October 11, 2008

FIX THE RATES, FIX THE MESS:

Subprime scapegoats (Boston Globe, October 11, 2008)

[T]he Community Reinvestment Act has nothing whatsoever to do with the subprime mess.

The law applies specifically to commercial banks, which in recent months have been the least volatile part of the financial-services industry. The measure was passed in 1977 to combat redlining, the practice of banks refusing to write mortgages in poor neighborhoods - even when they were taking deposits from residents of those neighborhoods.

To meet Community Reinvestment Act requirements, banks do make loans to low-income homebuyers - often in concert with community groups that provide financial advice and other crucial training. While banks at first had to be "dragged into participating," said Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, loans made under the auspices of the reinvestment law have performed remarkably well. One key initiative of this sort, the state's SoftSecond mortgage program, has a delinquency rate of 1.8 percent - compared with about 5 percent for all mortgages in Massachusetts.

The subprime mortgages that have failed left and right are the antithesis of the carefully designed, well-supervised loans provided by tightly regulated banks. No law forced a mob of unregulated lenders to make loans in poor neighborhoods. Rather, mortgage companies and Wall Street financiers saw a business opportunity in subprime lending, where the risk of default was high but so were the interest rates.


Indeed, the problem was created by the rates charged by the borrowers and then central banks cranking rates to fight a non-existent inflation.

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Posted by Orrin Judd at October 11, 2008 8:21 AM
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