous foreign correspondent for the paper, with (it turned out) some influence over how our Iraq Misadventure was to be interpreted.

In an early redlining story for the Times, Judy wrote that the new law “has been creating some tough problems for the nation’s bank regulators.”

She got that right. The regulation of mortgage loans was about to be undermined by the insistence that banks and S&L s could no longer be too fussy about borrowers’ credit-worthiness. I particularly liked the following paragraph in Judy’s story:

The Savings Bank Association of New York contended at the hearing last week that the law’s goal of encouraging lenders to meet credit needs of the entire community “is entirely at variance with the business of banking in a free enterprise system.” The association said: “Our institutions are not social service organizations…”

Try telling that to Rep. Barney Frank.

The New York Times, which was then (30 years ago) a more balanced newspaper than it is today, editorialized that “measures that would weaken standards are dangerous. New York’s savings banks already hold large numbers of defaulted mortgages, including many inner city properties.…We raise a strong word of caution against the expectation that bank credit is a substitute for the wages, salaries and other income that are needed to keep a community alive economically.”

By 1993, with the advent of the Clinton administration, the Washington Post began publishing articles about racial disparities in mortgage loans in the Washington area. The following year the Chevy Chase Federal Savings Bank (the largest such bank in Maryland) was accused of racial bias by Janet Reno and the Clinton administration. Without admitting any wrongdoing, the bank settled, agreeing to open branches in poor neighborhoods and by making $140 million in concessionary loans available to the alleged victims of “discrimination.” The Times, by now sounding a more familiar note, warned in 1994 that the Community Reinvestment Act “requires banks to meet the credit needs of all neighborhoods in a bank’s service area.”

Credit needs? How long before needs would become rights?

THE CHEVY CHASE BANK has survived, but recently posted a quarterly loss of $5 million on assets of $15 billion.

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