The bottom line for any lender is that they want to get paid back.
When a bank underwrites a loan, it bases its interest rate on the risk that the borrower will default on the loan at some point. This risk should cover the entire business cycle, since borrowers are more likely to default during a recession, when businesses have less cash flow and individuals often lose their job.
In the past, banks discriminated against various groups, possibly because they had poorer overall risk and possibly out of pure prejudice.
Banks (and non-bank lenders, such as mortgage lenders) loaned to subprime borrowers in the 2000s. They offloaded the risk by bundling the loans into derivatives which they sold to yield-hungry investors. (Many of these defaulted during the 2008-9 financial crisis.)
The GSEs were established in the 1930s to encourage banks to create mortgages which the GSEs then bundle and sell on the secondary market. After the GSEs failed in 2009, the government guaranteed GSE bonds. The government backing puts taxpayers on the hook for losses.
A new program, called “REACh” is extending credit to underserved groups. The economy is currently strong. It’s likely that defaults will rise over the entire economic cycle (the next recession).
https://www.occ.treas.gov/topics/consumers-and-communities/p…
Access to credit is both a tremendous benefit and a potential trap.
Only time will tell how this project will turn out. Naturally, banks are all for expanding their customer base – as long as taxpayers absorb the risks.
Wendy