Community Reinvestment Act & Sub-Prime Bust

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Community Reinvestment Act & Sub-Prime Bust

Postby You Can Call Me Ray » Wed Nov 12, 2008 4:08 pm

Here is an article that explains the relationship between the Community Reinvestment Act (CRA), which as orginally passed in the 70s did not initially do damage to the banking and home loan industry, but as a result of "tweaking" it in the 90s opened the door to where we are today.

The CRA Scam and its Defenders
by Thomas DiLorenzo

Thomas DiLorenzo is professor of economics at Loyola College and a member of the senior faculty of the Mises Institute.

When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous "community groups" that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded "community groups" like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other "community groups" by giving them millions of dollars as well as promising to make even more dubious loans.

Geee.... there is ACORN again...showing up right in the middle of DC politics... and essentially acting as a government-funded extortionist!

In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company ("Freddie Mac") pioneered the "securitization" of bundles of these high-risk loans so that they could be sold on secondary markets. Such "securitization" exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges"

Bernanke wrote:Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals.

The government also "streamlined" the regulatory requirements for CRA loans in 1995, allowing — and indeed pressuring — banks to make such loans without the benefit of many traditional credit-worthiness criteria, such as the size of the mortgage payment relative to income, savings history, and even income verification! Instead, the Fed told banks that participation in a credit-counseling program, many of which are federally funded, could be used as "proof" of a low-income applicant's ability to make his mortgage payments. In other words, federal bank regulators required banks to make bad loans based on nonexistent credit standards.

Do you see the connection yet? Banks were essentially being told that their continued development and expansion of their business could (and would) be held hostage unless they loosened their lending rules. And then we have the story of the "model citizen lender" Countrywide:

In his April 26 New York Post article on the CRA entitled "The Real Scandal," Professor Liebowitz explains how the government's Fannie Mae Foundation singled out one bank in particular as the role model for all other banks in America in terms of its commitment to CRA lending: Countrywide, the nation's largest mortgage lender, had committed to $600 billion in low-income or "subprime" loans as of 2003. Today, Countrywide is essentially bankrupted and has been merged with Bank of America.

We loved Countrywide right up until the time it could no longer do business...

The myth that the CRA would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt. "[The] CRA increased lending and homeownership in poor communities without undermining banks' profitability," Robert Gordon proudly proclaims. But now that the bubble has burst, all those unqualified borrowers — whom the government calls "subprime," as though their credit ratings are only a tiny, tiny smidgen below "prime" borrowers with the very best credit ratings — are defaulting on their mortgages in droves.

Bank profitability has been extremely "undermined," to put it mildly. The bursting of the Fed-generated housing bubble is the reason why the CRA scam was not exposed until now, despite having been in operation for some thirty years.

The sad thing is... those liberals who presided over this (prior to the Republican controlled Congress taking over on Bill Clinton's second election win) are the ones now pushing for more taxpayer money to shore-up the problem they helped create by leaning on banks. You know, Senator Dodd and Representative Frank.... those who also received large benefits from Fannie and Freddie! :shock:

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Re: Community Reinvestment Act & Sub-Prime Bust

Postby You Can Call Me Ray » Wed Nov 12, 2008 4:25 pm

And here is an extremely prescient article written way back in 1994 that was pointing out the mucking around with the CRA, and how interpretation of vague terms in the CRA by federal legislators was going to allow something bad to happen:

Community Reinvestment Act: Ensuring Credit Adequacy or Enforcing Credit Allocation?
by Vern McKinley

Vern McKinley has worked at the Federal Deposit Insurance Corporation, the Federal Reserve Board, and is currently employed at the Resolution Trust Corporation. ... ck4-94.pdf

In a July 15, 1993 speech on the South Lawn
of the White House, President Clinton discussed
the availability of credit to low and
middle-income areas, and mentioned what has
been a relatively obscure statute for most of its
seventeen-year existence—the Community
Reinvestment Act (CRA). This statute requires
financial institutions to reinvest deposit funds
back into the communities in which they are
located. Clinton claimed that the CRA has not
lived up to its potential. In line with this concern,
the bank and thrift regulatory agencies,
primarily under the leadership of Clintonappointee
Eugene Ludwig of the Office of the
Comptroller of the Currency (OCC), have spent
most of the past year and a half revising their
regulations interpreting this statute.


Rather than being a positive trend, these
recent actions allow government and special
interest groups to influence and even dictate
lending decisions. Instead of being expanded,
the CRA should be repealed.

More salient quotes predicting what was to come:

The Boston Fed Study sought to discover
whether differences in mortgage loan denial
rates could be explained, controlling for factors
such as financial, employment, and neighborhood
characteristics. The study concluded that
overt discrimination, whereby minorities with
unblemished records are denied credit, is not
pervasive—97 percent of such applicants are

The Clinton administration favors expanded
use of the CRA, believing that a governmental
response to economic problems in inner cities is
generally more effective than a market solution.

Of course, because the liberal solution to all (perceived) market problems (hint: there was no market problem here) is "big government intervention".

The CRA sets up the conditions for a classic
case of handing out other people’s money.
Bankers distribute loan dollars for a living, taking
on risks that can get them fired, cost them
their investments as stockholders, or subject
them to lawsuits from the FDIC. No similar discipline
constrains the community groups or regulatory
agencies. Coercion enters the picture
because these community groups know that
time is of the essence in merger transactions,
and that any source of delay means more time
and, thus, money, is consumed. As a representative
of the Association of Community
Organizations for Reform Now (ACORN) put it,
“When you’re talking a billion-dollar merger,
every day of delay costs lots of money. It’s
cheaper to negotiate than to fight.”

The term "redistribution of wealth" was NOT something Barack Obama dreamed up just for this campaign! It was the active practices of ACORN even back then!

Many of the negative effects of CRA, while
not fully documented, can nonetheless be identified
as a burden to the economy. For example,
CRA undoubtedly causes many financial institutions
to avoid opening facilities in lowerincome
or minority areas because of the probable
CRA burdens awaiting them. The CRA tells
a financial institution that if it moves into such
an area, financial regulatory agencies and community
groups will dictate how its “community”
will be defined, how its performance will be
judged, and, most importantly, how it will make
its lending decisions.

And let's not forget.... all of the "re-interpretation" of the CRA law took place under the Clinton administration. There are charts that show up to that time that increase in home values tracked well with the rate of inflation. But after that time period is when we saw the values of homes accelerate and become "unhinged" from inflation. It is not a coincidence.

The CRA should be repealed. Altering the
underlying regulations merely leaves the way
open for future administrations to utilize the
statute as a government credit allocation scheme.

Again: "Redistribution of wealth". That is why I have said all along that Obama is nothing new, and he is NOT really going to bring you any "change" other than to change BACK to the policies of his Dem cronies that started this mess in the first place.

Did greed play a factor? Of course. It always does. But that greed was fueled by the CRA forcing banks' hands to lend money to people in "innovative" ways such that they would not have their development plans stifled by groups like ACORN. But once again I draw attention to the fact that, despite the (perhaps) well-meaning intent of "re-interpreting" the CRA laws, what the liberals actually set up was a situation which would put their constituents in a MUCH WORSE situation: Defaulted on their adjustable "sub-prime" loans, no home, AND A CREDIT RATING HIT TO BOOT!

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