Blaming the CRA

By Alan White

The financial crisis is now being attributed by the Wall Street Journal editors and other right wingers to the Community Reinvestment Act. The CRA requires banks to provide loans and financial services in underserved communities, particularly poor and minority neighborhoods. This blame-the-victim theory does not withstand fact-based analysis.

The blame-the-CRA theory says that the subprime mess was caused by weak-hearted lenders pushed by misguided bureaucrats into making loans to poor people and minorities who can't repay them. Nothing could be further from the truth. First, subprime mortgages that are now defaulting in droves were made mostly by unregulated mortgage bankers with no CRA obligations or oversight. Second, the Alt-A mortgages that are a major part of the crisis were made mostly to middle-and upper-income white borrowers who didn't want to verify income or wanted a bigger loan than a prime lender would offer. Third, loans made by banks to fulfill CRA obligations, even those to very low-income homebuyers, perform quite well. Fourth, the only category of mortgages in which the foreclosure and default rates are not going up is the FHA program, a program that makes loans almost exclusively to low- and moderate-income Americans, many of them African-American and Latino. The bottom line is that it was the design of subprime mortgages, not the selection of borrowers, that caused them to default in massive numbers. Lenders can make sound loans to underserved groups, or they can make overpriced dangerously risky loans.

The only tiny grain of truth in this blame-the-CRA theory is that HUD, under the Bush Administration, agreed to give Fannie Mae and Freddie Mac credit for buying subprime mortgage-backed securities to meet their affordable housing goals. Fannie and Freddie's affordable housing goals are not technically part of the CRA but they are motivated by the same goals. The problem here is not the goal but the means. CRA and consumer advocates consistently opposed counting high-cost, high-risk subprime loans as meeting any bank or GSE's affordable housing goals, but the laissez-faire HUD and OFHEO regulators went along. The same right-wingers now blaming the CRA were praising subprime lending a few years ago as the solution to meet the needs of previously underserved homebuyers. CRA advocates, on the other hand, have never confused subprime lending with community reinvestment.

Comments

[mike]

what a bunch of crap from a liberal aclu laywer. more bds (bush derangement syndrome) whenever possible, blame bush. your only critcism is that of the bush admin. no one to fault, is there? barney frank? no! chris dodd? no!

[Mark]

If you feel you are smarter or have more accurate information than Mr White, please post it. Otherwise, please vent your inappropriate, misplaced and seemingly empty and completely politically motivated anger in some other more constructive manor or forum. Regardless of how badly conservative talk-show pundits and their misled listeners want it to be so, it is impossible to disconnect the Graham, Leach deregulation act that opened the door for merchant banks and their associated ludicrous financial products, from the core problem that led not only to the real estate crisis, but the meltdown of our global economy, the impact of which we are measuring by the minute right now. This specific deregulation and the resulting competitive but dangerous loan practices (or better stated, "greedy subprime loan hustling") caused the the failure of our system as assuredly as it was a Republican led house and senate (Newt's famous "contract with America" bunch) that proposed the "veto-proof" legislation to the president and wreaked this havoc on all of us; in blind pursuit of their trickle-down ideals.

[Scott]

Mr. White,

I am intrigued by your assertion that Fannie and Freddie were allowed to meet their affordable housing goals by purchasing these securities but have been unable to find a solid cross reference for it. Would you be willing to cite your source for that information?

Thank you,
Scott

[Dean Moriarty]

http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_3.html

Here is a link to the HUD reference. It was actually during Clinton's term that allowed Fannie and Freddie to use subprime loans. The HUD director admits it was a mistake, but blame still lays at the feet of the Bush HUD people. CRA regulators were sounding alarms in the late 90s and also in 2004, when they saw that Fannie and Freddie, being involved in Mortgage backed securities and not subprime loans themselves, they couldn't enact much oversight. In 2004, when regulators were saying "this is bad," the administration actually UPPED the percentage of subprime loans that could be used, which was very profitable at the time. Obviously it didn't work out that way.

[David Ahlport]

==HUD, under the Bush Administration, agreed to give Fannie Mae and Freddie Mac credit for buying subprime mortgage-backed securities to meet their affordable housing goals==

==when they saw that Fannie and Freddie, being involved in Mortgage backed securities and not subprime loans themselves==

Where can I find this?

Because that lines up quite well with the timeline
greyfalcon.net/thirdpartybanks.png

And I'm wondering if it has anything to do with the
"American Dream Downpayment Act of 2003"
whitehouse.gov/news/releases/2003/12/20031216-9.html

[Brad]

The housing bubble was clearly the Clinton admin's fault via the desire to increase the affordability of housing. Read HUD Secretary Cisneros' press clip at http://www.presidency.ucsb.edu/ws/index.php?pid=48902. Note the comments about the "56-partner" coalition which includes Fannie and Freddie (at the centerpiece).

Confirming that the housing runup was during the Clinton admin and involved a dramatic increase in LOW INCOME homeowners is a 2001 study by Obama's alma mater, Harvard University. It is entitled
"Anatomy of the low-income homeownership boom in the 1990s" and is found at
http://www.jchs.harvard.edu/publications/homeownership/liho01-1.pdf

In Sept. 2003, the Bush admin recognized that Fannie/Freddie were out of control, tried to regulate their activities but theh dems blocked their efforts. Read for yourself the congressional tanscript at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_house_hearings&docid=f:92231.wais. This transcrip contains comments from Barney Frank and other dems about the system not being broken and their desire to not regulate so that affordable housing to low and lower income families will not be disrupted.

It should be noted that the Bush admin again sought oversight control in 2005 with the dems also blocking this effort.

Adding to the mess is that Fannie was run by two prominent DEMOCRATS, James Johnson (who was part of Obama's team)and Franklin Raines from 1999-2004 (budget director under Clinton) who committed what is estimated to be a 10.6 BILLION accounting FRAUD which allowed them to received over 100 million in pay bonuses. This fraud clearly hid the losses that Fannie Mae was already incurring as President Bush ENTERED the white House. There is a lot of info out there but a brief overview can be read at the http://www.ofheo.gov/media/pdf/lockharttestimony61506.pdf.

The "affordable housing" nightmare is a social experiment that the dems pushed which went horribly wrong.

[Tosh]

Brad:

You need to check your facts. Two of your links lead nowhere. The third leads to a numeric assessment of housing issues but unless there was a real explosion in manufactured housing defaults most of their loans are ok.

Also, I am trying to figure out how the Democrats stopped anything in 2003 or 2005. They may have complained but that is about all they could do. As I recall that Rep. Conyers hearings on Iraq were held not in a committee room but in a converted store room. The GOP would give him no space.

The following snippet from a Post article suggests that instead of trying to shut down subprime lending the Bush Admin was actively promoting it.
"But by 2004, when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

That year, President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."

For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.

"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster." "

Not the statement about an unregulated market. That would support the statement of the authors that most of the meltdown comes from outside the regulated mortgage markets.

Try again or go away.