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A Poisonous Cocktail
...The White House and Congress want to expand a 30-year-old law--the Community Reinvestment Act--that helped to fuel the mortgage meltdown. What the CRA does, in effect, is compel banks to seek the permission of community activists to get regulatory approval for bank expansions and mergers. Often this means striking a deal with activist groups such as ACORN or unions like the Service Employees International Union (SEIU) and agreeing to allocate credit to poor and minority areas that are underserved.

In short, the CRA encourages banks to make loans they would not ordinarily make. What's more, these agreements often require that banks offer no-money-down mortgages and remove caps on how much debt a borrower can take on. All of this is done in the name of "financial democracy."

Liberals pooh-pooh the idea that a 30-year-old law could have contributed to the current subprime crisis and credit crunch. But what they ignore is the massive expansion of CRA-commitments forced on banks in the run-up to the 2008 financial crisis. ...

...According to the National Community Reinvestment Coalition, in the first 20 years of the act, up to 1997, commitments totaled approximately $200 billion. But from 1997 to 2007, commitments exploded to more than $4.2 trillion. (Keep in mind this is more than four times the size of the current health bill being debated in Congress.) The burdens on individual banks can be enormous. Washington Mutual, for example, pledged $1 trillion in mortgages to those with credit histories that "fall outside typical credit, income or debt constraints," and was awarded the 2003 CRA Community Impact Award for its Community Access program. Four years later it was taken over by the Office of Thrift Supervision. In 2004 Bank of America ( BAC - news - people ) agreed to provide $750 billion in CRA loans to applicants with poor credit who had previous difficulty obtaining a mortgage. By 2008 Bank of America was reporting that CRA loans represented only 7% of its portfolio but 29% of its losses. Numerous large banks are now in the middle of enormous CRA commitments. In 2004 J.P. Morgan Chase ( JPM - news - people ) agreed to provide $800 billion of such loans over the course of 10 years.

For all the talk of unsold condos in Miami and foreclosed McMansions in California, the epicenters of the mortgage crisis are inner-city urban areas--precisely those areas where the CRA was most applicable. As the Boston Federal Reserve put it in a massive 2008 study, "In the current housing crisis foreclosures are highly concentrated in [urban] minority neighborhoods." The study found that borrowers in these areas were seven times more likely to be foreclosed on than the general population. Analysis by the Pew Research Center and another by The New York Times found that mortgage holders in these areas had foreclosure rates four times higher than the national average. ...