I’ve Heard This One Time Too Many


Once and for all, if you believe that the Community Reinvestment Act, signed into law in 1977 by Jimmy Carter, is the cause or even a major cause of the housing collapse or credit crisis, then you are part of the problem. The same is true if you believe the cause is government regulation forcing banks to give out loans to people who couldn’t afford the payments. Stop watching Fox News and listening to partisan pundits and do your own research for a change. If you got this from someone else then tell them to do the same.

Let’s start at the beginning. The Community Reinvestment Act (the CRA) was created in 1977 to get banks and related organizations to offer loans to all segments of the communities they operate in. This was an attempt to blunt what is known as “redlining” or not offering these services to areas based often on race. The term comes from banks that would draw red lines on maps denoting where they would “draw the line” on offering their various services.

The CRA remained unchanged for twelve years doing what it was intended to do. Then in 1989 it was amended for the first time. This was in response to the infamous and expensive savings and loan scandal. The CRA’s regulating power was increased and this was quickly signed into law by George H. W. Bush. Current Chairman of the Federal Reserve, Ben Bernake, has spoken very positively about the results of this expanded oversight.

In total the CRA has received legislative changes in 1989, 92, 94, 95, 99 and 2005. Note that at least half of those were modifications made by a Republican-controlled Congress. The one in 1989 was signed into law by a Republican President and the one in 2005 by George W. Bush under a Republican-controlled Congress.

The bottom line on this part of the debate is that it’s ludicrous for people like Rush Limbaugh to blame Jimmy Carter and the Democratic Congress of 1977.

Now let’s look at some numbers. The facts are that well over 50% of all subprime loans (which are just a percentage of the total loans out there) were provided by independent mortgage companies (just like my own and most other people I know). Most people today do not get their mortgages from their local bank. These independents are not regulated by the CRA.

Another roughly 30% of subprime loans came from organizations only partially regulated by the CRA. For the few organizations that are fully regulated by the CRA (just 15% of the total) only 25% of their loans were subprime loans. A recent accounting found that nearly 85% of all subprime loans were made by organizations outside the control of the CRA.

Additionally, the vast majority of subprime loans given by CRA-regulated organizations have been sound. The Federal Reserve has noted that CRA loans have proven to be profitable and not overly-risky. They also pointed out that the vast majority of problem loans have come from organizations with the least federal oversight—in other words, organizations not under the oversight of the CRA.

So then, if only 15% of loans came from CRA-regulated banks and only 25% of those were subprime loans and not all of them have failed, how is it that this is the cause of the problem?

The real problem was caused by mortgage-backed securities known as Credit Default Swaps. These were unregulated insurance policies that AIG, Citigroup, Merrill-Lynch, Freddie Mac, Fannie Mae (all names that have dominated the headlines) and others, bought or sold to one another. When the value of homes dropped and Adjustable Rate Mortgages (ARM’s) climbed to put borrowers into payments they couldn’t handle they ended up in foreclosure. The value of their homes was under what they could sell them for. Many just walked away from them—literally. While this would be bad on its own, it was made far worse when it was discovered that the entities offering the CDS insurance hadn’t actually put the money aside in the event of such an outcome. The feeling was that the market would always go up for homes. Thus the home owner lost a home and the lender ended up with a lien on a property below the value of the investment. Everyone lost.

The CRA had virtually nothing to do with this situation. The attempts of the Right to deflect blame here is nothing more than an attempt by partisan pundits to blame someone else. It’s never their fault. If anything they bear the biggest burden here. The Bush administration allowed Fannie Mae and Freddie Mac to meet their quotas by buying into these questionable insurance plans in the first place.

In the end it was lenders who approved questionable adjustable-rate mortages with little or no concern as to the ability of the borrower to afford them. The CRA in no way forced these organizations to offer these loans. The only thing that enticed them was the allure of potential profit and it blinded them to the risks involved and to doing their own due dilligence to investigate the soundness of the investments they were making.

Much is made about the lack of intelligence of the borrower taking out a loan that they couldn’t afford to pay back. However, that ignores the bigger question of the organizations that are supposed to be the professionals here. What does it say about the intelligence of the organizations making those loans?

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