A Renewed Crackdown on Redlining

[Monte_RCMS]

A return for the subprime mortgage market.

Has this appeared anywhere else?

This is what got us into the mess we are in, in the first place.

businessweek.com/magazine/content/11_20/b4228031594062.htm

REGULATION May 5, 2011, 5:00PM EST

A Renewed Crackdown on Redlining

In the wake of the subprime implosion, the Obama Administration has stepped up its scrutiny of disadvantaged neighborhoods’ credit access

By Clea Benson

Business Week MAGAZINE

excerpt:

Community activists in St. Louis became concerned a couple of years ago that local banks weren’t offering credit to the city’s poor and African American residents. So they formed a group called the St. Louis Equal Housing and Community Reinvestment Alliance and began writing complaint letters to federal regulators.

Apparently, someone in Washington took notice. The Federal Reserve has cited one of the group’s targets, Midwest BankCentre, a small bank that has been operating in St. Louis’s predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. Although executives at the bank say they don’t discriminate, Midwest BankCentre’s latest annual report says it is in the process of negotiating a settlement with the U.S. Justice Dept. over its lending practices.

Lawyers and bank consultants say regulators and the Obama Administration are scrutinizing financial institutions for a practice that last drew attention before the rise of subprime lending: redlining. The term dates from the 1930s, when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending. Congress later passed laws banning lending discrimination on the basis of race and other characteristics. “The agencies have refocused on redlining because, in the wake of the subprime explosion and sudden implosion, they are looking at these disadvantaged neighborhoods and not seeing any credit access,” says Jo Ann Barefoot, co-chair at Treliant Risk Advisors in Washington, D.C., which consults with banks on regulatory issues.

The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year.

Meanwhile, in Missouri, things are starting to change. Midwest BankCentre Chairman Ronald T. Barnes recently announced the bank would open a branch in Pagedale, a town near St. Louis that is predominantly African American.

The bottom line: Lenders have been caught off guard by stepped-up enforcement of laws to prevent discrimination against minorities and the poor.

Benson is a reporter for Bloomberg News.

 

[Ridgerunner]

There is an assumption underlying anti-“redlining” efforts. The assumption is that a lender’s wanting to stay out of a particular area is motivated by racism.

In my opinion, it’s an unwarranted assumption unless the regulators can prove that somehow loans to minority borrowers in non-declining areas are not being made. Never have I seen anything even pretending to establish that, say, blacks trying to borrow money to buy housing in Clayton (a pretty nice neighborhood/municipality adjacent to St.Louis) are any less able to get the loans than are white applicants in Clayton. In the absence of such proof, the entire rationale for “anti-redlining” efforts falls apart.

Nor do regulators exclusively focus on race when it comes to indivdual lending. They focus on the negatives of a neighborhood under the Community Reinvestment Act. Long ago, when I was in the banking business in an area where there were just no minorities at all, anywhere, (despite fruitless regulatory efforts to find some) they picked out a blighted, very white, area and told me I had to make more loans there. I pointed out that since most of the housing there was (substandard) rental housing, it was prudent to approach values there from a “rental” standpoint rather than a “owner-occupied” standpoint. But that wouldn’t do. I found ways around it, but I’m sure plenty of lenders didn’t, and paid the price.

On the other hand, regulators knock you down as a lender if your bad loans exceed the numbers they think “safe”. There is a fundamental contradiction in “regulatory purposes” when it comes to things like this.

I will add that sometimes these kinds of programs lead to unjustified profits to some and losses to the public. I recall, for instance, some packages of Federal Housing Authority guaranteed special housing project loan-based securities. Because they were all made on substandard housing in awful areas, the securities sold at a pretty good discount. Figuring, as I did, that the loans would largely default, requiring FHA to come in and pay off the loans in the package at face amount, I bought a bunch of them. Made a lot of money for the bank as a result, because most of the loans did default, and the bank pocketed the “discounts”…at taxpayer expense, of course.

On and on.