Community Reinvestment Act: a Legacy
Posted on September 30, 2008
Filed Under Community Reinvestment Act, Freddie Mac, Fannie Mae, Real Estate, General |
Not long into my real estate life – sometime in 2005 – our office had a meeting at which the in-house loan originator talked at length about the burgeoning Hispanic market and the loan products designed to meet the growing need, including 100% no-doc loans. When I asked what steps were being taken in the screening process to assure legal status, he said:
“None.”
Which, when you think about it, is the resulting logical slope of the warm and fuzzy Community Reinvestment Act.
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Born under Jimmy Carter in 1977, [Wikipedia here]< the intent was to end the practice of redlining, in which banks allegedly were not lending in certain neighborhoods. It was revised in 1995 under Bill Clinton, with provisions added that would force banks to meet certain goals of low-income lending. Fannie Mae and Freddie Mac were required to meet goals of their own in buying the high risk paper – less of a risk to the executives of those companies since their bonus was predicated on the profit that high risk brings - while the burden of any loss would be borne by the: taxpayer.
In 2004/2005 Republicans in the Congress saw red flags, and tried to apply stricter oversight to both Fannie and Freddie. Democrats objected, and nothing was ever done.
So when you hear Barney Frank and Chris Dodd; Barack Obama and Joe Biden; Nancy Pelosi and Harry Reid whine that it’s all the Republican’s fault, remember this video:
UPDATE: If there are still doubts: Wall Street Journal follow up.
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9 Responses to “Community Reinvestment Act: a Legacy”
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[…] just in case you don’t look at comments, check out Jeff Kempe’s site, pointed out in the comments by Ron Ares, with a video with Congress asking for more regulations […]
Poor Jeff. Watching FOX News and clinging to the notion that this is all democrats’ fault. Who ran Congress until 2007, Jeff? Yes, that’s right. REPUBLICANS. They even had a republican president! If they wanted to they could have done anything they wanted with Freddie and Fannie.
Now perhaps you can explain to us who created the exotic financial instruments that Fannie & Freddie bought? Answer: Wall Street REPUBLICANS.
Then maybe you can explain the other failures in the financial sector: Indymac, WaMu, Bear Stearns, Merril Lynch, Lehman, AIG (now there’s a BIG ONE!), Wachovia, etc etc etc. Were those because of democrats or poor people with CRA loans?
CRA was created to stop red-lining, something done by your people who were content to take the deposits of a community but not loan it back out to the same people. All CRA did was require a bank to loan money to the people who deposited it there. Sounds fair to me but probably not to a republican like you. And CRA loans have a lower default rate than others.
Cling to what little your gutter ideology has left. You’ll be living under President Obama soon.
>Now perhaps you can explain to us who created the exotic financial instruments that Fannie & Freddie bought?
Heh. Love the left. Manifestly poor at ideas, its members invariably resort to ad hominem and forced condescension - next will be the diminutive ‘Jeffy’ - or to active suppression, hoping in the process that absent argument they can fool anyone but other angry zealots. Doesn’t work. Never has.
[These are the same people, incidentally, who think grade schoolers singing adoringly to Dear Leader is cute, as opposed to intensely creepy.]
The answer to the question can be found here. Simply: In 1995, at the behest of Bill Clinton, CRA was used to force lending institutions to adjust lending standards in order to accomodate those who otherwise couldn’t qualify for a mortgage, and forced Fannie and Freddie to subsequently buy the risky paper. All was fine and a lot of money was made by a lot of people in the process - Franklin Raines and Jim Johnson come to mind - as long as frenzied prices continued to increase. When the housing market crashed the bad loans predictably defaulted, the entire house of cards came down with it.
And we are where we are.
This strawman argument has been debunked so many times it is embarasing to see it still trying to be sold. Did the CRA make brokers give out no-doc loans?..no! Did the CRA make banks loan 100% LTV on real estate?…no! This was not caused by a change in the CRA 13 years ago. With a Republican President for the the last 8 years and Republicans controlling the Congress for 12 of the last 10 years to try and blame this whole thing on Democrats is laughable.
>This strawman argument has been debunked so many times it is embarasing to see it still trying to be sold.
Excellent, Kevin. Would you, then, point to where it’s actually been debunked, or actively debunk it yourself?
Glad to provide just a links for this argument. http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis and here http://www.americanprogress.org/issues/2008/09/cra.html and http://bigpicture.typepad.com/comments/2008/10/federal-reserve.html Even if you believe the changes made to CRA in 1995 were ruinous how do you explain it taking 10-12 yrs to show up? Most of these toxic mortgages that are the real root of our current problem are only a few years old.
The idea that the financial crisis was caused by the CRA is purely ideologically driven and has no basis in reality. Period.
Subprime Suspects
The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.
By Daniel Gross
Posted Tuesday, Oct. 7, 2008, at 2:08 PM ET
We’ve now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday’s congressional roasting of Lehman Bros. CEO Richard Fuld and continued on Tuesday with Capitol Hill solons delving into the failure of AIG. On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there’s a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks—which had a long, distinguished history of not making loans to minorities—to make more efforts to do so.
The thesis is laid out almost daily on the Wall Street Journal editorial page, in the National Review, and on the campaign trail. John McCain said yesterday, “Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread.” Washington Post columnist Charles Krauthammer provides an excellent example, writing that “much of this crisis was brought upon us by the good intentions of good people.” He continues: “For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.” The subtext: If only Congress didn’t force banks to lend money to poor minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel’s Neil Cavuto put it, “I don’t remember a clarion call that said: Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.”
Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it’s the fault of Jimmy Carter, Bill Clinton, and poor minorities?
These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let’s be honest. Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.
Here’s why.
The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. There’s much more. As Barry Ritholtz notes in this fine rant, the CRA didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.
Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.
Third, lending money to poor people and minorities isn’t inherently risky. There’s plenty of evidence that in fact it’s not that risky at all. That’s what we’ve learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York’s outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project’s 3,900 homes. That’s a rate of 0.25 percent.
On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it’s even more risky, since they have a lot more borrowing capacity. And here, again, it’s difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?
Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.
At Monday’s hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman’s demise on Fannie and Freddie. After comparing Lehman’s small political contributions with Fannie and Freddie’s much larger ones, Mica asked Fuld what role Fannie and Freddie’s failure played in Lehman’s demise. Fuld’s response: “De minimis.”
Lending money to poor people doesn’t make you poor. Lending money poorly to rich people does.
Give it a rest guys. Conservativess like Jeff will always blame the poor for the ills of the culture. They WORSHIP the wealthy and drop to their knees when they see money.
That’s why we’ve come to a point where AIG gets bailed out and then spends $400,000 on a retreat for executives. A point where the CEO of Lehman makes $70 million in the year the company goes broke. A point where Lehman gives $20 million in bonuses to three executives weeks before begging for a bailout.
By the way, the Slate article was brilliant. But don’t expect people like Jeff to understand. They think using the term “ad hominem” makes them intelligent.
I’m sorry but the slate article was shallow and naive. Blaming the CRA is not blaming the poor people. It’s blaming the politicians and those implementing the CRA. See those Dem congressman? That’s where the blame is being laid.
It is a less than truthful analysis of the CRA and uses arguments like “You can’t say it wasn’t a worth cause” and “Obviously, CRA could not have such a large effect.” Well damn. If it was a for a good cause, it couldn’t have unintended consequence or create cascading effects across the entire mortgage industry. Hmmm. Obviously. Wrong.
The slate article does correctly point the finger in the opposite direction. Doesn’t exactly absolve the CRA or politicians defending the CRA.