With landmark lawsuit, Barack Obama pushed banks to give subprime loans to Chicago’s African-Americans

That settlement came as Citibank’s top executives sat down with leading progressives in Bill Clinton’s government to bargain for their future. Their future was at stake because of a successful campaign by Obama’s allies in Chicago.

Their “anti-redlining” political campaign began in the 1960s, when new federal housing laws and federal financing laws helped African Americans in overcrowded city blocks buy houses in Chicago’s white, middle-class neighborhoods.

This resulting migration accelerated white flight to the suburbs and was dubbed “block-busting.” That’s because many previously white neighborhoods transformed into all-black neighborhoods, and many later suffered from blight once buyers proved unable to pay their mortgages.

Yet the Chicago housing activists sought to shield their own neighborhoods — such as Austin and Oak Park — by pressuring banks to fund many more mortgages inside the so-called redlines that marked African-American neighborhoods.

The anti-redlining campaign scored repeated courtroom victories, and also drove Congress to pass the Community Reinvestment Act in 1977.

Congress repeatedly expanded the law, and in combination with a 1994 “Joint Statement” by Clinton’s regulators, effectively gave progressives in government the power to paralyze — and atrophy — any bank’s business if it did not increase mortgages inside the redlines.

Citibank felt that power in April 1998, when it sought federal approval for a merger with Travelers Group. It only got approval from the Clinton administration progressives after it promised in May to provide $115 billion for anti-redlining loans.

Executives at numerous other merging banks were also submitting to the progressives’ top-down terms. Their anti-redlining promises added up to $600 billion between 1993 and 1998, according to a 2000 Treasury Department report.

Before striking its deal with the federal government progressives, Citibank got rid of the Chicago lawsuit by paying off the Chicago lawyers.

While the settlement provided $950,000 for the lawyers, it provided $20,000 for each of the three named plaintiffs, and $360,000 in benefits to be divided among the 183 other clients.

Obama’s Role

The Chicago Sun-Times reported in 1998 that Obama claimed $23,000 in billable hours for his role in the lawsuit. That role was limited, partly because he was networking his way toward his 1996 election to the Illinois Senate. But he stayed with the firm until 2004, and it was his lawsuit.

Obama also won massive campaign donations from the mortgage industry, including at least $126,349 between 1989 and 2004.

He sought public credit for the lawsuit: His employer submitted a docket to the court that listed him as an attorney for the three named plaintiffs in the case. The docket bound Obama’s name to the lawsuit — and to the 186 clients who would soon follow.

Obama also used his courtroom work to win a keynote speaking slot at an important conference of Chicago housing groups in 1996. Friends said “‘he’s really thoughtful, [and] he’s done some work as an attorney in these communities,’” Joel Bookman, director of programs for the influential Local Initiatives Support Corporation, which organized the event, told TheDC.

Obama endorsed the national subprime policy, telling a Wall Street audience in September 2007 that “subprime lending started off as a good idea: Helping Americans buy homes who couldn’t previously afford to.”

But by then, the disastrous impact of the top-down subprime policy was obvious, so Obama so tried to push the blame on the banks. “They began to lower their standards. … Most everyone knew that some of these deals were just too good to be true,” he told his Wall Street audience, “but all that money flowing in made it tempting to look the other way.”

The Downsides

To meet their anti-redlining promises, executives ditched their caution. Street-level officers soon began offering loans to people with little chance of repaying, including many of Obama’s eventual clients.

Banks were “financing people who had no jobs. … [T]he pendulum swung the other way,” Renee Brooks, an accountant and one of the three named plaintiffs, told TheDC.

“They didn’t check out certain people, and they got loans and they couldn’t afford them in the first place,” Juanita Malone, another Obama client, told TheDC. “I think that really was, to me … not professional.”

In the late 1990s “money became available to everybody … everybody and their brother-in-law,” said Freeman. “Individuals who get money easily and who don’t have a good background and or a good education would expect to suffer the consequences.”

Their judgment is shared by Mark Zandi, an Obama supporter and the chief economist at Moody’s Analytics. “Too-easy credit and millions of bad loans made during the U.S. housing crisis paved the way for the financial calamity and [the] Great Recession that followed,” he wrote in an Aug. 25 column for the Washington Post.

Bank standards fell so fast that by 2006, Citigroup and other banks were offering favorable mortgages to many legal and illegal immigrants who did not have assets or stable incomes – and with the full support of “compassionate conservative” President George W. Bush.

Another downside was that the extra money inflated house prices. Buyers used their easy mortgages to bid against each other for nice houses, and the resulting property bubble ensured that many African-Americans — and by 2007, many Hispanics in the Southwest — faced unaffordable monthly payments.

“When they made the loan, they were able to take care of it,” said Samuel Wilson, who owns a hardware store in Chicago’s Englewood district. “But work began to slow down and they weren’t able to keep up.”