Inside Financial Services

Eric Holder, Subprime Enforcer

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I somehow missed this:

[T]he Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by IBD.

Prosecutions have already generated more than $20 million in loan set-asides and other subsidies from banks that have settled out of court rather than battle the federal government and risk being branded racist. An additional 60 banks are under investigation, a DOJ spokeswoman says.

Settlements include setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit and even counting “public assistance” as valid income in mortgage applications. [Emph. added]

So the government is strong-arming lenders into making loans to borrowers with sketchy credit histories? Didn’t we just try something like this? It didn’t end well, if I recall.

This new effort by the Justice Department is a disgrace. First, the government seems to be targeting only small community banks, who’ll have no choice but to cave when confronted by the power of the federal government. Second, the discrimination the government is alleging is apparently based on nutty theories, such as “disparate impact,” that would never hold up in court. Worst of all, prosecutors are forcing banks to sign nondisclosure agreements once they settle, so that no one will ever learn how shaky these prosecutions are. It’s basically extortion, except that since it’s the DoJ, it’s legal. I find this lack of transparency a complete disgrace!

And for what? So subprime borrowers can get loans they’d be otherwise denied? We already know that the bulk of the marginal borrowers swept up in the subprime mania of the last decade never deserved their loans in the first place, and had no chance of paying them back. The result was a catastrophe both for the borrowers and the banks. And yet Eric Holder and his lawyers are pushing banks to lend to exactly those same types of borrowers now, and are expecting a different outcome. There’s a word for that: insanity.

This is no way to help subprime borrowers, and it certainly won’t loosen up credit for people who actually deserve it and can put it to productive use. Eric Holder should lay off the banks. He’s not doing anybody any good.

And, by the way, other parts of government (the financial regulators) are busily writing rules that will toughen underwriting standards by, for instance, prescribing what counts as a Qualified Residential Mortgage. More contradictory policies from our government: just what the country needs to help pull it out of the mortgage mess!

What do you think? Let me know!

23 Responses to “Eric Holder, Subprime Enforcer”

  1. Anonymous

    I can not believe Holder is trying to do this. Are they so far in their own World that they deny History?

  2. Anonymous

    Yes Tom this is what governments do. Can’t be used as collateral at the FHLB’s. Can you say liquidity issues? Next in is the regulators and by all means these loans are nonperforming – so take down the bank. FDIC incurs costs – sues the directors to recoup their money.
    What’s not to like about Eric Holder?

  3. Anonymous

    disgrace is far too kind of word ..this is the gov.t at its worst why can’t the banking industry do something about this!!! as everyone knows everyone that was breathing during the past five years could get a loan that in so many cases they didn’t qualify for and eventually couldn’t afford
    this is another reason why everyone is so fed up with washington!!!

  4. Erich

    Refresh my memory, did you ever sell your subprime stocks or did you ride them to bankruptcy. Who forced you to invest in them? $20 million in subprime loans. Wow. Like finding a needle in a haystack. Congrats.

  5. GF

    As long as you have anti-business clowns in the White House along with sensational leadership in key financial roles, i.e. Barney Frank and company, what else should we expect?

  6. Adam

    So are you saying that the Justice Department is wrong to pursue a remedy for violations of civil rights laws? By the way, disparate impact is in the laws right now.

    At least I can find agreement with you about the QRM. The exemption, as proposed by the FDIC, is too high. We will see the value of housing drop when the set of people that can buy a home drops. It isn’t as if people that can afford a twenty percent downpayment will decide to increase their consumption of homes when post-QRM prices drop. Homes are not the same as oranges.

  7. Sheila Bair(ly)

    This is exactly what I want…QRM loans for only the wealthiest 10% of Americans and DOJ enforced subprime loans for the rest of you. I don’t know why its so hard for everyone to understand what I see so clearly. This will fix the housing finance system by bringing back securitization.

