Housing Regulations: Easy Credit Is Not Real Assistance

Kevin Drum and Ezra Klein have pieces today on the financial industry’s opposition to new mortgage regulations, in particular, opposition to provisions that would require mortgage originators to retain five percent interest in loans in which (to roughly summarize) the borrower does not make a 20 percent down-payment, or loans which amount to more than 28 percent of monthly gross income. (See this terrific Alyssa Katz piece in TAP for a different perspective from mine. She predicts a progressive split over Dodd-Frank. I think she is spot-on.)

The industry and its allies argue that these new rules will choke access to credit among low-income or minority households. Drum notes several good reasons to reject extreme industry criticisms of the proposed rule. I’m interested in two other matters: First, the tendency to conflate provision of easy credit with the actual transfer of resources to help low- and moderate-income people, second, the alliance of the NAACP and the National Council of La Raza with financial industry figures in negotiating the new rules.

The first matter was discussed in Raghuram Rajan‘s provocative book Fault Lines: How Hidden Cracks Still Threaten the World Economy. I’m not a financial expert, and I don’t agree with everything Rajan says. I do believe that one of his arguments is clearly right. It resonates with smart progressive and smart conservative critiques of the financial crisis, too.

It’s easy, but doubly dangerous, to conflate the provision of easy credit with the actual transfer of resources to low- and moderate-income households. We’ve learned to our sorrow that lax housing finance policies dangerously empower misconduct and recklessness within the financial industry. These policies also dangerously encourage families–often on unfavorable terms–to assume a risky, highly-leveraged investment that does not serve them well.

Public policies should help families of modest means afford homes. This should be done explicitly and carefully, not implicitly by perpetuating industry practices have proven so disastrous. Requiring mortgage originators to keep some skin in the game is a necessary step in curbing these problems.

The second matter was raised in a June 1 New York Times story on the lobbying battle in Congress. It turns out that the N.A.A.C.P. and the National Council of La Raza are important industry allies in this fight.

This is part of a concerning pattern, too. In many cases, respected civil rights organizations and advocacy groups become involved in the political process on behalf of firms whose practices within minority communities raise serious concerns. The Congressional Black Caucus Foundation exemplifies many of these concerns. As the New York Times reported last year, the Foundation’s backers include (among others) Altria, Coca-Cola, Heineken, Anheuser-Busch, and rent-to-own furniture enterprises. The accompanying problem speaks for itself.

The NAACP and La Raza make legitimate arguments in the current fight. Perhaps some adjustments should indeed be made in the proposed regulations. As Janis Bowdler of La Raza puts things:

Most people don’t have 20 percent to put down… These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.

Still, I can’t be the only person concerned about what anonymous federal regulators label “the unholy alliance” between the financial industry and some consumer and civil rights groups. If our nation fails to establish strong and enforceable financial regulation, we know whose communities will be left holding the bag.

[Cross-posted at Same Facts]

Harold Pollack

Harold Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago.