Yes, the Community Reinvestment Act encouraged banks to make risky loans
E. Thomas McClanahanOne of the big points of debate in the aftermath of the housing debacle is whether the Community Reinvestment Act — an anti-redlining law — contributed to the disaster. Defenders of the CRA turned themselves into pretzels to defend it, but all along it was obvious that the answer was yes.
It’s even harder for CRA supporters to deny it now, after the release of a study by the National Bureau of Economic Research. Where many academic studies hem and haw, this one doesn’t beat around the bush.
“Did the Community Reinvestment Act (CRA) Lead to Risky Lending?” the authors ask. “Yes, it did. … We find that adherence to the act led to riskier lending by banks.”
The CRA required banks to serve depositors in all neighborhoods in their areas, including those of low and moderate income. The NBER economists found that lending to borrowers in low and moderate-income census tracts increased around the the time of a bank’s regulatory exam and more of those loans went bad.
Quoting from the study (summarized in an Investor’s Business Daily editorial: “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts.”
Bascially, the process was as follows. Banks had to make affordable-housing loans under the CRA. Congress then forced Fannie Mae and Freddie Mac to buy up an increasing proportion of those loans, effectively imposing quotas. Many of the loans were subprime or otherwise dubious. To accept the loans, Fan and Fred had to drastically lower their credit standards, which debased credit quality in the mortgage market generally.
Yes, Wall Street got into the game in a big way, but it was Fan and Fred that provided much of the purchasing power for these lousy loans, encouraging subprime factories like Countrywide to crank out even more. Countrywide made the loans, sold them to Fan or Fred, which, by the way, then attached a taxpayer guarantee. Between 2001-2007, Fannie and Freddie scooped up roughly half of the home loans made under the CRA. Most of them had subprime features.
By the end of 2007, the bubble was enormous but by then the crash was already beginning. Wall Street had leveraged itself to the hilt to inflate the bubble, financing much of this effort with short-term money.
When the lousy mortgages started defaulting and the complex bond packages — backed by the mortgages — failed to perform as expected, the shakier firms couldn’t renew their short-term loans and the unraveling began, first with Bear Stearns and then spectacularly with Lehman — which set off the panic.
Two years ago, I had an exchange in an Editorial Board meeting with Rep. Emanual Cleaver, who at one point burst out, “There’s no evidence that anyone told Fannie and Freddie to make bad loans.”
He then sent me a five-page memo defending the CRA and its role in the debacle. In the meeting, Cleaver had said he wanted to change the law to make it even more “impactful,” which sounded as if he wanted more of that contributed to the problem in the first place.
The NBER study ought to end the debate over whether the CRA was one of the factors culpable in the housing bubble. It was. It encouraged lending of taxpayer-backed deposits to people with bad or dubious credit, and when those loans were scooped up by Fan or Fred, taxpayers ended up on the hook.
When I wrote about this two years ago, I noted that one result of the crash was that many of the people Cleaver says he wanted to help ended up financially ruined. One hopes that Rep. Cleaver can find the time to take a glance at the NBER study.
Mark Hastert
4 months, 3 weeks agoGosh, really? Loans to poor people are risky? Call me when the indict Angelo Mozilo, that will be news.
Mark Robertson
4 months, 3 weeks agoThank you Tom McClanahan. Another great column that debunks so much “misinformation.” What you and many of us have been saying for years, the Community Reinvestment Act passed by Carter and enhanced by Clinton was the major factor in the economic meltdown. In 2003, the Bush Administration tried to warn Congress about the impending meltdown of Fannie and Freddie. Then Treasury Secretary John Snow testified about the looming fiscal crisis. For that, the Bush Administration was heavily ridiculed by the likes of the pathetic Barney Frank(Is he gone yet?)They were even charged with racism. The mistake that the Bush Administation made was backing down when such insane charges were made. So many Democrat cronie crooks at Fannie and Freddie and elsewhere made millions in the scam.(See Franklin Raines, Jamie Gorelick etc.) Community “activist” groups such as Acorn(See President Obama) were also involved in the shakedown of lending institutions.(See: Architects of Ruin, How Big Government Liberals Wrecked the Global Economy- and How They Will Do it Again if No One Stops Them, by Peter Schweizer and Meltdown by Thomas Woods) The Democrat induced housing crash and not the often accused Bush economic policies were the actual reason for the economic downturn in 08. The Bush tax cuts actually brought on an economic boom, creating 8 million jobs and record Treasury revenue where the “rich’ paid much more in taxes.(Bush Tax Cut Secret: Rich Paid Even More, Investors Business Daily, by John Merline, 11-28-12) The Community Reinvestment Act, another liberal disaster that has made things much worse.(See also: The Great Society and the New Deal, and soon to be totally released horror show: Obamacare) Thank you. Mark Robertson Independence
George Hunsucker
Northland
4 months, 3 weeks agoDon’t confuse the libs with FACTS ET…
You know it was all Bush’s fault!!!
BTW, where does the Rev. stand with his carwash loan??? I guess this is just more libs’ “change we can believe in”….
Phil Cardarella
4 months, 3 weeks agoOK, everyone take a deep breath — and take note of what was and was not said.
Did CRA lead to riskier loans? DUH! Riskier than loans in better neighborhoods to folks with better jobs? Sure.
And, AS A RESULT OF the recession and the unemployment rise, many of those homeowners lost their houses. Especially when mortgages “ballooned” — one of those “subprime features” you mentioned.
But, that is not the same as claiming that such loans CAUSED the recession. In fact, it was the recession that caused the foreclosures. The mass of foreclosures that occured AFTER the collapse cannot have been the cause of the collapse.
It was arrogance and the iceberg that sank the Titanic, not the weight of the soon-to-drown folks in steerage.
Folks with jobs getting mortgages on $100,000 houses to live in at reasonable interest rates did NOT cause the recession. Some of those mortgages may have been bundled into securities that Wall Street used a gambling chips — but that is not the fault of the borrowers.
I know that Mac wants to blame anyone but the Wall Street Wizards for the collapse of the economy, but it was the guys making billions not the guys making $500 house payments who brought down the economy.
JR Beillenhouser
4 months, 3 weeks agoPhil, you really have a hard time with analysis.
People who couldn’t afford their mortgages, that they should not have gotten to begin with, were a major part of the problem. They were the housing bubble. They were being foreclosed on first. They could not afford their loans and were defaulting.
Wall Street took these bad loans and split them up and bundled pieces of them and sold them. Probably as a way to reduce risk. Was it smart, no, but the government forced them to make loans they wouldn’t have made otherwise.
In addition, money for homes was too easy to come by. Therefore the price of homes went up artificially higher than they actually were.
Then, just like every other bubble in history, it burst because of it’s own weight.
The price of homes suddenly dropped, forcing more people into foreclosure.
The bad mortgages, were all over the banking system, thus causing these investments to tank.
Then we got the recession.
Yes, Phil, riskier loans led to people who could not pay them and a flood of money into the housing market artificially inflated the market and bad assets where then sold by the investment community, CAUSING the recession.
And all of this came about because of the Dems policies. OWN IT.
Be prepared for the next bubble brought on by the same people, College loans.
Mark Hastert
4 months, 3 weeks agoThe CRA never falsified a loan app, never made a liar’s loan, never dummied up an appraisal. The lending industry did that. The CRA never bundled up, sliced and diced, and shorted their own paper, Wall Street did that.
It’s convenient to only blame government and poor folks who lost their jobs and then their homes for the crash. It avoids any long hard look at what American capitalism has become.
It’s said that we can’t get through the day without a rationalization, this one is a conservative favorite.
JR Beillenhouser
4 months, 3 weeks agoSo, it is shown that the problem was the government and Mark wants to look everywhere but there to fix the problem. Makes perfect sense to me.
Reagan faced a greater recession than Obama and what did he do to fix the economy? He made sure the government stayed out of the way. Unlike FDR or Obama, he let the system right itself. Our current administration thinks that a recession is a great time to add additional programs, regulations, and taxes. Guess what, the economy will not come back.
Mark, american capitalism is fine, if the government would just butting in with their grandiose plans.
Oh and now that the damage is done, we don’t have the government pushing everyone to buy a house. Had they just stayed out of it to begin with, we wouldn’t be in the current shape.
George Hunsucker
Northland
4 months, 3 weeks agoBut JR, these govt. programs give the libs such outstanding jobs and positions of power over we mere mortals…..
And then when it turns to crap, they blame “big business”…
Libs are such a hoot….
Steven Fetter
66223
4 months, 3 weeks agoBarney Frank said, “lets roll the dice” and go with encouraging (dictating) that Banks make substandard loans. Looks like we crapped out Mr. Frank.
It is convenient to only blame banks and lenders for the housing crisis. There are many home owners, rich and poor, that falsified loan documents, shopped appraisals, refinanced repeatedly, and then walked away from homes that no longer served their purpose of that as an ATM.
I believe that the lenders and the borrowers richly deserve each others companionship in this debacle.
JR Beillenhouser
4 months, 3 weeks agoAnother Point to Phil. If people were not defaulting on the loans, where were the bad assets coming from?
You might find this helpful
http://www.jccc.edu/catalog/credit/spring-2012/outlines/phil/phil-124.html
Matt Henry
4 months, 3 weeks agoOh my God, Mark, I respect your analysis quite often because you at least seem level-headed much of the time while still what I would call off-base, but is there no limit to where you won’t defend some of the crap that the government foists upon us?
Do you not understand that we do not blame the poor folks but the entity that forced lenders to make loans that these folks couldn’t afford in the first place? Were there some “predatory” practices out there? Sure. But would they have been happening if Fannie and Freddie weren’t buying these crap loans up from them on the back end? Would they have taken that risk if they were ultimately responsible?
Tom points to where Wall Street and lenders were culpable. There is blame to go around. Can’t you even acknowledge the government’s roll and that had they not been meddling in social engineering projects the ball wouldn’t have started rolling in the first place? Come on….
Matt Henry
4 months, 3 weeks agoBy the way, I agree with your lamentation about what American Capitalism has become. Unfortunately American Capitalism bears little resemblance to real capitalism at all.