I did some reading last night on this whole mess.
My original post was too easy on the problems associated with the realities of how we created incentives for subprime lending.
I do think that some want to blame minorities or government efforts to help minorities gain a better economic foothold -- some people are simply not supportive of that kind of thing for this reason and that. That said, one can be a frothing racist and still be right about the soundness, or lack thereof, of robust, non-market incentives for sub-prime lending.
Fixing the historical fallout of our nation's racist past should not be a first order consideration. If you can't rig your efforts to address systemic inequalities in ways that pay proper mind to the physics of moneylending, etc., then best try a different tack.
From what I read it seemed clear that lending at subprime rates under circumstances where in FNMA, etc., were basically covering the lenders' bets helped to drive a speculative, irresponsible boom in easy loans that all too often were entered into by people who could not handle the dynamic of the loan as it was structured. This was true of people from all walks of life, though there is evidence that the subprime loans that were put together for minorities were more prevalent. Due diligence was not followed through upon. The types of loans that minorities tended to get, namely 2-28 ARMs, blew their asses up once things got dicey. Nevermind it started to become clear that assessments on value were not commensurate with reality, not to mention the fact that the loans were often bad paper cobbled together for a secondary market that was not stringent enough in its own right.
No one had their thinking caps on and many blindly followed. If you are going to try to push lenders toward making these types of loans crunch the numbers for worst case scenarios and assume that the chance the **** will go hogwild pear-shaped is fairly high. This is especially the case if the plan purposefully seeks to tamper with risk assessment models.
Right now it looks like Justice is trying to get after lenders that were predatory with their loans. Maybe it's as simple as extortion, but the linked article does not make that clear to me.
Regardless, as a bottom line consideration of safety, any further nudges toward sub-prime lending has to be done with a better set of mechanisms for assigning the risks, and that includes the secondary market. I say 'assign' because, in reality, if you are not going to let the underwriters, etc., go about their business as they see fit, then you have to step in and provide structure which forces someone to hold the hot potato and work it out. In reality, there probably aren't alot of risky demographics that can make that a successful approach without really reigning in the number of loans you expect to go out. The housing market is also going to be prone to artificial escalations in value, at least that will be the case at some point.
The free market is not always the answer for correcting injustice. Neither is government intervention. If the government is going to intervene it needs to take real pains to try to make the market work in a just way, rather than redirect activity out of the free market and into artificial dynamics that have a notable toxicity when mixed with free market tendencies like 'do whatever you can to make as much money as you can as fast as you can.'.
I think that some subprime lending can work to better the lot of a few and strengthen the nation's fabric. But I must admit the arguments against tampering with this kind of thing in any broad way have solid underpinnings that aren't that hard to digest.
