Scapegoating the Economic Crisis
October 10th, 2008 by Judith Bell
We started noticing the trend last week. Traffic on our website was spiking dramatically, with nearly half of all our hits landing on one specific page, entitled: “What is the Community Reinvestment Act?”Could it be that in these increasingly dire economic times, Americans are looking for examples of successful, pragmatic solutions to encourage responsible homeownership and promote equality and justice? Sadly, not quite. 
It turns out our CRA page was linked in a scathing video blaming the CRA for the housing crisis - the basic argument being that the CRA forced banks to loan to all people and, therefore, precipitated the sub-prime crisis and irresponsible people getting loans they couldn’t afford.
The Drudge Report happily hyped this video and injected it into the conservative blogosphere. From there, the CRA meme caught like wildfire. Soon, we were seeing it in top conservative blogs and even on the op-ed pages of major newspapers. It is now an article of faith among many conservatives that the housing crisis is rooted in the CRA - and, in turn, the millions of people of color who were able to obtain mortgages through it.
This argument is not only morally repugnant, but simply factually off-base.
The CRA was passed in 1977 to counter proven and pervasive racial discrimination by banks and savings & loans. It addressed the unfair and widespread practices of denying credit-worthy customers of color, particularly African Americans and Latinos, access to standard loans and mortgages. The CRA was a remarkable success, sending home ownership rates among people of color to unparalleled heights and helping usher in a black and Latino middle class that is essential to America’s economic future.
However, during the past decade as the nation’s housing market flew closer and closer to the sun, enforcement of the CRA has actually decreased. Contrary to what CRA critics espouse, the CRA did not force these loans of lenders. The CRA became law in 1977, and the sub-prime loans that got us into this current crisis started being issued en masse in 2003. As financial institutions’ desire for accelerated profits and revenue streams grew, necessary regulation did not follow.
The strength of the CRA was significantly weakened in 1999 when financial legislation allowed investment and securities firms to enter the mortgage world. Prior to these changes, the home mortgage industry was fairly simple-banks offered loans, those loans were purchased, held and backed by the General Service Enterprises of Fannie Mae and Freddie Mac. The CRA applied to the regulated institutions issuing loans.
After the 1999 legislation broke down the firewalls between players, however, the network of firms financing homes included more than 20 types of entities that could purchase, repackage, and securitize loans. Brokers became free agents to recruit these loans for players that made money on high-fee, high-interest transactions. This massive web of financial entities offering, bundling, and trading of mortgages was not covered by the CRA. The vast majority of the sub-prime loans causing today’s massive foreclosures were issued by institutions not covered by the CRA.
Watchdog group Media Matters notes that in the 15 most populous metropolitan areas, 84.3 percent of high-cost loans in 2006 were made by financial institutions not governed by the CRA. Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, said in a March speech that ‘studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households.’”
Rather than having the government enforcing a banking regime that is fair and just to all people — as the CRA intended — lawmakers abdicated their responsibilities by not regulating the new players, and let the market run roughshod over millions of low-income Americans simply yearning for the American dream of home ownership. The CRA required meeting community credit needs across banks’ markets-not predatory lending across a vast opaque network of lending, trading, and securitization institutions. Uneven and nonexistent regulation became the tragic accelerant.
Trying to blame the CRA and hard-working, low-income Americans for an economic crisis that began in smoky Wall Street backrooms is not only factually but morally wrong. The CRA is an indispensable tool in our continuing push toward an America that offers equal, just and fair opportunity for all people.
Tags: , affordable housing, community reinvestment act, economic crisis, economy
October 10th, 2008 at 4:33 pm
I couldn’t agree more and continue to be amazed (and angry) with the blatant lack of accountability with which our leaders conduct themselves.
October 11th, 2008 at 11:00 am
I just read a blog post by Steve Dubb on http://www.Community-Wealth.org that includes powerful data on the low foreclosure rate found among homeownership and asset-building programs initiated by community lenders:
- Nehemiah Homes, an initiative that builds homes and sells them to low-income homebuyers in New York City’s outer boroughs, has had less than 10 defaults on 3,900 homes
- CFEDs survey of individual development account programs—most of which go to African American or Latino borrowers with family incomes under $40,000—found 3 defaults and 4 foreclosures out of 1,212 loans
- A survey by the National Community Land Trust Network found the foreclosure rate was 1/30th of the national rate in 2007.
