Green light for more subprime loans

This article provides an overview of President Obama’s proposed revisions and overhaul of the financial industry and its regulatory scheme. One of the “changes” will be the establishment of an agency that will be charged with insuring that lenders make loans under the Community Reinvestment Act (one of ACORN’s favorite means to pressure lenders into making risky loans to lower-income people). The article also goes into detail about the danger to the economic system from such loans. It is generally agreed that aggressive pushing of such loans exacerbated the systemic risk from the recent mortgage lending bubble. The author explains the history of such loans and the prevalence of the political and legal pressure brought on lenders to lend to unqualified borrowers. One example:

“Lenders also face the risk of being sued for discrimination if they fail to make loans to people with bad credit, which often has a racially-disparate impact (proving that such impact is unintentional is costly and difficult, and not always sufficient to avoid liability under antidiscrimination laws). They also risk possible sanctions under the Community Reinvestment Act.

“Banks get sued for discrimination no matter what they do. If they don’t make enough loans in low-income, predominantly minority neighborhoods, they get accused of ‘redlining,’ and are subject to sanctions under politically-correct laws like the Community Reinvestment Act, which contributed to the financial crisis by pressuring lenders to make risky mortgage loans.

“But if they do make such loans, they get accused of ‘reverse redlining,’ and get sued by the liberal special-interest groups and municipalities that encouraged them to make such loans during the mortgage bubble. Baltimore and various borrowers have also brought ‘reverse redlining’ lawsuits against banks.

“The Washington Post reported that bond-rating agencies like Moody’s and Fitch are now getting sued, too, for ‘reverse redlining,’ under the theory that they encouraged risky loans to low-income minorities (who subsequently regretted taking out those loans) by giving respectable ratings to the mortgage-backed securities produced by packaging those mortgage loans. The plaintiffs include the National Community Reinvestment Coalition, which has been pressuring lenders to make risky loans to low-income minorities for years. They blame the ratings-agencies for allowing lenders to make loans to minorities with ‘insufficient borrower income levels.’”

Get ready for more of the same.