In the last few years, New Deal era “redlining” has come to be seen as one of America’s most horrific historic sins, on par with slavery, due to the profound research of America’s foremost public intellectual, Genius T. Coates, who made FHA redlining central to his argument for massive reparations to blacks.
Not surprisingly, there exists a symbiotic relationship between the obsessions of the Obama Administration and of Coates.
From the New York Times:
‘Redlining’ Home Loan Discrimination Re-emerges as Concern for Regulators
By RACHEL L. SWARNS OCT. 30, 2015
NEWARK — The green welcome sign hangs in the front door of the downtown branch of Hudson City Savings Bank, New Jersey’s largest savings bank. But for years, federal regulators said, its executives did what they could to keep certain customers out.
They steered clear of black and Hispanic neighborhoods as they opened branches across New York and Connecticut, federal officials said. They focused on marketing mortgages in predominantly white sections of suburban New Jersey and Long Island, not here or in Bridgeport, Conn.
In complete contrast to, say, Apple Stores, which can be found all over the South Bronx and the ungentrified parts of Brooklyn.
Oh, wait, sorry, no, Apple Stores can’t actually be found in poor neighborhoods in New York. It’s fine for Apple, the richest company in the world with something like $200 billion in unused cash sitting around, to do business where it thinks best, but banks are subject to federal regulatory oversight.
(By the way, it looks as if there are seven Apple Stores in Manhattan south of 76th street and about two or three in the Outer Boroughs, even though the Outer Boroughs have about 80% of NYC’s population. That’s actually a sizable convenience issue since Apple customers typically get their products serviced under warranty by taking them to the “Genius Bar” at the Apple Store. No doubt there are people mulling over right now how they can get their hands on some Apple Store Diversity rake-off, but Apple is smart, so it’s not that easy.)
Seriously, the moral theory of the 1977 Community Reinvestment Act was that banks that open branches in black neighborhoods to take deposits should also lend in the same neighborhoods. It wasn’t about forcing banks to lend in geographical areas where they don’t do business.
(One unexpected side effect of the CRA was that it hurt small black-owned banks, which traditionally tended to diversify their risks by taking deposits in black neighborhoods and lending in white neighborhoods.)
The results were stark. In 2014, Hudson approved 1,886 mortgages in the market that includes New Jersey and sections of New York and Connecticut, federal mortgage data show. Only 25 of those loans went to black borrowers.
Hudson, while denying wrongdoing, agreed last month to pay nearly $33 million to settle a lawsuit filed by the Consumer Financial Protection Bureau and the Justice Department. Federal officials said it was the largest settlement in the history of both departments for redlining, the practice in which banks choke off lending to minority communities.
Outlawed decades ago, redlining has re-emerged as a serious concern among regulators as banks have sharply retreated from providing home loans to African-Americans in the wake of the financial crisis.
Over just the past 12 months, federal, state and city officials have successfully required banks to expand minority lending programs and, in some instances, to pay penalties as part of redlining settlements in Buffalo; Milwaukee; Providence, R.I.; Rochester; and St. Louis. And more banks are facing scrutiny. The Justice Department now has more active redlining investigations underway than at any other time in the past seven years, officials said.
“Redlining is not a vestige of the past,” Vanita Gupta, the principal deputy assistant attorney general of the Justice Department’s civil rights division, said last month in a conference call with reporters.
The effect on minority communities can be profound. Homeownership is a cornerstone of economic mobility, and without a stable group of homeowners, neighborhoods can be left vulnerable to blight and disrepair.
The recent cases illustrate how redlining has evolved. Bankers no longer talk openly about denying loans to black people. Instead, officials said, some banks have quietly institutionalized bias in their operations, deliberately placing branches, brokers and mortgage services outside minority communities, even as other banks find and serve borrowers in those neighborhoods.
The intent of such management decisions is typically left unspoken, officials said. But in interviews with federal bank examiners, Hudson executives made their reluctance to venture into minority neighborhoods plain.
It is “like a whole other world,” one lending executive told examiners from the Consumer Financial Protection Bureau, explaining why the bank failed to generate any mortgage applications from a minority neighborhood here.
Fallout from the excesses of the subprime era in mortgage lending has, in some ways, set the stage for the discriminatory practices of today. As banks have tightened their credit lending standards to avoid risky loans, the percentage of blacks and Hispanics getting approved for mortgages has plunged.
Grappling with foreclosures, job losses and battered credit scores, many minority borrowers have found it difficult to qualify for mortgages under the more stringent rules.
Banks normally try to avoid borrowers who seem likely to default on their loans, but some stepped over the line, officials say, excluding entire communities and the creditworthy people who live in them.
