Monday, February 23, 2009

The CRA allegation...

For about the twentieth time, I have heard the assertion that the Community Reinvestment Act caused the housing crisis.  It has shown up in comments to my posts, as well.

Frankly, I was not that up to speed on the CRA so here is what I found.
Bernanke, responding to a letter from Sen. Robert Menendez, D-N.J., said the Fed's experience with 1977's Community Reinvestment Act - including data on the subprime loan market - "runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties." Bernanke, continuing in the Nov. 25 letter to Menendez, said declining home values, inadequate risk management of complex financial instruments, and lending models that favored quantity over quality all contributed to the current problems.
"The available evidence to date, however, does not lend support to the argument that CRA is to blame for causing the subprime loan crisis," Bernanke wrote.
The CRA has come under fire from some conservative lawmakers for being a major factor in the current financial crisis. Proponents of the law note it does not require banks to make risky loans, and instead directs federal banking regulators such as the Fed to encourage banks to lend to underserved areas in a manner that is "consistent with safe and sound operation." [More]
And this

        • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

        • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

        • What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

        • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

        • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

        • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

        • How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

        • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

        • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

        • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada;  Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

        • Did the GSEs require banks to not check credit scores? Assets? Income?

        • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

        • What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

        • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?  

    The answer to all of the above questions is no, none, and nothing at all.


and finally, this rebuttal from Tyler Cowen:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default. [More]

In balance, I'm going with Bernanke.

Let the Great Scapegoat Search continue.

Addendum:  Thinking about it this afternoon, I realized how ludicrous the "predatory borrowing" concept is.  So a bunch of poor people with evil in their hearts forced bankers to lend them money by bald-faced, easily refuted lies?  How stupid does that make the lenders?
If he is asserting the government made them make what they knew to be bad loans he does not say it, nor has anyone shown that to be fact. 

My verdict is once they discovered securitized CDO's lenders went into overdrive to package garbage and sell it to foolish investors.


Anonymous said...

Kinda reminds me of my miss spent days as an ag lender in the late 70's early 80's , when people couldn't cash flow the loans they had ,we borrowed them more money! It was called"maintaining" loan volume.

Russell and Janelle Mills said...

Thanks John for the good information. Many conservatives, (and I consider myself a conservative), have pointed to the CRA as the primary source of the housing/mortgage problem. Despite the constant finger pointing it was a very minor factor in comparison to the many factors pointed out it your post. Greed, recklessness, and irresponsibility are equal opportunity vices effecting all political and social backgrounds. There are plenty of examples appearant at the root of this crisis at all levels. Better oversight and regulation while helpful, will never substitute for integrity. Until we face up to the consequences of our bad judgment and make a renewed commitment to integrity at all levels of our economic and political system we are in for some difficult times. What troubles me now is the blaming of free markets and capitalism for our problems. Free markets can't function without trust and honesty as we have seen but don't make the mistake that socialism will either.

Jim said...

Thanks for this, John. I may have to use some of those lines next time my family starts ranting about the CRA and ACORN.

Anonymous said...

Having home mortgage interest the only deductible interest for most of us working stiffs was a good excuse (temptation) to load up the house debt. When you sold your house and move, it just rolled up and 'disappeared'. All is good as long as values rose. A bunch of us payed to play. Now we all pay for the play.