In his first two Democratic presidential debates, former New York City mayor Michael Bloomberg has taken a penitent approach when explaining his record in office. He apologized for supporting stop-and-frisk policing, which helped drive down the city’s violent-crime rate and save the lives of thousands of people. He has similarly resisted making a full defense of his comments about the roots of the 2008 financial crisis, thereby missing a crucial opportunity to highlight flaws in liberal policies—from the Community Reinvestment Act to Fannie Mae’s affordable-housing goals—that put the household assets of minorities at risk.
The tempest over “redlining” began earlier this month, when Bloomberg’s lecture at Georgetown University in September 2008—at the height of the economic crisis—surfaced online. “It probably all started back when there was a lot of pressure on banks to make loans to everyone,” he noted then. Congress, he continued, had overreacted to the wholesale denial of mortgage loans to low-income, often black, neighborhoods—so-called redlining. In response, banks started issuing loans to less-than-creditworthy borrowers. The CRA, a federal law enacted in 1977, encouraged financial institutions to meet these credit demands.
In the debates, Bloomberg has been attacked by Senator Elizabeth Warren and other candidates as a defender of racist lending practices. Under pressure, Bloomberg wilted, blaming the crisis solely on Wall Street’s mortgage-securitization practices. But he was right the first time: government-directed lending, including by the CRA, did play a significant role in the crisis. As a 2015 Federal Reserve Board of Governors paper observed: “The CRA provides an incentive structure that could plausibly have motivated banks to originate or purchase loans they would have otherwise considered too risky.” Another Federal Reserve paper, published in 2012, estimated that, before the crisis, Fannie Mae purchased up to 5 percent more high-risk loans than it should have. The subsequent meltdown of Fannie Mae, along with Freddie Mac, led to a $200 billion infusion of federal funds—the biggest bailout of the financial collapse.
Debating the origins of the financial crisis, however, is distinct from a critical question that Democrats aren’t raising: whether government-mandated bank lending improves the financial fortunes of poor neighborhoods and their residents. As the Federal Reserve concluded in its 2015 report on the CRA: “We do not have a good estimate of the net costs or benefits of the act.” Nor is it possible to know the extent to which the government example encouraged risky private lending.
Such loan programs, it turns out, miss a crucial metric: loan performance. Government advocates focus their attention on the total number—not the riskiness—of loans issued. The National Community Reinvestment Coalition boasts that the CRA has led banks to pledge $84 billion in “lending and philanthropy.” But the advocacy group doesn’t confirm if formerly redlined communities turned out, after all, to be good credit risks. Nor does it acknowledge that loan delinquencies and foreclosures—which result disproportionately from subprime lending—are greater risks for low-income neighborhoods than affluent ones. A wealthy household with a lost job or missed mortgage payment, for example, isn’t a risk to a community where the housing market is strong, and a foreclosed house in a rich neighborhood will probably be quickly resold. But a vacant or abandoned house in a poor neighborhood threatens the net worth of neighbors who dutifully pay their mortgages and can lead to a cascade of troubles as asset values plunge. The hardworking poor don’t want banks to discriminate against them, but they don’t want reckless credit programs hurting their neighborhoods, either.
It’s time to question the legacy of mortgage-lending mandates. One wishes that Bloomberg would have defended his past positions, not run from them. His policy reversals would only hurt the constituencies that he once served as mayor.
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