  8. Rick

    I could not agree with you more. lending to people that do not have income is not smart. People with tarniched credit have an opportunity to their issues. We are a country of people that believed in saving money.

  9. Bill D

    Tom, Some sharp attorney or law firm should contact the 60 banks under threat and put together a legal defense for them to stand up to this insanity.

  10. Bairly Sain

    I’ve been saying for years, if you make loans to deadbeats, you’re predators; if you refuse to make loans to deadbeats, you’re racist.

  11. DY

    I couldn’t argee withyou more Tom….it is truly a disgrace. My only question, however,…can you provide the source of your information?

  12. tom brown

    The article, which we provided a link to, was in Investors Business Daily

  13. Catalina

    Unbelievable! If I recall, Pres Clinton was pushing “every American should be able to own a home” back in the day, which, over the years, in concert with the Fed Reserve playing with rates at when 5s and 7s were adjusting, created the perfect storm. Wake up and go to sleep. So much contradiction. The politicians blame the banks for the mess, but the government pushed them to lend, it’s so transparent. Banks are just the scapegoats. How were they supposed to securitize them, how? It’s crazy. Banks are like a dog chasing its tail, so Im not surprised by the justice dept, which is just the mouthpiece for politicians using the legal system to manipulate lending to all constituents, regardless of whether or not they qualify. So, no, Im not surprised, it’s just more of the same craziness.

  14. Hawk

    I have only one thing to say to our government: Go “F” yourselves.

  15. sarwor

    Banks have now become public utilities. As such, p/e’s should reflect this. Talk about un-intended consequences. Adios, amigos.

  16. Commercail Mortgage Broker

    We do need a good mortgage program for borrowers that may have week tax returns, but the numbers must make sence. This system works if not abused and it helps inner citys create jobs and grow.

  17. Practical minded

    Excellent summation…too bad this article can’t be reprinted in the mainstream media outlets.

  18. tom olson

    This is the Eric Holder who wanted to try Gitmo terrorists in New York , who until very recently threatened to prosecute CIA interrogators. Now Mr. Holder wants to repeat the mistakes that almost put the country into bankruptcy. There is no doubt that the aty. gen. is a busy guy.

  19. William Chapman

    Banks are being abused by the opposing views of regulators and government. This is the identical issue that I have been talking about for years with respect to who gets the “blame” for Fannie/Freddie. In that case, the government created the GSE’s with no ability to diversify out of mortgages and gave them perverse incentives to make riskier loans (CRA credits) and then expected them NOT to fail when housing markets weakened! The government invites you to have a cookie from the cookie jar…and then smacks you when you reach for a cookie.

    It is my opinion that a bank should be able to choose the credit profile for it’s portfolio – as long as the composition of race within that portfolio is equivalent to the composition of the population WITHIN THAT CREDIT CLASS, I don’t think there is a case for discrimination.

    Banks jumped into subprime lending because they saw a business opportunity for income – not because there was a racial motivation. The same is true of the migration to higher quality loans – it has nothing to do with race, it is simply a flight to quality. This will reverse course and doesn’t need to be government-induced as the economy turns. The governent has a short memory (apparently) and so do the markets. It is, after all, called a business “cycle.”

    By the way, I love the comment below, “if you make loans to deadbeats, you’re predators; if you refuse to make loans to deadbeats, you’re racist.”

  20. rich

    who do we vote in amd who do we vote out to stop this immoral action

  21. Paul

    Hey, no problem! When it crashes, we can blame it on “Wall Street greed” and “predatory lending.” Then we can hire a few hundred new bureaucrats for the Consumer Protection Agency to fix the problem.

  22. freebird

    actually, the way out of the problem is for the bank to also tell them that they do not have to worry about payments, taxes or utilities, the bank will pay for everything..then bank can claim the correct number of low income loans on their books house and give it to the welfare is the only way to satisfy,,,because if the give 200,000 mort to low income borrowers, they will be sued for predatory lending, unless the bank gives the house to them

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