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Wednesday, October 15, 2008

Community Reinvestment Act Not to Blame for Mortgage Collapse

For being big supporters of the little guy, some conservatives love to blame to the poor...

I've heard occasional blips of conservative commentary blaming something called the Community Reinvestment Act for the mortgage meltdown. The 30-year-old federal program gave loans to poor people who shouldn't have gotten loans, goes the argument, and that's why housing prices are tanking, Wall Street is collapsing, and America is turning into Sweden (not there's anything wrong with Sweden... now where's my universal health care?).

Hmm, conservatives blaming low-income folks for the country's problems while ignoring the role of wealthy speculators... why didn't this set off my B.S. alarm sooner?

The Community Reinvestment Act is a scapegoat, and a pretty thin one at that. The program was around for 30 years, well before subprime lending came along to indulge irresponsible buyers and crash the economy. It was enacted to address discrimination in low-income and minority neighborhoods, where "banks were happy to take depositors' money but weren't willing to lend the money back into those neighborhoods" [Shannon Buggs, "Crisis Has Nothing to Do with Reinvestment Act," Houston Chronicle, 2008.10.11]. It did on a small scale exactly what Paulson, Bernanke, et al. now feel obliged to do for the giant corporate banks: make credit available to those who can't get it.

And the funny thing is, the Community Reinvestment Act worked:

"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households," said Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, in a March speech [Buggs, 2008.10.11].

And it had almost nothing to do with the subprime implosion. The federal government wasn't making risky loans; the deregulated private sector was:

Federal Reserve Board data show that:
  • More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that the critics lambaste.
The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday [David Goldstein and Kevin G. Hall, "Data Show Federal Incentives Not to Blame for Subprime Mortgage Mess," Kansas City Star, 2008.10.12].

Darned data, always getting in the way of some good old conservative scapegoating.

Read more from the Kansas City Star, Aaron Pressman at BusinessWeek, the Center for Responsible Lending (PDF alert!), Media Matters, and Professor Mark Thoma at U. of Oregon.

And stop blaming poor people for a problem caused by rich people trying to get richer.


  1. Cory, Cory, Cory -- Don't you EVER learn??? Facts have no application in the world of the looney-tunes!!

  2. We can all find articles and statistics to back up our arguments. Greed, lack of regulations, AND loosening of the criteria for loans all had a part to play in this mess.



  3. Anonymous said...
    We can all find articles and statistics to back up our arguments. Greed, lack of regulations, AND loosening of the criteria for loans all had a part to play in this mess.

    could not have said it better myself..............

  4. So, Fox Viewer 10:15, are you just going to ignore all data and choose to believe what you want to believe? Guess there's not much I can do about that... though I'll still encourage you to read the links I provide, as they pretty directly rebut the baloney you cite. It's just like welfare: you can probably find instances where poor folks have caused some problems, but the much greater financial harm comes from the corporate abusers.

    Again, when the rich wage class warfare on the poor and middle class, you shouldn't be surprised when someone wages war back.

  5. Corey,

    Few people place all the blame of the mortgage mess on CRA. However, it is a component of the greater problem.

    You are correct that CRA loans are not the major cause of the sub-prime mess (Fannie is the greatest).

    However, CRA loans are by definition higher risk loans and experience higher default rates during stressful times. Banks are experiencing significant capital problems and the losses related to CRA is compounding the problem, esp. because CRA loans are not usually able to be bundled but are instead held locally.

  6. Ha, ha, ha. The Federal Government has been regulating banks since like forever. They are the ones who all but forced banks to issue those loans. Do you really believe banks would intentionally loan money to people they believed couldn't afford that house? Do you really believe the Federal regulators would let banks intentionally put their customer's money at risk--money the Feds insure? Maybe you ought to get all the facts.

  7. Well, you do well to prove that facts can be understated to prove any point that supports your agenda.

    1st- The CRA was created in '77, as you claim, and at the time did what it was supposed to, vis-a-vis reinvesting in local communities. HOWEVER, in '95, under Clinton, the powers of the CRA were EXPANDED, and it was allowed to compel thrifts/banks to make loans more accessible to unqualified home buyers under threat of dire consequences such as losing FDIC protection.

    2nd- Fannie Mae and Freddie Mac were the next villians, in that that they took advantage of this new infrastructure direction. While they didn't make the brunt of the loans themselves, they were given the power to securitize loans made by smaller banks/thrifts, whom in turn were ostensibly "guaranteed" by these govt. sponsored entities (GSE's). Barney Frank, Chris Dodd, and Charlie Schumer helped to block regulation which would have reigned in much of the abuse.

    3rd- Wall street took advantage of the new infrastructure created by the CRA, and Fannie/Freddie, by packaging up these bad loans and selling or brokering them locally and overseas.

    However, boiled down the Community Reinvestment Act editions in 1995 CREATED the INFRASTRUCTURE, and Fannie/Freddie CREATED the VEHICLES for the impending bad credit meltdown. And, the Dems, led by Frank, Dodd, and their respective cronies refused to allow tightened regulation.

    So, if your'e going to tell the story... tell the WHOLE story, and not just the bits that fit your wildly distorted agenda...


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