Community Reinvestment Act: Separating Fact From Fiction (Long Article)

Cover-Up: Acorn clones using the Community Reinvestment Act to shake down banks aren't happy with our campaign to expose the truth about the CRA's central role in the financial crisis.

The Greenlining Institute is typical. The Berkeley, Calif.-based community organizer fired off a letter to us complaining about our March 21 editorial "WaMu: Guilty Only Of CRA Compliance."

In it, we argued that Washington Mutual, a CRA poster boy in the run-up to the crisis, is now a convenient whipping boy for the same regulators who pressured the bank into making the "reckless" multicultural loans they're suing it over today.

"IBD's continued insistence that the Community Reinvestment Act was responsible for the subprime mortgage meltdown has been refuted by virtually every reputable authority in the field," wrote Greenlining spokesman Bruce Mirken. "That includes nine of 10 members of the Financial Crisis Inquiry Commission, including three out of four Republican appointees."

The Greenlining official added: "While some cling dearly to the myth that the CRA was the culprit, simply repeating a statement endlessly does not make it true."

Greenlining's pique is understandable. It helped fuel the subprime crisis by using the CRA to leverage large banks like WaMu for record loan set-asides for uncreditworthy minorities. Then it extorted even more money when the banks announced merger plans, filing protests with federal regulators to delay their bids.

This is an example why business people cannot have power to lead this nation. If someone came to me and said do something economically stupid or else. You have two options surrender and die or fight it and die. Either way you will die. If you are on sound legal ground go to court even if the adversary is the government. Get the court to make a ruling forcing in writing for you to do it so you have legal cover when SHTF. Instead they let a bunch of community organizers bully them into submission to do something stupid and when the loan goes bad the advocates can claim no knowledge and the bank trying to placate the issue privately is left legally holding the bag. That is stupidity at is maximus. Banks were so wrapped up in PC they chose to surrender to gain temporary peace and hope the situation blows over. Imagine if CEO’s had undue influence in running this country?!!!?? How would they deal with China????!! How would they deal with Islamic terrorism if oil rich Arabs squawk at gov policies deemed anti Arab???!!!! How would they deal with illegal immigration and open borders with Mexico???!!!!! I think the answer is obvious because their past behavior already defines their ability to think long range, morally and nationally. It doesn’t exist. My recommendation to conservatives and freepers is keep big business out of our struggle and any businessmen we have in the coalition, monitory them at all times because they will betray the movement for temporary convenience and short term profit. They have no moral framework to fight or remain loyal to the principles of our founding fathers!

Ping to all Freepers I know who probably remember the last candidate to challenge Schwartzenrenegger for CA Governor. Phil Angelides, the greediest of all CA Democrat RE devilopers who hypocritically goes around criticising every other developer for raping the planet!!!

One of the most rascally of scoundrels and skallywags you'd ever not want to do business or politics with for sure!!!

We all know that Janet Reno's deputy AG Jamie Gorelick are the two bichin bureaucrats that bullied the banking industry to start all this pure unadulterated crappola.

Then here comes Phil like the immoral Democrat operative he will always try to be, trying to throw dirt all over the tracks of those most responsible for this horrible loss to the whole country like a deranged feline named Sylvester!!!

I've printed this one out to give all my Demonicrat friends who get arugumentative and I think I'll buy the book it refers to in order to shower them with quotes and references to the actual factual truth!!!

The IBD piece is reinforcing a fiction itself, the belief that the CRA was the primary cause of the subprime bubble.

The fact is that during the 1990s investment banks and pure mortgage lenders, which weren’t covered by the CRA, sought to develop the subprime market as a major new source of revenue. They actively lobbied Congress to relax Glass Steagall restrictions on their activities, which they got via Gramm-Leach-Bliley, and they lobbied to keep derivative trading unregulated, which they got via the Commodities Futures Modernization Act. Investment banks and hedge funds created their own mortgage securitization market parallel to Fannie and Freddie and rapidly took market share from the two GSEs. The parallel market, the “shadow banking market”, is where extreme lending took place, very high yield paper in contrast to Fannie and Freddie’s stodgy conforming paper.

The CRA is a pernicious example of government meddling in private markets that can be exploited by groups like ACORN, but it doesn’t help to exaggerate its role in the financial crisis and to ignore the role that gutting Glass Steagall played.

Here’s the source of the Lawrence Lindsey quote from the article. The IBD article refers to Lindsey as “Ex-Federal Reserve Board Gov. Lawrence Lindsey, a staunch CRA defender”. IBD neglects to mention that Lindsey is a supply-sider who worked for Reagan as the Senior Staff Economist for Tax Policy, and that in Dubya’s administration Lindsey played a major role in designing Bush’s tax cuts.

http://www.frbsf.org/publications/community/cra/cra_means_provide_public_goods.pdf

First, like all soft quotas, the CRA program was designed to meet the needs of the period in which the rules were written. But, by definition, the success of the program made those criteria somewhat outdated. In the early 1990s, the credit needs of these communities were horrifically unmet. Clearly, creditworthy (and profitable) individuals could be found, particularly given that the public good problem of lending in distressed areas was being addressed. These creditworthy borrowers got loans.

