Regulators' efforts to cool the lending frenzy were also fettered by America's fierce and long-running devotion to the ideal of home ownership for all. Since the Great Depression, politicians had viewed the percentage of American families who owned their dwellings as a key benchmark of economic success. Regulators were given an openended mandate to help drive that number higher. Any agency or administrator who did not actively pursue this vision was roundly criticized.
The pursuit of higher home ownership went into high gear beginning in the 1970s, as it also became a test of the nation's success in promoting civil rights.
The 1977 Community Reinvestment Act had outlawed "redlining," historically the practice by bankers of defining neighborhoods literally outlined on maps in red where they would not make mortgage loans. Such neighborhoods were usually poor and most often home to minorities or out-of-favor ethnic groups. The Community Reinvestment Act (CRA) was meant not just to end, but to actively reverse the effects of such discrimination by offering banks both carrots and sticks to encourage lending in underserved areas. The CRA was given more teeth during the Clinton administration in the mid-1990s: regulators could now require banks to explicitly target disadvantaged neighborhoods for both business and home-mortgage lending.
About this time, the Federal Reserve also unveiled new statistical methods for detecting discrimination in mortgage lending.7 Marrying data from mortgage loan applications and approvals (as required under the 1975 Home Mortgage Disclosure Act) with sophisticated econometric techniques, researchers at the Fed felt they could tell whether lenders were racially discriminating.8 A bank tagged by the Fed's models could be denied permission to acquire or merge with another bank.9 This was a period of active consolidation in the banking industry and any institution that could not be a shark quickly became a minnow. Only a handful of banks actually failed the Fed's test, but they were soon acquired, reinforcing the message from regulators to lenders to push home ownership aggressively.
The Clinton administration was especially proud of the rise in home ownership during the 1990s, particularly among lower income and minority groups. While home ownership rose 7% among white households during the decade, it increased 13% among African American households and 18% among Hispanic households. This could not have happened without the regulators' blessing and encouragement.
President Bush readily took up the homeownership baton at the start of his administration in 2001. Owning a home became one pillar of his "ownership society," a vision in which everyone would possess a stake in the American economy. For millions, this meant owning their own home. In summer 2002, Bush challenged lenders to add 5.5 million new minority homeowners by the end of the decade; in 2003 he signed the American Dream Downpayment Act, a program offering money to lower income households to help with down payments and closing costs on a first home.
Lenders gladly accepted Bush's challenge. To reinforce this effort, the Bush administration put substantial pressure on Fannie Mae and Freddie Mac to increase their funding of mortgage loans to lower-income groups. Both Fannie and Freddie had been shown to have substantial problems during the corporate accounting scandals in the early 2000s, and both were willing to go along with any request from the administration. OFHEO set aggressive goals for the two giant institutions, which they met in part by purchasing subprime mortgage securities. By the time of the subprime financial shock, both had become sizable buyers of the Aaa tranches of these securities.
Democrats in Congress were worried about increasing evidence of predatory lending. Some noted that the 2001 rule prohibiting such lending only applied to federally regulated lenders. North Carolina had passed a law banning predatory practices in 1999, and the Democrats wanted a federal equivalent that would cover all lenders nationwide. The Bush administration and most Republicans in Congress were opposed, believing legislation would overly restrict lending and thus slow the march of home ownership; moreover, the Republicans argued, existing regulations were adequate to discourage the worst excesses.
The last attempt to pass anti-predatory lending legislation occurred in 2005, but it was also stymied. It was thus up to regulators to strike the appropriate balance between promoting home ownership and ensuring prudent lending. All too obviously, they failed to strike that balance.
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