EDITORIAL: The mortgage scandal roots

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How did the United States get to the stage where politicians decided it was necessary to scare the taxpayers into forking over $700 billion to purchase assets the private sector wouldn't touch? So far neither Democrats nor Republicans have shown interest in examining a major factor in the mortgage lending mess - federal government policies which, taken together with pressure from left-wing activist groups, eroded credit requirements to make mortgages available to people who could not possibly pay them back, including some who were illegally in the United States. Columnist Michelle Malkin points out, for example, that Bush administration's policies permitting illegal aliens to use easily forged matricula consular cards from Mexico and taxpayer identification numbers facilitate mortgage fraud.

In 1977, in response to complaints that banks were "redlining" inner-city neighborhoods, President Carter signed into law the Community Reinvestment Act (CRA), which declared that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered and that federal regulators should take their performances into account when considering merger requests. But efforts to enforce the law were sporadic until a 1992 study by the Federal Reserve Bank of Boston purporting to prove racial bias in mortgage lending. Yet the study had mishandled statistics on minority default rates. When the errors were accounted for, the same study showed no evidence that nonwhite mortgage applicants were being discriminated against.

But in 1995, the Treasury Department issued new CRA regulations that would make it much more difficult for banks to get a satisfactory CRA rating. These institutions would have to demonstrate that they were investing more money in poor, higher-risk neighborhoods if they wanted federal approval to merge. Much of that money they invested went to ACORN and other left-wing nonprofit groups who prided themselves on making loans to persons with poor credit and little to no savings. Meanwhile, by the late 1990s, Fannie Mae, the nation's biggest underwriter of home mortgages, came under pressure from the Clinton administration, the banking industry and mortgage companies to make more loans to subprime borrowers. If Fannie fails, "the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry," American Enterprise Institute scholar Peter Wallison warned in 1999.

Thus far, however, politicians have been too busy congratulating themselves over enacting the bailout to investigate how foolish federal policies created the current mess in the first place.