Either to expiate their guilt – or to exploit the guilty – city council members in Evanston, Illinois, recently approved the nation’s first actual reparations program.
Sensing that arguments about slavery and Jim Crow would not have much purchase in this youthful city, the activists focused on housing, a grievance of more recent vintage.
Thus, the Restorative Housing Program, as it’s called, addresses the harm allegedly caused by “discriminatory housing policies and practices and inaction on the City’s part.”
In their urge to create new homeowners, Evanston activists seem blissfully unaware of what happened the last time the nation writ large attempted to put the unready in homes they were unprepared to sustain. It’s time for a friendly reminder.
Hard to believe, but it involved politics. Needing to solidify his liberal base before the 1996 election, President Bill Clinton put teeth in Jimmy Carter’s 1977 Community Reinvestment Act (CRA).
Carter’s people had merely “encouraged” financial institutions to “help meet the credit needs of local communities.” Under Clinton, regulators moved from encouraging to strong-arming.
The regulators were backed by the street-level bully-boy tactics of ACORN, shorthand for Association of Community Organizations for Reform Now.
Even before Clinton was elected, ACORN had begun to lobby for a strengthening of the CRA. In 1991, before swarming the Capitol was a bad thing, ACORN operatives took control of the House Banking Committee hearing room for two days.
Historically, banks had been reluctant to offer home loans to people who might not pay them back, and so ACORN set out to embarrass bankers into overcoming that reluctance.
The New York Times cited a federal regulator who seemed at ease with ACORN’s soft-core extortion: “ACORN is street-tough and they bedevil the bankers. But they’ve gotten banks to commit millions they otherwise would not have lent.” Swell.
To make ACORN’s task easier, the Clinton administration demanded that banks quantify the progress they were making in giving loans to LMIs – people of low and moderate income.
The administration encouraged banks to use “innovative or flexible” lending practices to reach their LMI numbers. With a gun to their head, the lenders turned to Fannie Mae and Freddie Mac to relieve bankers of the imprudent loans they were now being forced to make.
Fannie and Freddie were happy to oblige. In 1999 Fannie Mae’s CEO told the Times that he planned to extend credit to borrowers a “notch below” its traditional standards. That notch was spelled “subprime.”
Lenders consider a borrower with a FICO score in the 650 to 850 a prime credit prospect. Those who score beneath 650 are considered subprime.
Historically, subprime borrowers had a limited ability to shop for better rates. Given the greater risk, subprime prospects typically had to pay more interest to secure a loan.
Wanting it both ways, ACORN and its fellow travelers would denounce the higher rates for subprime borrowers as “predatory lending.”
For investors, high interest translated into high yield. In 1997, investment banks began to underwrite the first securitization of subprime loans.These securities proved enormously popular.
They promised a 7.5% yield in a low-interest environment and, if that were not enough, a chance to cleanse one’s venal Wall Street soul by doing what appeared to be a social good.
In his valedictory address at the Democratic National Convention in August 2000, President Clinton celebrated “the highest home ownership rate in our history.” His work wasn’t done.
To rally the base a week before the 2000 election, the Clinton administration announced historic new regulations that would put a further squeeze on Fannie Mae and Freddie Mac.
The regs upped Fannie and Freddie’s “affordable housing” quota from 42 to 50%. Said Fannie Mae CFO Timothy Howard, “Making loans to people with less-than-perfect credit” is “something we should do.”
In 2003, at President George Bush’s urging, Congress passed the American Dream Downpayment Act. Said a spokesman, “The White House doesn’t think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home.”
Both parties were now promising affordable housing for all people, regardless of income or character. Their debt obligations, should they choose to honor them, would be packaged, insured and sold without risk.
As long as home prices continued to grow, default would not be much of a threat for lenders or borrowers. The borrower could recoup his money by reselling, and if the borrower defaulted, the lender could recoup his loan by selling the home.
This model worked well enough until June 2004, when the Fed finally began to raise the interest rate. To keep the bubble from bursting, lenders grew increasingly willing to take borrowers at their word.
Some lenders no longer asked to see proof of income, ID, or even citizenship. By 2006, most subprime loans were made on “stated income.”
When the bubble finally burst in 2008, no one wanted to address the moral/cultural factors that contributed to it. There was nary a word about the cultural embrace of credit, the breakdown in the family, the media support for profligates, or the government imposition of race and gender quotas on lenders.
It was Wall Street’s fault, the left told us, time to “occupy” its streets and bend its denizens to our will. That, they have done in spades.
Now with a new toy, reparations, just rinse and repeat.
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