Subprime Double Standards

The Huffington Post reports that the Department of Justice is fixing to slap a lawsuit on Wells-Fargo for “allegedly preying upon African American borrowers during the housing bubble and steering them into high-cost subprime loans,” which seems a little strange, considering that this was the goal of certain government policies leading up to the subprime crisis.

In the 1990s, the Clinton administration pushed for increased homeownership among traditionally under-represented groups. The Department of Housing and Urban Development released the “National Homeownership Strategy” in 1994. The plan for increasing homeownership includes this ominous statement:

For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.

The government recognized that these borrowers lacked the qualities to purchase more stable loans, and, in order to achieve a political end, encouraged lenders to reduce their standards. The Clinton White House even pressured Frannie Mae to extend mortgage loans to subprime borrowers. These policies met their political goals, at least in the short term — helping “poor and moderate income” home-buyers access credit was a celebrated accomplishment of Slick Willy’s regime. In the longer term, however, the same policies contributed to the recent crisis.

There’s no debating that selling bad loans to poor folk is wrong. If Wells-Fargo did con poor black home-buyers, they should be prosecuted, but it should be recognized that their huckstering was an integral part of the “successes” of Clinton-era housing policy. They were incentivized to offer these loans by federal policy; the federal government is just as guilty of enticing poor African Americans to buy bad loans.