The Community Reinvestment Act, Evaluated
Contents
Defenses of the Community Reinvestment Act
"Community" Activists
Overall Performance Statistics
Large vs. Smaller Institutions
Conclusions
References
We need to be clear about one thing at the beginning; blaming a government program aimed at minorities is not the same as "blaming minorities". Unless you wish to make a blanket claim that no program aimed at helping minorities can possibly have negative consequences, you have to leave that door open. Any government activity aimed at benefitting a group you consider sympathetic, like any other human activity, can go wrong.
There have been many claims and counterclaims concerning the Community Reinvestment Act (and government assistance to low income borrowers in general) since October 2008. This article will run down some common defenses of the CRA, give some history of the act and related government activities, then show the real performance of loans stemming from it and its impact on bank profitability. In order to address this, the first thing to settle is the relationship between the CRA and Fannie Mae/Freddie Mac. According to Edward J. Pinto, Fannie Mae's chief credit officer from 1987 to 1989, "approximately 50% of CRA originations since the mid-1990s were acquired by Fannie Mae and Freddie (the GSEs) to help them meet HUD-mandated affordable housing (AH) goals. CRA created the supply and the GSEs created the demand" [Pinto 2009b]. Fannie/Freddie statistics are relevant to any discussion of the Community Reinvestment Act, and Pinto uses Freddie/Fannie statistics to create a proxy for CRA loan performance (below). Federal Chairman Ben S. Bernanke explains the activities that led to Fannie Mae and Freddie Mac's involvement in this whole affair:
Broadly speaking, Fannie Mae and Freddie Mac each run two lines of business. Their first line of business involves purchasing mortgages from primary mortgage originators, such as community bankers; packaging them into securities known as mortgage-backed securities (MBS); enhancing these MBS with credit guarantees; and then selling the guaranteed securities. Through this process, securities that trade readily in public debt markets are created. This activity, known as securitization, increases the liquidity of the residential mortgage market. In particular, the securitization of mortgages extended to low- and middle-income home purchasers likely has made mortgage credit more widely available.
The GSEs’ second line of business is the main focus of my remarks today. It involves the purchase of mortgage-backed securities and other types of assets for their own investment portfolios. This line of business has raised public concern because its fundamental source of profitability is the widespread perception by investors that the U.S. government would not allow a GSE to fail, notwithstanding the fact that--as numerous government officials have asserted--the government has given no such guarantees. The perception of government backing allows Fannie and Freddie to borrow in open capital markets at an interest rate only slightly above that paid by the U.S. Treasury and below that paid by other private participants in mortgage markets. By borrowing at this preferential rate and purchasing assets (including MBS) that pay returns considerably greater than the Treasury rate, the GSEs can enjoy profits of an effectively unlimited scale. Consequently, the GSEs’ ability to borrow at a preferential rate provides them with strong incentives both to expand the range of assets that they acquire and to increase the size of their portfolios to the greatest extent possible. [Bernanke 2007]
The mortgage/housing crisis has been blamed by some on the deregulation of greedy, short-sighted bankers. This is not the case. A change in the relevant regulations helped spur the crisis, but evidence shows the bankers tried to act prudently:
Commercial bank capital holdings are governed by the Basel regulations, which are set by the financial regulators of the G-20 nations. In 2001, U.S. regulators enacted the Recourse Rule, amending the Basel I accords of 1988. Under this rule, American banks needed to hold far more of a capital cushion against individual mortgages and commercial loans than against mortgage-backed securities rated AA or AAA. Similar regulations, contained in the Basel II accords, began to be implemented across the other G-20 countries in 2007. The effect of these regulations was to create immense profit opportunities for a bank that shifted its portfolio from mortgages and commercial loans to mortgage-backed securities.
Bankers were of course seeking profits by purchasing mortgage-backed securities, but the evidence is that they thought they were being prudent in doing so. They bought AAA instead of more lucrative AA tranches, and they bought credit-default-swap and other insurance against default....[Friedman 2009]
Was the government keeping a hands-off policy concerning mortgages? No.
...Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers [of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages] were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?[Wallison 2009b]
What about subprime lenders, not covered by the CRA?
Myth: The CRA could not have led to financial Armageddon, because the overwhelming share of subprime mortgages came from lenders that were not banks and not regulated by the CRA.
Fact: Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA. [IBD 2008]
Was 'securitization' to blame instead? No.
Isn’t it really securitization that is the culprit?
The government pushed for greater mortgage securitization in an effort to increase CRA lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of “affordable” mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you can’t blame securitization without coming back around to the CRA. [Carney 2009b]
This is the same Andrew Cuomo that the Village Voice says "turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded 'kickbacks' to brokers that have fueled the sale of overpriced and unsupportable loans" [Barrett 2008]. Can we find other good liberal Democrats to properly regulate the industry? How about Rep. Barney Frank (D., Mass.) who said in 2003 "I want to roll the dice a little bit more in this situation towards subsidized housing" [WSJ 2003] and "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing" [Labaton 2003]? He is also on record as telling the New York Times "I don't think it's a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast" [Chapman 2009]. If not Congressman Frank, how about that "friend of Angelo", Senator Chris Dodd (D., Conn), who was on the V.I.P. list at Countrywide Financial Corporation, receiving "reduced interest rates that could save him tens of thousands of dollars" [NYT 2008]? These are not a couple of insignificant players (even if their party did not control Congress in 2003). Representative Barney Frank (D-MA) and Senator Chris Dodd (D-CT) are the Chairs [as of March 24, 2008] of the House and Senate committees, respectively, with jurisdiction over housing [John 2008].
Defenses of the Community Reinvestment Act
The first claim made by CRA defenders is that there was a problem in the first place. However, studies 'proving' that fact had serious problems (the example below happened after the CRA was passed in 1977, but before much of the reinforcement of the act outlined later in this article):
The last defense of banks trying to defend themselves against charges of engaging in biased mortgage lending appeared to fall when the Boston Fed conducted an apparently careful statistical analysis in 1992 purporting to demonstrate that even after controlling for important variables associated with creditworthiness, minorities were found to be denied mortgages at higher rates than whites.
In fact, the study was based on horribly mangled data that the authors of the study apparently never bothered to examine. Every later article of which I am aware accepted that the data were badly mangled, even those authored by individuals who ultimately agreed with the conclusions of the Boston Fed study. The authors of the Boston Fed study, however, stuck to their guns even in the face of overwhelming evidence that the data used in their study was riddled with errors. Ex post, this was a wise decision for them, even if a less than honorable one....
...My colleague, Ted Day, and I only decided to investigate the Boston Fed study because we knew that no single study, particularly the first study, should ever be considered definitive and that something smelled funny about the whole endeavor. Nevertheless, we were shocked at the poor quality of the data created by the Boston Fed. The Boston Fed collected data on approximately 3000 mortgages. Data problems were obvious to anyone who bothered to examine the numbers. A quick summary of the data problems: a) the loan data created by the Boston Fed had information which implied, if it were to be believed, that hundreds of loans had interest rates that were much too high or much too low (about fifty loans had negative interest rates according to the data); b) over 500 applications could not be matched to the original HMDA data upon which the Boston Fed data was supposedly based; c) 44 loans were supposedly rejected by the lender but then sold in the secondary market which, of course, is impossible; d) two separate measures of income differed by more than 50% for over 50 observations; e) over 500 loans that should have needed mortgage insurance to be approved were approved even though there was no record of mortgage insurance; e) several mortgages were supposedly approved to individuals with net worth in the negative millions of dollars.