In 2014, black people held 5.2 percent of the nation’s home loans, compared with 8.7 percent in 2006, according to the Federal Reserve Bank. Hispanics have struggled to regain lost ground as well, accounting for 7.9 percent of home loans in 2014, compared with 11.7 percent in 2006.
Obviously, 2006 should stand as our benchmark of prudent lending.
Federal and state officials said it was impossible to determine how widespread discriminatory lending had become. They believe a vast majority of banks are operating legally, but recent lawsuits have revealed striking disparities.
In Missouri, where Eagle Bank settled a redlining lawsuit with the Justice Department last month, the bank’s competitors generated five times as many mortgage applications from predominantly black neighborhoods in the St. Louis area as Eagle did, Justice Department officials said. The bank, which said it disagreed with the government’s findings, promised to set aside $975,000 to provide services for black residents and businesses.
And in Buffalo, Evans Bancorp settled a redlining lawsuit filed by Eric T. Schneiderman, the attorney general of New York, last month. The suit alleged that the bank focused its mortgage lending in communities that appeared on its “trade area” map, which excluded the predominantly black neighborhoods on the city’s East Side. Evans, which described the allegations as “unsubstantiated,” agreed to pay nearly $1 million to settle the suit. …
The issue is also achingly familiar. Until the 1960s, banks openly starved minority communities of home loans with the full backing of the federal government.
And the 1960s were only, what, five or ten years ago?
For decades, the Federal Housing Administration relied on so-called residential security maps to help decide which mortgages it would insure. The maps ranked and color-coded neighborhoods in cities across the country according to their perceived investment risk.
Affluent white neighborhoods that were “in demand” were typically shaded green. Black neighborhoods were shaded red and shut out of the conventional loan market. Here in Newark, for instance, every black neighborhood was deemed “hazardous” for investment in 1939, according to Kenneth T. Jackson, a historian at Columbia University.
And 1939 was, I don’t know, only 20 years ago.
With conventional loans so difficult to secure, many black people found themselves sidelined from the homeownership boom after World War II. Others were forced to turn to an underground economy that offered overpriced, predatory loans.
Even after the passage of laws that banned discriminatory lending in the late 1960s and ’70s, redlining persisted. Its modern-day form, though, is far less overt.
New Jersey banks no longer respond explicitly, as some did in the late 1930s, when asked, “Are there any areas in which loans will not be made?” (“Newark,” some said.)
Most of Hudson’s customers would have had no idea that the bank was excluding blacks and Hispanics, officials said.
A spokeswoman for Hudson did not respond to several requests for comment. But in a statement, Denis J. Salamone, the chief executive, said the bank believed it was meeting its fair lending obligations by buying loans originating in minority communities on the secondary market …
Founded by immigrants in 1868, Hudson was a darling of Wall Street for a time in the 2000s. Forbes magazine called it the “best managed bank of 2007” for steering clear of the subprime loans that sank other financial institutions.
Now the nation’s seventh-largest savings bank, it built its business on traditional mortgages and prided itself on its old-fashioned feel.
All the while, federal officials said, the bank was systematically avoiding minority communities as it expanded beyond its New Jersey roots into New York and Connecticut.
Of the 54 branches that Hudson acquired or opened from 2004 to 2010, only three were in predominantly black or Hispanic neighborhoods, according to the lawsuit filed by the Consumer Financial Protection Bureau and the Justice Department.
Okay, but wasn’t a resistance to dive into the minority lending business in 2004-2007 a key to Hudson not going bankrupt in 2008?
Predominantly black and Hispanic communities accounted for more than a third of its market in the region that included North Jersey and parts of New York, but the bank stationed only 12 of its 162 mortgage brokers in those communities. Last year, blacks accounted for just over 1 percent of Hudson’s mortgage approvals in the market that includes New Jersey and sections of New York and Connecticut; Hispanics accounted for 4 percent.
The government’s analysis of the bank’s lending data shows that Hudson’s competitors generated nearly three times as many home loan applications from predominantly black and Hispanic communities as Hudson did in a region that includes New York City, Westchester County and North Jersey, and more than 10 times as many home loan applications from black and Hispanic communities in the market that includes Camden, N.J. …
As part of the redlining settlement, Mr. Salamone, the bank’s current chief executive, has agreed to open two full-service branches in minority neighborhoods, to increase outreach to those neighborhoods, and to invest $25 million in a loan-subsidy fund to increase the amount of credit extended to black and Hispanic borrowers.
Hudson, which is expected to merge in November with M&T Bank Corporation, the nation’s 25th-largest bank, also agreed to pay a $5.5 million penalty. M&T recently settled its own federal lawsuit relating to accusations that it steered black borrowers to higher-cost mortgages than their white counterparts, among other concerns. In his statement, Mr. Salamone said M&T had reviewed and consented to Hudson’s agreement with the federal government.
