Here we go again: The Obama Administration is pressuring banks to give loans to high-risk borrowers

The housing market is still crashing from the recent subprime mortgage debacle, but the Obama Administration doesn’t seem to care. Today we learn from BusinessWeek that the Obama Administration is putting pressure on banks to provide home loans to high risk borrowers. What’s the definition of insanity again?

Community activists in St. Louis became concerned a couple of years ago that local banks weren’t offering credit to the city’s poor and African American residents. So they formed a group called the St. Louis Equal Housing and Community Reinvestment Alliance and began writing complaint letters to federal regulators.

Apparently, someone in Washington took notice. The Federal Reserve has cited one of the group’s targets, Midwest BankCentre, a small bank that has been operating in St. Louis’s predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. Although executives at the bank say they don’t discriminate, Midwest BankCentre’s latest annual report says it is in the process of negotiating a settlement with the U.S. Justice Dept. over its lending practices.

Lawyers and bank consultants say regulators and the Obama Administration are scrutinizing financial institutions for a practice that last drew attention before the rise of subprime lending: redlining. The term dates from the 1930s, when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending. Congress later passed laws banning lending discrimination on the basis of race and other characteristics. “The agencies have refocused on redlining because, in the wake of the subprime explosion and sudden implosion, they are looking at these disadvantaged neighborhoods and not seeing any credit access,” says Jo Ann Barefoot, co-chair at Treliant Risk Advisors in Washington, D.C., which consults with banks on regulatory issues.

The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year.

It’s a good thing when banks have lending standards because those standards help ensure those who get a mortgage can actually afford to pay it back. For example, Canada’s banks have stricter lending practices, and their housing market is not just surviving but thriving. However, it seems President Obama isn’t interested in a thriving housing market here in the US. He’d rather “spread the wealth around,” as he explained it to Joe the Plumber. If he keeps on spreading the wealth at the rate he is, soon there won’t be any more wealth to spread around.

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