Direct Fleet Insurance

The Subprime Meltdown created by the Government Mortgage
Thomas J. DiLorenzo
Thomas J. DiLorenzo


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The thousands of mortgage defaults and foreclosures in the "housing market risk (ie, mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make loans to borrowers with bad non-solvent. The policy in question is the 1977 Community Reinvestment Act (CRA) requiring banks to make loans to borrowers with low income and that supporters of the Act call "communities of color" that they might not otherwise make based on purely economic.

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support through grants and government programs like the CRA received. These include various neighborhood organizations, "as they like to call themselves, such as" ACORN (Association of Community Organizations for Reform Now). These organizations claim that over $ 1 trillion in CRA loans were made, but nobody seems to know the magnitude with greater certainty. A U.S. Senate Banking Committee staff member told me ten years ago, at least 100 billion dollars of loans were made in the first twenty years of the Act.

Groups called "community" like ACORN benefit themselves from the CRA through a process that resembles the legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The law is set up so that the expansion of a branch bank merger, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "reserve" is issued by a community group. " This can cost banks great sums of money, and "community groups" understand perfectly. It is their influence. They use this leverage to get the banks to give them millions of dollars and promising to do a certain amount of bad loans in their communities.

A man named Bruce Marks became famous during the last decade for pressuring banks to spend billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He boasted to the New York Times that he had "won loan commitments," $ 3.8 billion Bank of America, First Union Corporation and Fleet Financial Group. And this is a group "community" operating in one city - Boston.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will suffer from more loan defaults. If they do not comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation as Bank of America billions of dollars. Like most businesses, they have largely given way under and have returned to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate for the added risk of extending these loans, many lenders have increased the cost of credit associated with mortgages. It is simply an indirect way of doing what banks always do - and what they must do to remain solvent: charging rates effectively higher interest on riskier loans.

But this is discriminatory!, Complains community organizations. Thus, if one browses the ACORN web site, we can read of their boasts of having "predatory lending in Los Angeles.