Last week, we noted the National Review's editorial blaming the mortgage crisis on the Community Reinvestment Act (CRA), a bill passed in 1977 that demands banks lend throughout the communities they serve. Searching for a way to abrogate themselves of blame for cheering on deregulation and ignoring the housing bubble, a number of syndicated conservative pundits have latched on to this meme. According to Mona Charen -- whose column appears in The Southern -- the Democratic-backed CRA "forced banks to serve their 'whole communities' and required them to offer loans to people who were not credit worthy." In a column that appeared last week in the State Journal-Register, Charles Krauthammer piled on, writing that the CRA "led to tremendous pressure to extend mortgages to people who were borrowing over their heads." Meanwhile, slews of local conservative bloggers have linked to this rockin' YouTube video that holds up the CRA as the root cause of the meltdown.
Yet when held up to serious scrutiny, it's clear the CRA had virtually nothing to do with the current economic crisis. Robert Gordon's April piece in The American Prospect is the best rebuttal to date, proving unequivocally that lenders approved bad loans to make cash, not comply with the CRA.
The timing of the bill is important. Enacted originally in 1977, Gordon writes that "new CRA regulations and a wave of mergers led to a flurry of CRA activity" in the mid-1990s. But as noted by the New America Foundation's Ellen Seidman, that activity "largely came to an end by 2001." And three years later, the Bush administration weakened CRA regulations by allowing small and mid-sized banks to opt out of the law's toughest standards. "Yet sub-prime lending continued, and even intensified," Gordon says, "at the very time when activity under CRA had slowed and the law had weakened."
As it turns out, most lenders that peddled subprime mortgages weren't even subject to CRA regulations, either:
As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
What's even more damning is that banks that were subject to CRA regulations engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, tells Gordon that independent mortgage companies -- which are not covered by CRA -- made high-priced loans at more than twice the rate of the banks and thrifts. "CRA," Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."
Of course, even if one thinks Gordon's case is faulty, blaming the financial instability on the bad debt itself shows a grave naivete about the fundamental dynamics of the meltdown. Adam Serwer has more:
But even if 100 percent of bad debt had been produced by people of color, the reason for the financial collapse is that debt was chopped up and marketed as mortgage-backed securities to financial institutions all over the world. If the debt hadn't been sold, making many people very rich, the bad debt wouldn't have been integrated into the rest of the financial system and it would have just led to the collapse of the original institutions providing mortgages. In other words, it wasn't the debt itself; it was the very lucrative selling of the debt that got us where we are today.
It's the slicing and dicing of subprime mortgages -- enabled by conservative deregulation -- that's led to our financial situation. Blaming a successful law that helped atone for years of intentional redlining and structural impediments to capital is not only revisionist, but pretty shameless to boot.
Anonymous (not verified) on Mon, 09/29/2008 - 14:18
I wouldn't call that a strong rebuttal. It's speculation, nothing more.
emti95 (not verified) on Mon, 09/29/2008 - 14:30
This article neglects to mention that the Clinton administration, in 1999, loosened the restrictions on borrowing that were still keeping low income borrowers from getting mortgages. This opened a floodgate of lending which caused the real estate bubble. Greater demand caused housing prices to increase (remember supply and demand?). When interest rates increased in the past few years, and energy costs went up the bubble burst as people started to default on the loans, which caused a increase in the supply of houses. With too few buyers home values dropped below the cost of the mortgages (darn supply and demand again) and Fanny and Freddie could not guarantee the huge losses, and lending institutions failed and the market hemorrhaged and now we have to pay $700 billion to cover this little bit of social engineering. Thank you Jimmy Carter, Bill Clinton, Chris Dodd, Chuck Shumer. See http://www.youtube.com/TheMouthPeace .
Curt Schimmels (not verified) on Mon, 09/29/2008 - 14:54
I find a marked flaw with the logic applied regarding the number of institutions within and without the regulation of the CRA. In an open market, those without must compete with those within such regulations. Since one group is providing these loans, all groups must in order to remain competitive. If these loans were not mandated for a large percentage of lenders, there would not be a pressing need for other lenders to compete by providing the same sort of product. This being the case, the entire market was clearly affected.