October 18th, 2008 at 4:33 pm
This is great information to have. The argument would be even stronger, though, if the original blog didn’t skip over the 1992 legislation (Federal Housing Enterprises Financial Safety and Soundness Act) and its impact. I believe the act mandated targets for low and moderate income loans in the Fannie Mae and Freddie Mac portfolios, which is also being touted as evidence that this type of lending was the cause of the crisis. But it also made subprime loans in general more attractive to lenders by allowing Freddie Mac to purchase them, relieving the original lender of the increased risk that should have cooled these engines.
December 11th, 2008 at 12:57 am
1. I haven’t dug through the data yet, but the model for institutions like countrywide was that loans might be initiated by independant banks and countrywide could purchase those loans, service them, etc. I’m trying to figure out whether the claim that the CRA didn’t cover many of the banks that initiated the loans is relevant or not. Since pressure was exerted via a variety of means (threat of lawsuits, blocking of mergers, etc) on institutions like Countrywide who did business with smaller banks, the CRA seems like it could have an effect on smaller institutions.
2. The CRA lowered the amount of money a bank had to hold in reserve against a loan. This is a pretty straightforward mistake. Keeping the amount of cash that had to be held against a loan would have slowed the mortgage crisis.
3. It’s simply irrational on its face to assert that certain people were universally barred from getting a loan solely because of their race and no financial institution might have been influenced by self-interest to serve them, but that a law was required. As Michele pointed out, the FMs decision to insure CRA loans artificially decreased their riskiness. Even if a single bank was racist, we’d have to argue that most banks were operating purely from racist motives (to the detriment of their bottom line)
I wouldn’t say that the CRA was the sole cause of the mortgage crisis. The belief that sub-prime loans were actually low-risk (since people had been refinancing them rather than defaulting for years) fueled the problem immensely. But the CRA is certainly problematic. Democrats were wrong to block reforms to the CRA which certainly would have dampened (though not avoided) the current crisis.
February 11th, 2009 at 4:04 pm
I find this article very interesting, and of course bias. You reference Media Matters as a objective reference? This makes me laugh.
About the content, the stimulus being passed by congress will now give more money to people who don’t produce anything and can not pay it back - just like getting a low-income person a loan. Why did Fannie Mae and Freddie Mac fail? Was this not government oversight? Weren’t they there to lend to the low-income person? WHY DID THEY FAIL??? If I were a bank, I would WANT to lend to a person that COULD pay it back, with interest, not default on it. Of course if you’re forced to (i.e. CRA) then you have no choice. Also, the borrower is at fault as well - don’t get a loan you CAN’T pay back. The banks weren’t FORCING people to get loans. People had to walk in a apply. And of course they can’t be denied the right to fill out the paperwork even though they have no job, 2 car loans, and horrible credit - that’s discrimination! As long as Freddie Mac and Fannie Mae approved the loan, the money was theirs!
Oh well, I’m sure the stimulus will get us out of this…. right?
February 24th, 2009 at 6:26 pm
Hello, as an economics major, anytime that the governement or another entity steps in to put a low or high ceiling in place, ineffeciencies are often at created (NY city rent cap has been a widely studied issue). In 1996, before Clinton did any work, on the CRA, several papers were published about Financial Liberalization. This process is used to artificially lower interest rates, at teh cost of other tangible events. Due to the fact that banks were not encouraged, but forced to participate created such an inefficiency. This caused the credit bubble (the evidence of all data supports the credit bubble occured worldwide, and the spending by the lowest two-thirds of all people in the world, (which makes America’s poor seem like Bill Gates) increased 24%, while the other classes grew about 17%). This credit bubble and the ease of restrictions that came with the credit, lower FICO scores, reduced Debt to Income ratios, and reduced paperwork requirements, all led to a dramatic increase in people getting even further over their head. So, what happens when such a large imbalance occurs in the free market place? The stock markets in America are a major sign of this recovery, that the markets are now trying to re-balance themselves. No, CRA itself did not do it, but the forcing of banks to lend and the free flowing credit practices did cause this.
Another fact is that the largest percentage of foreclosures now are ARM mortgages. Why would anyone sign an ARM, except to maximize the size, location, or value of the house you can get, relative to the lowest payment possible. Then since the credit bubble led to a drastic over pricing in the housing market, the ARM’s started resetting when the markets the process of releveling themselves.
Now, some ARM mortgage holders are happy because rates are again low, but don’t you wonder how the market will react to 50 to 100 billion of government bond being sold to fund the TARP? Do any memories of the dramatic post WW1 Germany levels of stagflation come to mind?
I am not against people owning their own homes, but I would rather teach a man to fish, then jsut give him a fish. One method he comes back to me later for more, and the other he now steps away from me so I can help more.