This is actually the feds’ chokehold: approval of mergers and acquisitions. The fines are chump change, but the federal government’s ability to block lenders from mergers and acquisitions if the feds don’t like their level of minority lending is a key selection effect that determines who can get big and who must stay small.
Consider Washington Mutual and its CEO Kerry Killinger, which became the biggest mortgage lender bank in the 2000s and then went bottoms-up in the fall of 2008. Killinger got federal approval for acquisitions of 29 competitors over a couple of decades, including two historically catastrophic acquisitions in Southern California in which WaMu outbid rival suitors for federal approval by topping the other bidders’ promises of lower income and minority lending.
Back in 2009 in VDARE I figured out how the CRA’s chokehold on M&A approvals has a selection effect on the entire culture of the mortgage industry. Almost nobody else has figured this out, so it’s worth repeating at length. The following analysis helps explain one of the huge economic events of the prior decade, but it’s almost totally off the intellectual radar in 2015.
Consider Washington Mutual’s promise in 2001 that if it got federal permission to buy Dime Bank it would lend $375 billion to lower income and minority homebuyers. I asked in VDARE:
“How could the government hold a gun to the financial institutions’ heads and force them to make hundreds of billions in stupid loans? Sure, giving out $375 million in stupid loans to get the government off your back, that would make sense. $3.75 billion, maybe. $37.5 billion, conceivably. But $375 billion, no way. Nobody would promise to give away $375 billion to dubious borrowers unless they thought it was a great idea. They’d leave the industry before they’d promise to hand out $375 billion to people whom they doubted would pay it back.”
… Okay–but how does a bank get more market share and revenue growth?
One major way: by buying other banks. And to do that, you have to pass through the CRA gauntlet. If you aren’t willing to lend to people the government wanted you to lend to, then you were out of luck at mergers and acquisitions game.
So, the CRA implicitly selected for Kool-Aid Drinkers, such as WaMu’s Killinger. They’re the ones whom the government allows to build empires. …
I missed understanding the impact of the CRA because I kept asking myself: “How could the CRA force a banker who thinks lending more to minorities is a bad idea to lend more to minorities?” I kept trying to imagine the CRA’s effect on the already crazy-stupid WaMu, and how that couldn’t have been all that significant.
But I should have been thinking about the other side of the coin: all the sane-smart banks that didn’t get to get big like WaMu did because the government rigged the acquisition process so that crazy-stupid banks were more likely to get merger approval. WaMu got permission from the government to make 29 acquisitions from 1990 onward. A smart-sane bank wouldn’t.
That WaMu sincerely believed that it was going to make a fortune handing big mortgages to mariachi singers, illegal immigrants, and Department of Motor Vehicle clerks etc. etc. seems clear. After all, WaMu not only originated about one out of every eight mortgages in the U.S., but it also held on to a fair number of them instead of securitizing them and dumping them on Wall Street.
WaMu explained its minority-oriented strategy over and over again.
Why was WaMu, with its derisible strategy, able to buy out so many big lenders? To understand it, think about it the other way around: why didn’t more prudent financial institutions outbid WaMu for acquisitions?
Say there are two banks, WaMu and Scrooge-Potter BanCorp. The latter is owned by Ebenezer Scrooge of Charles Dickens’ A Christmas Carol and Mister Potter of Frank Capra’s It’s a Wonderful Life. While WaMu is beloved for lending to anybody with a pulse, Scrooge-Potter BanCorp is widely loathed for taking a dim view of lending money to likely deadbeats.
They both would like to buy George Bailey’s Bailey Building and Loan Association. ACORN and the National Community Reinvestment Coalition announce they will protest vociferously against regulatory approval of the merger unless the winner pledges to make $50 billion in minority and low income loans.
Fearing a debacle of defaults, Scrooge-Potter BanCorp issues a two-word press release: “Bah, humbug”. And it drops out of the bidding.
WaMu announces: “Well, heck, we’ll promise to lend $55 billion.”
In fact, because Scrooge-Potter realized its quest was hopeless, WaMu got Bailey Building and Loan for less than it would have paid if the government wasn’t biased in favor of imprudent bankers. This gives WaMu more money to pursue more targets.
Lather, rinse, and repeat. The CRA means that WaMu gets big while Scrooge-Potter stays small.
Consider the indirect effects on Scrooge-Potter BanCorp. Who would want to go to work for a bank that can’t make acquisitions because it won’t play nice with the government on CRA? Scrooge-Potter can’t buy anybody, it can only be bought. So, how’s your job security at Scrooge-Potter looking? Wouldn’t it make more sense to go work for WaMu instead?
The CRA drives the climate of opinion in the entire mortgage industry. If you wanted to be able to buy other banks, you had to play ball.