More than three years ago, federal regulators were warned by community groups, including the Greenlining Institute, about the perils of exotic adjustable-rate mortgages and the need to focus, at least in part, on Wall Street investment bankers and other unregulated sources of subprime credit.
Today, the regulators have awakened to part of the problem. Unfortunately some of the regulators, as well as Freddie Mac, are veering toward a course of possibly arbitrary and artificial tightening of credit that may be counterproductive.
That is, it may dry up credit for members of minority groups, the poor, and the 70% of Americans who live from paycheck to paycheck.
David Glover, the executive director of the Oakland Citizens Committee for Urban Renewal and a Greenlining director, recently said, “The irony of this is that people who already own expensive homes are influencing the decisions that adversely affect renters and the poor who also want a part of the American dream.”
Except for the comptroller of the currency, John Dugan, it appears none of the regulators has yet thought about, much less carefully studied, the adverse impact policies might have on their efforts to close the minority homeownership gap. Nor have some regulators studied whether a tightening of credit could reduce our national homeownership rate from 69% to the 64% level of just a decade ago.
Of equal concern to housing advocates, particularly those concerned about the unacceptably low homeownership rates among African-Americans, Latinos, and Southeast Asians, is the regulators’ apparent unwillingness to influence the conduct of giant Wall Street investment banks such as Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman Brothers, and Merrill Lynch. In recent years almost two-thirds of mortgages have been packaged into securities and sold to investors worldwide by these bankers. To date, none of these giant investment banks has offered, despite their CEOs’ $50 million salaries, to share the pain with the poor.
Another issue that concerns many advocates for the poor is what effect a tightening of credit for the regulated and generally responsible financial institutions would have on the irresponsible unregulated market. Without national legislation and federal regulation, it is quite possible that more minorities and the poor will be forced into exotic subprime loans made by unregulated lenders, including a wide range of subprime mortgage companies that are in it for quick profits.
Of equal concern is that federal regulators lack solutions for a pending foreclosure crisis that could, according to the Center for Responsible Lending, affect 1-in-5 subprime borrowers, a disproportionate share of whom are minorities and/or poor people.
If the regulators want uniform support for a credit tightening, they should first offer a two-pronged solution. The first part would be creation of a multibillion-dollar, national Anti-Foreclosure Fund with money coming partly from the giant Wall Street investment banks that have profited so heavily from the mortgage instruments the regulators now wish to restrict or eliminate.
At a minimum this fund should be available to all low- and moderate-income families that face foreclosure — whether by a regulated or unregulated institution, or whether by the originator or a foreign security holder — so long as the cause of the foreclosure is not primarily the borrower’s own fraud. Some of us believe that financial literacy alone, or a 311 hotline, is not the full answer, though both could benefit thousands of those facing foreclosure.
One can hope that the chairman of the Federal Reserve, the chairman of the Federal Deposit Insurance Corp., the comptroller of the currency, and the director of the Office of Thrift Supervision will soon issue a clear call for all those who have benefited from loose credit mortgage standards to come to the table and develop such a fund. Nine years ago, Alan Greenspan, then the Federal Reserve chairman, did just that in order to save a hedge fund, Long Term Capital Management, from its own fraud and greed.
The second part of the solution would be to contemplate the “unthinkable”: regulating the investment banks, insurance companies, mortgage brokers, and Ameriquests of the world. This would help set a universal standard of conduct.
In the absence of a universal standard, even the most responsible financial institutions would be forced to get out of the subprime business, as Bank of America did a few years ago, or to compete at the lowest-common-denominator level.
Perhaps it is time for our new Congress to follow a suggestion first made in 1993 by Eugene Ludwig, then the comptroller of the currency, to expand the Community Reinvestment Act to cover financial institutions including investment banks and insurers.
