Self induced wounds

Now Cleveland is going to sue banks on subprime mortgages.

This post is going to be a education to some of you explaining how governments helped precipitate this subprime mess.

Many years ago, I worked for a large super regional bank. My job was in an area called "community" lending which was for all intents and purposes loans to small businesses. At that time, banks were under pressure from various political groups to lend to inner city businesses and mortgages.

The vogue term at the time was "redlining", the myth that banks would not loan to people who lived in certain zip codes.

As a result of that pressure, the feds passed, what was called at the time, the Community Reinvestment Act. The CRA essentially gave "points" to banks for doing at risk loans in certain zip codes.

Our bank, along with all the other banking players, did all kinds of "outreach" programs to increase our loans to minorities. We would spend all kinds of money to set up booths at shopping centers, job fairs, the Black Family Reunion, etc, etc. All in an attempt to increase our loans to minorities.

While most of these were geared to the mortgage business, our particular group was also assigned to attend these events to generate small business loan applications.

Now it doesn't take an Einstein to realize, if you give a mortgage application to any Tom, Dick & Harry at a shopping mall, you will have a higher rate of rejection than you would have using a normal lending process.

As a result of these efforts, the banks started getting reamed for higher than usual rejection of minority applications.

Hello!!!!!!!

As a result of this problem, our bank put together a committee that had a representative from every area of the bank. Our job; review every minority application that was rejected.

I can tell you this. Nearly every application that our committee reviewed was rejected for one reason; poor credit. Most of the applicants that were rejected never paid on one damn bill, let alone a mortgage. All you have to do is look at lending practice 101 and you'll see DON'T LEND TO PEOPLE WITH BAD CREDIT.

Again, banks were under increasing pressure to do deals to minorities so what did they do? They dropped their credit criteria. Now we really had a code word; we called it a CRA deal, which meant, this loan is a piece of shit but were going to do it as a cost of doing business.

Many times, if our bank wouldn't do a deal, a competitor would.

Which brings me to the perfect case study I was a part of.

A young woman came into my office with a loan application. She wanted to build a car wash on McMillan Ave right near a particularly bad part of Cincinnati called Peebles corner. Now the loan request was somewhere around $300,000 to do the car wash.

Believe it or not, I liked the deal, but this borrower had no down payment and no experience in putting together a project like this. I told her I could do the deal but I could not and would not be able to do more than that, so if there were cost overruns she had to come up with the money to get it done.

Since she had none, I had to turn it down. I told her at the time I was doing her a favor. Because, if this deal would go bad it would kill her credit rating.

Well, she ultimately found another banker who would do the deal (a guy who was known as a local minority loan huckster). I use to drive past the project site wondering if I made a bad decision. I saw the shell to the car wash go up and nothing; she ran out of money.

That shell is still up there on McMillan Ave, a total eye sore; spray painted with graffiti, busted beer bottles over it. Drive down McMillan some day (I wouldn't do it at night) and you'll see that dump for a property still sitting there.

Now who did the bank help in this instance? So now we have an applicant with a bad credit rating and piece of real estate that doesn't enhance an area, it detracts from it.

How does this apply to the sub prime mess? If the politicians had just kept their damn noses out of the banking business, none of these loans would ever had been made.

I think the banks in Cleveland should sue the city for forcing them to do deals they didn't want to do in the first place.

As an aside, do you think this lawsuit makes it more likely for businesses to locate in the city of Cleveland or less likely?