Anonymous (not verified) on Mon, 09/29/2008 - 15:22
What are you, a mouthpiece of Fox news? The CRA itself was a good piece of legislation, opening up lines of credit to many who were discriminated against in the past. You have two things correct, Clinton et al are crooks and this is a simple supply and demand issue. However, you have the supply and demand wrong. Due to massive deregulation (by Phil Grahm, Bush, and Company), mortgage lenders were able to sell their loans as securities making more money & freeing up capital to make more bad loans. Without any oversight or responsibility, they loaned and sold securities ad nausem. Now you have worthless securities (supply) that no one wants (demand). The actual foreclosures are only about 5% of the entire homes in the United States, they are being bought and will be bought. See, it's not about homes it's about securites. The greedy fellows on Wall Street couldn't get enough of these securites because mortgages pay great interest over many years. So while the Conservative establishment wants to blame black poor people for the economic meltdown, it's really the greedy bastards on wall street who now want some serious welfare. Let'em fail, bad investments should cost the investors, but hey Hank Paulson only owns 630 million worth of shares in Goldman Sachs so why would he want to "save" them. Vote third pary, the other two are all corporate crooks. Coroporations will kill capitalism.
Adam Doster on Mon, 09/29/2008 - 15:52
emti95,
Read the third paragraph of my post.That should answer your claim that I neglect that President Clinton "loosened the restrictions on borrowing that were still keeping low income borrowers from getting mortgages." He did, but the time line still makes no sense.
Anonymous (not verified) on Mon, 09/29/2008 - 21:48
How about backing up what you are saying with a link. If you know what you are talking about, put your money where your mouth is, tell everyone exactly where to find the information. I am tired of everyone repeating what others have said without a lick of proof to back it up. And why is anyone who cannot pay their mortgage poor black people. Talk about racism.
twj57 (not verified) on Mon, 09/29/2008 - 23:23
The CRA is not the issue. If Freddie and Fannie weren't messed with, this whole thing wouldn't have happened. Fred and Fan were pressured heavily to change the way they did business. They were pushed to dramatically increase in size by making risky loans they would otherwise not have made. The pressure did not come from a conservative, deregulation agenda. It was a push from Clinton to increase homeownership to more minorities and the poor. The goal may have been noble, but he and congress were warned what could happen and they pushed anyway. It was political in nature. Not surprisingly, human greed stepped in later. Sorry it's bloomberg.....read it anyway. Please.
Here's your link: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0
Here's an exerpt: Greenspan's Warning
Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''
Anonymous (not verified) on Tue, 09/30/2008 - 18:45
Why aren't the American people calling for the resignations of these politicians in Congress? Hello? Are there any other Americans out there that feel like I do? BETRAYED,LIED TO, VIOLATED, AND ALL THE ABOVE? I feel like my own party let me down (I AM A DEMOCRAT): 1 by coming up with this asinine Bailout bill; 2 lying to us all when a lot of them, Barney Franks knowing all about the Fannie Mae/Freddie Mac problem for several years now. WHY ISN'T ANYONE PROSECUTING THEM? WHO'S IN BED WITH WHOM?
WHY AREN'T THE AMERICAN PEOPLE MAD AS HELL AND NOT GOING TO TAKE IT ANYMORE? WHEN? WHEN WILL THEY DO SOMETHING ABOUT ALL THIS CORRUPTION?
matthew (not verified) on Sat, 10/04/2008 - 12:34
Did the CRA force Moodys, S&P etc to rate junk paper as Triple AAA????
Did the CRA force banks to make "interest only" loans???
Did the CRA force banks to NOT VERIFY income and credit history???
Did the CRA force investment banks to repackage and sell these mortgages as safe investments???
Did the CRA force banks to make "no money down" mortgages???
The answer to all of these questions is NO!!! In fact 80% of all subprime loans were made by institutions not subject to the CRA. Countrywide for example, was not subject to CRA. It failed regardless!
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