Bank of America CEO Brian Moynihan is defending a new program offering zero-down-payment home loans in black and Hispanic neighborhoods. Don’t worry, he says, about a rerun of the 2008 financial crisis, sparked by easy money and lax underwriting: The new policy carries no such risks because it’s small-scale and limited to select neighborhoods.
“This is about granting a down-payment to a buyer who, no matter who they are, as long as they meet the income requirements, to buy a house in a majority-minority neighborhood,” Moynihan told Fox News.
Criticism has centered on the reverse racial discrimination the policy would seem to encourage. But that’s not what should most worry those concerned about minority upward mobility and neighborhood improvement.
Moynihan’s defense is itself the red flag. Good neighborhoods and wealth appreciation depend on strict underwriting standards — and are threatened by easy credit. The hard work of saving up a down payment won’t apply in Bank of America’s program.
But saving for a down payment is a virtue, not an obstacle. Every neighborhood is a virtuous conspiracy in which we depend on our neighbors to maintain their homes, watch over their children and take an interest in civic life.
Making it too easy to obtain a home mortgage risks extending credit to those without the means to fix that roof or repaint — or make their payments. A vacant or dilapidated home next door threatens the property value of those who work hard and play by the rules.
The concern here should be focused on those Bank of America’s policy purports to help. Unfortunately, we’ve seen this movie before, with the Community Reinvestment Act and its regulatory pressure on banks to extend credit based on ZIP code rather than standards. As my colleague Edward Pinto, former Fannie Mae chief economist, noted, the 2008 “financial crisis had a single major cause: the accumulation of an unprecedented number of weak mortgages in the U.S. financial system.”
That crisis and its resulting widespread mortgage foreclosures disproportionately affected blacks, with 240,000 black homeowners losing their homes. The causes crucially included federal “affordable-housing goals” for low-income neighborhoods that encouraged lenders to extend credit to those who did not meet traditional standards.
It is that same pressure — from Federal Reserve and Treasury regulators — that creates the perverse credit incentives Bank of America is adopting.
Banks seeking regulatory approval to merge or grow through acquisition face a gauntlet of regulators and advocacy groups demanding they show a network of branches in select ZIP codes and a record of extending commercial and residential credit to low-income and minority borrowers.
Banks face five different types of Community Reinvestment Act exams. Moynihan is not wrong, as CEO, to signal the bank’s intentions to target black and Hispanic neighborhoods; it’s exactly what regulatory overseers insist upon. They call it “meeting the credit needs of the community.”
But the focus of such easy credit — premised on factors other than the ability to repay a loan — is on the volume of lending rather than the important measure prudent banks have historically paid attention to: How well do those loans perform?
The Community Reinvestment Act has never required loan-performance reporting. Notably, it dates from 1977 — long before banks could compete across state lines and long before the start of Quicken Loans and other online lenders, which don’t face the regulatory pressure banks do but are available to creditworthy borrowers no matter where they live. They know better than to provide unqualified borrowers with a down-payment grant.
For the major banks, extending easy credit in minority neighborhoods is, in other words, a virtue signal that’s a cost of doing business.
The victims about whom we should be concerned are not white homebuyers denied credit but minority homeowners for whom lax underwriting standards are the enemy of stable, improving neighborhoods.
Here’s what fair housing should really mean: the chance for any household with adequate means to obtain a mortgage. Denying credit based on race is wrong. Extending it on that basis does recipients no favors.
Howard Husock is a senior fellow at the American Enterprise Institute and author of “The Poor Side of Town: And Why We Need It.”