www.slate.com/id/2204583
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.
CLOSE 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.
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? Community-development banks, credit unions, and other CDFIs--a mixture of faith-based and secular, for-profit and not-for-profit organizations--constitute what might be called the "ethical subprime lending" industry. Even amid the worst housing crisis since the 1930s, many of these institutions sport healthy payback rates. They haven't bankrupted their customers or their shareholders. Nor have they rushed to Washington begging for bailouts.
Cliff Rosenthal, CEO of the National Federation of Community Development Credit Unions, notes that for his organization's 200 members, which serve predominantly low-income communities, "delinquent loans are about 31 percent of assets."
Share this article on Buzz Participants in this "opportunity finance" field, as it is called, aren't squishy social workers. In order to keep their doors open, they have to charge appropriate rates--slightly higher than those on prime, conforming loans--and manage risk properly. They judge their results on financial performance and on the impact they have on the communities they serve.
What sets the "good" subprime lenders apart is that they never bought into all the perverse incentives and "innovations" of the bad subprime lending system--the fees paid to mortgage brokers, the fancy offices, and the reliance on securitization. Like a bunch of present-day George Baileys, ethical subprime lenders evaluate applications carefully, don't pay brokers big fees to rope customers into high-interest loans, and mostly hold onto the loans they make rather than reselling them. Clearinghouse's borrowers must qualify for the fixed-rate mortgages they take out. "If one of our employees pushed someone into a house they couldn't afford, they would be fired," says CEO Douglas Bystry. These lenders put into practice the types of bromides that financial-services companies like to use in their advertising.
The 7,500-member nonprofit, based on New York's still-scruffy Avenue B, doesn't serve the gentrified part of Manhattan's Lower East Side, with its precious boutiques and million-dollar lofts. "A Hispanic woman from either Puerto Rico or the Dominican Republic in her late 40s or early 50s, on government assistance, with a bunch of kids," Levy says. But the delinquency rate on its portfolio of mortgage and consumer loans is 23 percent, and it's never had a foreclosure.
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