Housecleaning

In the aftermath of the housing crash of 2008, many analysts identified the cause as government policies aimed at expanding home ownership in the United States, particularly among U.S. communities that in previous generations had been locked out of the American dream house by mortgage redlining. The Community Reinvestment Act of 1977, meant to force banks to lend to the African-American and Latino “high risk” communities, was frequently pointed to as a culprit. But is the case against the C.R.A. really so solid? Even if it were, how should that affect national policy on home ownership going forward? Is the value of home ownership for all Americans still worth promoting?

The “blame the victim” narrative of the Great Recession may be more reliant on ideology than facts. More than 80 percent of the boom years’ problematic subprime loans were not even issued under C.R.A. regulations, and homeowners with C.R.A. mortgages have defaulted at a lower rate than other mortgage holders. The economic earthquake of the foreclosure crisis, which, if the C.R.A. were truly to blame, should have been domiciled mostly within U.S. urban communities, has been for the most part geographically specific, with regional centers in California, Florida, Illinois and Nevada accounting for about half of all foreclosures. It is true that some minority communities are experiencing higher rates of foreclosure in this crisis, but that is due more to the nature of the loans they received than to federal policies aimed at promoting home ownership among minority groups.

Low-income communities, exploited as opportunity zones for predatory lending, ultimately endangered the originating banks as much as they did the homeowners. Shaun Donovan, the secretary of Housing and Urban Development, has called those loans “a targeted scourge on minority communities.” Donovan reports that 33 percent of the subprime mortgages given out in New York City in 2007 went to borrowers with credit scores that should have qualified them for conventional and more affordable prevailing-rate loans.

But there was no federal regulation that required “zero down, interest only” and “teaser” loans destined to detonate later under the inexperienced and unwary. No government policy ever demanded that bankers abandon due diligence and caution in mortgage lending; but agog at remarkable quarterly profits generated by the subprime market frenzy, bank executives and shareholders did exactly that. Aggressive brokers pushed adjustable rate mortgages on novice homebuyers with a wink and a nudge, suggesting they merely refinance when the ruinous interest rates kicked in, not warning them that this could prove impossible. Others were sold on interest-only mortgages with the naïve expectation that home values moved in only one direction: up.

As the nation emerges from its housing hangover, the temptation is strong to lay too much blame on the subprime mortgage holders who threw the spark to the tinder in 2006. Certainly tightening procedures on the streets where they live and where this crisis began is not a bad idea. Just as surely it is not enough to prevent a similar economic scorching in the future. We would be setting ourselves up for false security even as we condemn working-class American dreamers unjustly. Many may have signed mortgages they did not understand, but how many “analysts” on Wall Street recommended complicated derivatives and subprime mortgage packages they did (and do) not understand and whose risks they blithely and negligently ignored?

As a nation we responded to this crisis by bailing out banks and leaving soon-to-be ex-homeowners twisting in the historic downturn. Now, as the officers of the big banks insist it is time for them to get back to “business as usual,” which apparently means transferring risk to the taxpayer, little good can be achieved by further diminishing the reach of the C.R.A. Surely it would be more reasonable to recognize that the era of self-regulation, whether among the investment scions of Wall Street or the predatory mortgage writers at your neighborhood commercial bank, must end.

Broad-based homeownership remains a worthy goal for a nation reliant on a sturdy middle class to hold its ends together. It may surprise many to learn that in spite of foreclosure rates almost triple the norm, U.S. home ownership at 67.2 percent remains near historic highs, and the rate of home ownership among minority communities likewise remains at levels never seen before.

It would be a great injustice if one of the few groups forced to “reform” because of this debacle were the working class families who had finally been able to open the door to their American dream.

This article appears in February 22 2010.