Subprime targets: Why everything pundits and politicians are telling you about the CRA is wrong


All throughout North Minneapolis, 100-year-old trees are turning deep shades of gold and crimson. On some streets, the tall oaks look like lone survivors of a nuclear disaster, untouched by the blight over which their canopies cast long shadows. In fact, you don’t have to spend much time in North Minneapolis before a darkening picture becomes clear. Something happened here. Something serious and destructive and almost barbaric.

Entire blocks, like those near the corner of Sixth and 13th, have been destroyed. Gray boards cover windows and trash litters yards and alleyways of abandoned streets. There are nearly 900 vacant homes in North Minneapolis. And more than two-thirds of those are now condemned.

What happened here is what many housing experts call reverse redlining–predatory lenders targeting low-income and black and Latino neighborhoods with high-cost and imprudent loans. Conservative columnists, pundits, bankers, and politicians like Minnesota’s own Michele Bachmann have taken to blaming the subprime fallout and subsequent credit crisis on the Community Reinvestment Act, a Carter-era program that was designed to require banks to make loans in areas from which they also took deposits. And housing and civil rights experts like Myron Orfield, a law professor at the University of Minnesota and the executive director of the Institute on Race and Poverty, and Geoff Smith of the Woodstock Institute, a policy and advocacy organization that specializes in housing research, say they couldn’t be more misguided.

Created more than 30 years ago, the CRA essentially worked like this: In turn for taking money from low-income communities, banks would have their lending practices examined by federal regulators to ensure they’re making loans for mortgages, small businesses, and community development in those same neighborhoods. In other words, they’d be examined to ensure they weren’t discriminating against low-income neighborhoods that supplied them with monies to make loans to other customers.

But what actually happened in the last few years, Orfield says, is much different. “One of the purposes of the CRA was to ensure that prime credit would be extended into poor neighborhoods,” Orfield says. “And it never really has been that way. It’s been 30 years of enforcement, and it hasn’t really gotten better. Neighborhoods have become more racially segregated, particularly in the Twin Cities. The CRA has become perverted. It’s often become a way to have subprime and predatory lending and to reinvest in projects that deepened poverty. This is what CRA has come to mean.”

For one thing, the CRA never required banks and lenders to create risky loan packages and market them to consumers who would be unable to afford them after the terms changed. For another, the banks never had a specific quota to meet under CRA, but instead were simply required to show they reinvested back in the community.

Geoff Smith agrees with Orfield’s assessment, and says blaming the CRA is woefully misplaced. “The CRA wasn’t the problem,” he says. “The mortgage crisis went well beyond the scope of the CRA. What’s more, the vast majority of lenders were not covered by the CRA. In fact, it was a loophole in the CRA that subprime lenders were not covered under CRA by regulation.”

Targeting Twin Cities neighborhoods

Orfield is serving on a national bipartisan commission, co-chaired by two former Department of Housing and Urban Development Secretaries, Jack Kemp and Henry Cisneros, to study housing discrimination in America. The group has been taking testimony from homeowners in cities like Atlanta, Chicago and Boston. While the Twin Cities are not part of the investigation, Orfield says that Minneapolis and surrounding suburbs are taking a serious hit from reverse redlining and continued segregation.

“There is a lot of segregation in this metropolitan area, and it’s deepening,” Orfield says. “There’s a disproportionate share of these loans in black and Latino neighborhoods. The predatory action has certainly not only destroyed equity, it’s destroyed families and deepened racial segregation. And that’s not what the CRA was meant to do.”

Orfield says that neighborhoods hardest hit are North Minneapolis, South Minneapolis, Brooklyn Center, Brooklyn Park, Bloomington, and Richfield.

These were areas that had a higher concentration of loans created by mortgage shops like Countrywide, Ameriquest, and other one-off subprime mortgage providers—lenders who were not under CRA regulation. In other words, they were lenders looking to make only a quick buck whose lending practices weren’t evaluated by regulators.

In an effort to compete with the growing number of mortgage shops, banks like Minneapolis-based U.S. Bancorp began making subprime loans. But these larger banks, which are FDIC insured and under CRA and larger federal regulations, often had thrifts, or subprime mortgage stores, that weren’t depositors and therefore not under CRA and federal rules. The nefarious loans, which could then be easily bundled and sold while brokers raked in quick cash from the close of the deal, were then purchased by companies like Freddie Mac, which began buying these subprime loans on the secondary market in 1998. That deal made it easier for banks and mortgage lenders to sell the loans and quickly remove them from their books.

Smith says don’t get it wrong, the CRA is not without flaws. For one thing, it didn’t regulate these mortgage shops that were preying on people in low-income neighborhoods. In fact, Smith says, it’s a flaw in the CRA that it doesn’t prevent these kinds of risky loans from being made. But it certainly wasn’t what drove these loans or the crisis. “The problem is pretty clear,” he says. “It was little regulation, and little accountability.” What’s more, it was institutionalized racism.

What’s next for the Twin Cities?

Orfield says that as the subprime crisis continues to unfold and minorities get hit the worst, Minneapolis is fast becoming more racially segregated. “We are going backwards,” he says. “We are actually so far behind where we need to be. This is a problem for the entire city. It affects education, crime rates, prison populations. It affects everything. And we’re actually seeing the city use this as a means to put up low-income housing in low-income areas. But segregating housing is not the answer.”

Orfield says he hopes cities will use this as an opportunity to reexamine both state and federal housing programs, from HUD to city-funding housing units. Neighborhoods, he says, need to be diverse both racially and economically to thrive.

The City of Minneapolis recently received a $5.6 million federal grant to buy up houses in neighborhoods like North Minneapolis and to reinvest in neighborhoods decimated by subprime lending. But Orfield says it’s going to take a lot more than a few million to take care of the problem. For one thing, there are nearly 900 abandoned properties. For another, the problem is widespread and systemic and requires real leadership to enact change and create more mixed-use housing.

Orfield says Minneapolis Mayor RT Rybak and city planners need to start considering creative and forwad-thinking solutions, not short-term Band-aids. If Minneapolis wants to survive the crisis, he says, it needs to start applying the Federal Fair Housing Act in its decisions to reinvest in communities. “If Federal Fair Housing Act were really applied, you’d have more of these family units built in suburban areas, too. But we don’t see that,” he says. “And instead it’s getting worse.”