As time went on, however, the requirements for the number of loans made did not change. In fact, it would be a real CRA black eye for a bank to reduce the number of loans it was making in a particular area. However, given that the most creditworthy borrowers had already received loans, a somewhat less creditworthy group had to take their place. As time went on, lending standards had to be relaxed to avoid any “backsliding” on an institution’s CRA obligations. In this way, the CRA did contribute to a downgrading of credit standards.

Second, the Investment Test under the CRA and the related deals the Justice Department struck with Fannie Mae and Freddie Mac during the 1990s created a natural market for securitizing these loans. Of course, securitization was occurring in its own right on a wide scale, but most securitization involved fixed lending criteria established by the government sponsored enterprises (GSEs).

Given the problems discussed in point one above, an enormous market opened for securities of nonconforming loans, which involved some CRA credit that fell short of the Investment Test. This was a good thing in that it allowed credit to flow to underserved areas in far greater quantities than before, but the securitization of nonconforming loans involved a much greater risk, with far more pernicious consequences, than the securitization of conforming loans.

By definition, nonconforming loans are more idiosyncratic, harder to monitor and model, and generally more geographically or socioeconomically concentrated than conforming loans. The CRA did not recognize this risk, and in fact gave a reason to ignore the risks inherent in the process. In this way, the CRA and the related Justice Department arrangements with the GSEs exacerbated the securitization problems in the subprime crisis.

Third, the very fact of “opening the flood gates” on credit exacerbated a normal problem in credit cycles which tends to mask risk, and thereby leads to greater excesses in the cycle. The CRA itself was part of this, but hardly the major element. Rather, it was the changing of the rules of the game that caused an abrupt shift. The story is as old as credit cycles. When credit suddenly becomes more available in any market, demand rises for the assets being financed. The very fact of rising prices leads to a lower rate of defaults and loan losses given that the rise in asset prices allows troubled borrowers to dispose of the asset and repay the loan easily. The lending community tends to view this as a reduction in risk and therefore lends more, pushing asset prices up further, defaults down, and thereby leading to even more easing of credit terms and more excesses. When the cycle ends and prices start to fall, the fundamental riskiness of lending in this market not only returns but is magnified.

This latter observation is also a comment in general on the development and crash of the latest housing bubble. That bubble began to develop in the mid-1990s and took on steam, as all bubbles do, as the rising prices increased demand and still more credit. The CRA is not the cause of this phenomenon; the cycle has been well documented since at least the time of the South Sea Bubble in the 1600s. All bubbles are built on the fundamentals of human nature. Therefore, I am not saying the CRA caused the subprime crisis. But, it would be equally wrong to deny that the CRA played no part of that process.

“Effectively, in the pursuit of larger pools of funds with which to facilitate the type of investments characteristic of modern technology, Lindsey doesn’t get why small independent banks are necessary to preserve wealth in the housing market..”

If you’re saying that the CRA inherently limits the ability of small independents to use their best judgement in how they make loans I’d agree with you. But I don’t recall Lindsey saying anything in particular about small independent banks.

“Most bankers of his ilk have little faith in the discernment and ability of local investors. “

Well he’s not a banker, he’s an economist. He worked for Reagan and both Bushes. He taught at Harvard. He worked for the Federal Reserve Board. He probably needs some experience as a small banker. If he had to worry about the safety of his own capital he might gain some appreciation for the problems created by do-gooder legislation like the CRA.

The whole idea of the CRA was to use the threat of rejection of an application for a merger as an enforcement tool. Mergers enlarge capital pools to mitigate the risks of large investments. The ultimate capital is when risks are socialized. Large banks whine that they need mergers to stay competitive with European and Japanese banks. That is because of the huge concentrations of capital required to fund modern projects. The bank has to be of sufficient size to maintain reserves and spread risks. So effectively, we have a financial battle among nations with the key weapon being the ability to socialize risks.

So, what did the left do? They used that leverage for social purposes with the goal of chasing increasing risk. The bankers were perfectly happy to play because Uncle Sugar owned the risk. That allowed them to build a huge market of securities with which their banker friends got to play, effectively risk free. When it all blew up, they came running with their claim tickets whining about the government forcing them to make bad loans. Small banks collapsed and big banks got them. Voila! CRA allowed only the biggest banks to get bigger. A typical corporate leftist ruse.

As you and I both know, the fundamental problem with the whole game is that capital was not directed to its most profitable use, cost of risk included. Instead they socialized risk, unitized all borrowers as if they were the same. RINOcrats were overjoyed with the idea that home-ownership would elevate the working class into a more responsible lifestyle because of their stake in the investment. Republicans dreamed that once they start paying property taxes, they might even become Republicans! Little did they know that Soros et al. were going to kill their marginal cash flow by inflating the cost of fuel via speculation. People will defer their house payment for the gas to get to work.

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