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The CRA Scam and its Defenders
...Gordon is incensed that a few "analysts," including myself and Professor Stan Liebowitz of the University of Dallas, have argued that the bursting of the housing bubble has caused the chickens to come home to roost, so to speak, after thirty years of government policy pressuring banks to make tens of billions of dollars in bad loans to people with low (or nonexistent) credit ratings. Neither Liebowitz nor I have argued that every last bad loan out there is a CRA loan, but Gordon implies that we do in a rather feeble attempt to construct a straw-man argument.

Gordon cites Fed bureaucrat Janet Yellen as the source of a "killer statistic" that absolves the government of all guilt: "Independent mortgage companies" which are not covered by the CRA made many more "high-priced loans" to borrowers with bad credit than did CRA-regulated banks, she says. Well, so what? Even if Yellen is correct, that does not mean that CRA-regulated loans have not caused tens of billions of dollars in defaults.

Moreover, Yellen and Gordon don't seem to understand what an "independent mortgage company" is. Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers — including "subprime" borrowers — with banks, including CRA-regulated banks. Some killer statistic.

By ignoring the role of the Fed in creating the whole housing-market mess, Gordon's pronouncement that it is entirely a result of "market failure" is laughable on its face. He also flatly denies that CRA lending has had anything to do with why so many uncreditworthy borrowers have defaulted now that the Fed-generated housing bubble has burst. This, too, is an untenable position....

...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" (published online by the Fed),

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. (p. 3).

In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act loosened up the regulatory barriers to bank mergers. Consequently, said Bernanke, "As public scrutiny of bank merger and acquisition activity escalated, advocacy groups [like ACORN] increasingly used the public comment process to protest bank applications on CRA grounds." In other words, there was a burst of additional legalized extortion perpetrated by the Fed and its pet "activist organizations" beginning in the mid-1990s. As a result, says Bernanke, "banks began to devote more resources to their CRA programs." What an understatement.

Also in 1995, the US Treasury Department created the multibillion-dollar "Community Development Financial Institutions" fund to "provide banks with access [i.e., taxpayers' dollars] to new opportunities to finance community economic development" as "encouraged" by the CRA, said the Fed chairman.

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.

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....