In “Subsidizing Disaster” (NY Post, 10/31/07), Thomas Sowell suggests that the sub-prime mortgage fallout cannot be fixed by innovative policy solutions since it is the result of past policy solutions.
Foremost in Sowell’s piece is the belief that “Government laws and policies, especially the Community Reinvestment Act, pressured lenders to invest in people and places where they wouldn’t invest otherwise.” This is simply untrue. The Community Reinvestment Act (CRA), was enacted to prevent redlining, which is the practice of denying or increasing the cost of services, such as banking, to residents in certain, often racially determined, areas. Perhaps Sowell thinks home loans should not be provided to certain parts of town. To further that line of logic, perhaps we should also not provide supermarkets or gas stations in those parts of town either.
In addition, the CRA encourages banks to meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. While some might, from a free market perspective, suggest that the CRA effectively provides preferential treatment to low- and moderate-income family, this policy has been in effect since 1977. Why, after 30 years of effective implementation, is the CRA to blame for our current crisis?
The truth is, the mortgage crisis is the result of an overzealous mortgage lending market. As interest rates fell to historic lows and investors reappointed their traditional stock earnings into housing stock, the mortage industry competed to get a larger share of the money-lending pie. As competition increased, companies began making riskier and riskier lending decisions, such as offering loans with reduced down payment requirements, low-doc funding, and encouraging irresponsible home equity refinancing. Additionally, lenders attracted more high-risk buyers, wooing them with initially low, adjustable rate mortgages and then instituting usurious pre-payment penalties. The mortgage lending market failure has resulted in a public policy conundrum as millions of families struggle with housing debt and the foreclosure rolls are piling up across the nation. Rather than turn our backs on innovative policy solutions, we need to work together to figure out the best way to assist and protect those who have or will lose their homes and prevent predatory lending practices from again disrupting the national economy.
-Lonny Stern | Communications & Outreach Director