home ownership, racism and the subprime mess

Sunday, July 27, 2008


Before World War 2 less than 50% of US households owned their homes. By 1960 this had risen to nearly 65%, an increase fueled by deliberate government policy.

The Federal Housing Administration lowered the cost of buying homes by extending mortgage insurance, allowing banks to lend money at less risk and therefore at better terms to borrowers. Banks could now extend 30 year mortgages covering 80-90% of the buyer's cost at 6% interest.

But it was explicitly a whites only policy, guided by an FHA rule limiting loan underwriting to segregated white neighborhoods, a practice known as redlining. (Wikipedia: The term "redlining" ... describes the practice of marking a red line on a map to delineate the area where banks would not invest). 98% of 10 million loans guaranteed by the FHA went to whites.

Court cases in 1948 and 1953 struck down the policy but the practice, known as redlining, continued. In 1977, the Community Reinvestment Act tried to end the bias - it demanded that banks serve the communities from which they receive deposits, and undertake regular audits of their practice to ensure compliance.

Initially banks fought the CRA but in the 1980s they realized they could profit from it by providing subprime loans to a clientele they had previously failed to serve. The practice grew slowly. In 1994 only 5% of all new mortgages were subprime; by 2004 20% of home loans were subprime, and in 2006 50% of all new and refinancing home loans were subprime.

States that tried to head off the subprime lending by requiring 'tangible net benefits' statements to be issued by the lender were subjehttp://www.blogger.com/img/gl.link.gifct to intense and costly lobbying pressure to desist - political donations, boycott threats and the like. Only in North Carolina did such regulation survive - and now North Carolina is one of the states least affect by the foreclosure crisis.

Once again racism and attempts to get beyond it confound us.

Kai Wright, The Subprime Swindle, The Nation, July 14 2008
http://www.thenation.com/doc/20080714/wright