Sunday, July 31, 2011

Where Did “Red-Lining” Come From?....

In the 1980s one of the issues that “housing activists” used to sue banks for “housing discrimination” over, was a practice called “Red-Lining.”

Interestingly enough, that practice was the result of one of the earliest intrusions of government into the mortgage business.

During the Great Depression, the federal Home Owners Loan Corporation (HOLC), a New Deal agency established in 1933 by the Home Owners' Loan Corporation Act, decided that America’s banks needed improved mortgage lending criteria and created what came to be called “Residential Security Maps” for every city in the United States.

The HOLC had over 40,000 people grading each neighborhood’s fitness for loans on a scale from A to D.

To accomplish this, the HOLC relied on hard (numerical) data, mostly in the form of housing statistics and local economic data to determine each community’s grade.

As Joe Flood (author of The Fires) noted, “...the maps became an early warning about the weaknesses of the kind of centralized, statistical decision-making that would come to dominate American government and business in the ensuing decades, as complex issues were reduced to a handful of the most easily obtainable and often misleading statistics.”

Those Residential Security Maps of the HOLC became the basis for and the foundation of the practice of “Red-Lining.”

Ironically enough, planners thought that those Residential Security maps would lead to slum clearance and urban renewal, but they resulted in the expansion of the slum, in practice.

In fact, no issue has been more abused than claims of “discrimination.” It was “discrimination lawsuits against traditional lending criteria that allowed both HUD and the DoJ to litigate American banks to cease using “traditional lending criteria,” because they “discriminated against low income Americans.”

U.S. law won’t permit banks to treat well-off borrowers any differently than they treat lower income borrowers, so traditional lending criteria CAN’T be used ONLY with more affluent borrowers. Neither can American banks charge higher fees and interest rates to higher income borrowers to make more loans available to lower income borrowers, by offsetting its riskier loans with higher rates and fees from more reliable and stable borrowers.

Andy Cuomo called the government’s abuse of the U.S. banking industry and forcing MORE subprime loans (loans to sub-prime borrowers) “affirmative action in lending.”

Moreover, Janet Reno’s mentee (Eric Holder) is looking to do the very same thing TODAY in the wake of the disastrous results of the last attempt at this;

“In what could be a repeat of the easy-lending cycle that led to the housing crisis, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for low income Americans with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by IBD...

“...Settlements include setting aside prime-rate mortgages for low-income Americans with blemished credit and even counting “public assistance” as valid income in mortgage applications.

“In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing low income customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

“Among other remedies: favorable interest rates and down-payment assistance for minority borrowers with weak credit.”
That’s exactly the kind of litigation that forced banks into poor (subprime loans) last time and it indicts Holder now.

The court’s ruling is flawed and forces banks to comply with flawed policies that once nearly destroyed our economy...and the start of these subprime abuses (mandating banks to lend to more sub-prime borrowers) started with the federal program (those Residential Security maps) that became the foundation of what would come to be called “Red-Lining.”

No comments:

American Ideas Click Here!