The subprime bust tragedy — how government-selected winners turned into losers

The Washington Post reports that “the implosion of the subprime lending market has left a scar on the finances of black Americans — one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades.” The problem, of course, is that blacks comprised a disproportionate number of the people who purchased homes they couldn’t afford under traditional lending practices, by making little or no down payment. When the housing market collapsed, they thus comprised a disproportionate number of the people who couldn’t make good on their loan payments. Consequently, their credit scores tanked. According to the Post, this leaves blacks at a huge disadvantage when it comes to securing loans.

The fact that blacks are suffering the consequences of having disproportionately low credit scores will no doubt lead to calls for government remedial action. In fact, the government is already taking such action. It has begun suing employers who take credit history into account in making hiring decisions, even for financially sensitive positions, on the theory that the use of this criterion results in the disproportionate exclusion of blacks.

But before we go any further down this road, it’s worth remembering why blacks find themselves in the parlous situation described by the Post. They find themselves there in large part because the federal government acted to confer a benefit on them – easy home ownership – in response to the fact that blacks disproportionately did not own homes.

The campaign to promote home ownership by blacks dates back at least as far as the 1970s. In the 1980s, it was a major objective of the community organizing movement, which took militant action to coerce banks in cities like Chicago into changing their lending practices. The campaign “mainstreamed” its way into aggressive federal policy under President Clinton, who sought successfully to increase homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a government-sponsored enterprise. As George Will puts it:

Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could off¬load risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.

This trend continued apace during the Bush administration. Officials like Treasury Secretary Snow occasionally warned about the dangers of the reckless lending practices that were enabling low income people to purchase homes, and even made modest proposals to address the problem. But Republicans ran into a stone wall in the form of liberal Democrats like Barney Frank and Chuck Schumer.

Subprime loans were available, of course, to members of all racial groups. But, as noted, blacks obtained them in disproportionate numbers because they constituted a disproportionate number of the people who needed them to purchase a home. The 2000 census showed, for example, that less than half of black households owned homes, compared to more than three-quarters of white households.

It was the government’s goal to remedy this disparity by changing lending practices. As the Post notes, the availability of subprime loans dovetailed with federal initiatives to promote racially “fair” lending and was “heralded as a way to boost homeownership in black neighborhoods.”

In short, the government championed the bestowment of a benefit on a particular group based on racial considerations. In effect, the government picked winners on a racial basis.

It turns out, however, that the “winners” selected by the government have actually lost by virtue of government policy. There’s a lesson in this — something to do with the wages of what George Will describes as “government’s terrifying self-confidence.” But it’s a lesson liberals will never learn.

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