The Subprime Good Guys:
The ethical subprime-lending industry helps people buy houses they can affordIn recent months, conservative economists and editorialists have tried to pin the blame for the international financial mess on subprime lending and subprime borrowers. If bureaucrats and social activists hadn't pressured firms to lend to the working poor, the story goes, we'd still be partying like it was 2005 and Bear Stearns would be a going concern. The Wall Street Journal's editorial page has repeatedly heaped blame on the Community Reinvestment Act, the 1977 law aimed at preventing redlining in minority neighborhoods. Fox Business Network anchor Neil Cavuto in September proclaimed that "loaning to minorities and risky folks is a disaster."
This line of reasoning is absurd for several reasons. Many of the biggest subprime lenders weren't banks and thus weren't covered by the CRA. Nobody forced Bear Stearns to borrow $33 for every $1 of assets it had, and Fannie Mae and Freddie Mac didn't coerce highly compensated CEOs into rolling out no-money-down, exploding adjustable-rate mortgages. Banks will lose just as much money lending to really rich white guys like former Lehman Bros. CEO Richard Fuld as they will lending to poor people of color in the South Bronx.
But the best refutation may come from Douglas Bystry, president and CEO of Clearinghouse CDFI (community-development financial institution). Since 2003, this for-profit firm based in Orange County—home to busted subprime behemoths such as Ameriquest—has issued $220 million worth of mortgages in the Golden State's subprime killing fields. More than 90 percent of its home loans have gone to first-time buyers, about half of whom are minorities. Out of 770 single-family loans it has made, how many foreclosures have there been? "As far as we know," says Bystry, "seven." Last year Clearinghouse reported a $1.4 million pretax profit.
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