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"From "Adverse Uses" to "Moral Hazards","

by William L. Taylor November/December 2008 issue of Poverty & Race

This is to underline and elaborate briefly on the excellent article by Gregory Squires on the myths that conservatives have propagated to blame the current financial crisis on African Americans and government.

First, it is not just conservative commentators who are blaming minorities for the meltdown. Republican leaders in Congress such as Eric Cantor (R-VA) have challenged Barney Frank’s demonstration of the failure of regulation for more than a decade to restrain unscrupulous lending practices. The conservative purpose is to stave off new regulation and make mortgage credit unavailable even to people who are sound risks.

Second, a little history is in order. During the 1930s, 40s and into the 50s, the Federal Housing Administration was helping people who could afford only low downpayments to acquire decent housing. But FHA policy (which reflected state policies and real estate practices) sought to restrain access by black families to housing in white areas. Such “adverse (or mixed) use” would depress property values, in the view of the FHA. These policies help explain the absence of black families from suburbs, the gap between FHA loans to blacks and whites, and ultimately, the asset gap between families who acquire wealth by paying off mortgages and those who are unable to do so.

These inequities continued largely unabated until the 1970s when, as Squires reports, Congress passed the Community Reinvestment Act to increase access to credit for borrowers in low- and moderate-income housing.

Something else happened, too. The civil rights laws, particularly the Civil Rights Act of 1968, barred discrimination in housing. But the agencies— including the Federal Reserve— charged with regulating lenders largely ignored their responsibilities. In the 1970s, when the Federal National Mortgage Association (Fannie Mae) entered the secondary market, they proposed to adopt all the worst practices of the industry. They said they would not approve mortgages that counted a spouse’s income (women might leave the workforce); or counted bonus income received by workers (it might not be stable); nor would it approve good housing located in poor neighborhoods (red-lining); or a mortgage where the age of the applicant and the term of the mortgage added up to more than 85 (a 60-year-old applicant could not obtain a 30-year mortgage); or applications that revealed even small problems in the applicant’s credit history.

As Director of the Center for National Policy Review at Catholic University (which I founded), I undertook to assemble a group of civil rights leaders, labor union leaders, women’s rights, senior citizen leaders and consumer right leaders at a press conference, co-sponsored by the Leadership Conference on Civil Rights, to protest the proposed FNMA policy. Soon thereafter, Fannie Mae withdrew its proposed policy. No one can say with a straight face that issuing mortgages in any of the above circumstances led to destabilizing the housing market.

Similarly, my organization sued the federal regulatory agencies on behalf of about a dozen public interest groups to get them to prevent discriminatory practices. We won a settlement that required the federal agencies to set up civil rights offices and use their examination process to detect discrimination.

All of these community reinvestment and anti-discrimination initiatives led to modest gains by minorities in the acquisition of housing. Their failure to accomplish more was not, as conservative pundits and legislators would have it, due to any unsoundness in the policies, but rather to the fact that they were dealing by modest means with a deep-seated history of discrimination.

It was not until many banks and savings and loans fled the mortgage field and subprime lenders took over that the market went wild. It was not too much regulation that caused instability but too little effective supervision.

Now, in the face of the financial crisis, we are being told by conservatives that policies that would restore home loans to hard-working people of modest means would create a “moral hazard,” encouraging irresponsible borrowing and lending. The true “moral hazard” would be to deny people opportunities for purchasing a place in society that others have long enjoyed.

William L. Taylor is a PRRAC Board Member. He was Staff Director of the U.S. Civil Rights Commission from 1965 to 1968 and prior to that was the Commission's General Counsel. He now chairs the Citizens' Commission on Civil Rights.

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