When we attempted to conduct the statistical analysis removing the impact of these obvious data errors we found that the evidence of discrimination vanished. Without discrimination there would be no reason to try to ‘fix’ the mortgage market.... [Liebowitz 2008]
One defense of the CRA is that the loans made under it were prime loans and not subprime loans. However, Pinto writes that "approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores-characteristics that indicated high credit risk" [Pinto 2009a]. Pinto goes on to state that "an estimated 10% of CRA lending ended up being classified as subprime ... the reason that these were not high-rate loans was that the big banks and the GSEs were subsidizing the rates, as recent events have painfully demonstrated" [Pinto 2009b]. More on CRA and large institution subsidies below. Furthermore,
a FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008....An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto [Wallison 2009].
One cause of this misreporting was that "Fannie and Freddie consider subprime a certain classification: If it's a lender that traditionally does subprime, or has a division that does subprime, they'd count it as that" and if not, not. Pinto states that the result of this was "through the end of 2003, self-denominated subprime, impaired credit, as a percentage of loans, didn't change" [Cavanaugh 2010]. The danger in this is that "default risk on an original loan increases geometrically the closer you get to no money down. A default propensity of 1 on a property bought with 80 percent financing increases to 2 at 90 percent financing, 4 at 95 percent, and 8 at 100 percent" [Cavanaugh 2010].
Another defense of the CRA is that studies have absolved it of being seriously damaging, giving as an example the "evaluation of CRA loans by North Carolina's Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall. What they don't mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act" [Husock 2008]. North Carolina's Center for Community Capital is not one of the largest banks (the same applies to the 3,900 homes built under the Nehemiah housing program [Dwyer 2008]), and the differences between smaller entities and the largest banks will be addressed below.
When evaluating a study that claims CRA related loans are safe, the first question is "when were the loans studied?":
"The bulk of these loans," notes a Federal Reserve economist, "have been made during a period in which we have not experienced an economic downturn." The Neighborhood Assistance Corporation of America's own success stories make you wonder how much CRA-related carnage will result when the economy cools. [Husock 2000]
Rising home prices during the bubble resulted in lower default rates, as borrowers would rather sell for a profit than lose a property they couldn't afford in foreclosure. The test of a loan should also include how it performs in a downturn, and not just during a bubble. Stan J. Liebowitz of The University of Texas at Dallas explains the cycle of low standards increasing demand which increased prices which reduced defaults (for a time):
If relaxed lending standards allowed more households to qualify for financing, basic economics also says that housing prices would have risen as the demand for homes increased. Some portion of the housing price bubble, perhaps a large portion, must have been caused by the relaxed lending standards.
Of course it is not the rising portion of the bubble that causes unhappiness. In fact inflating bubbles are usually associated with joy and the robust housing market was generally looked at benignly and considered good for the economy. The rising home prices would also keep the dark underbelly of relaxed lending standards from view since any homeowners having difficulties handling their mortgages, and there must have been many who would have run into trouble relatively quickly, could easily refinance or sell their home at a profit. Defaults would remain a rarity even for loans that should never have been made.
When housing prices started to fall, however, all the joy and happiness came to an end.... [Liebowitz 2008]
Another trick in defending Fannie/Freddie/CRA is to limit what types of involvement count. An example of this comes from a study by staff members of the Federal Reserve Bank of New York
...Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie....While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion....Fannie and Freddie purchased billions of dollars of subprime-backed securities for their own investment portfolios and got hit just like every other investor. [Pressman 2008]
Note the article admits Fannie and Freddie bought the securities, which is the claim made below. Fannie and Freddie were not 'involved' by 'backing' loans or 'originating' loans (or "getting loans by using mind control rays on bank executives", for that matter), but you cannot go from there and extend the claim to say they were not involved at all, and you cannot try to disguise their involvement by painting them as innocent victims of evil capitalists. Edward Pinto adds:
...Let’s start with the assertion that GSEs only buy mortgages made to borrowers with substantial downpayments. While it is generally accepted that a substantial down payment would be 20% or more of a home’s value, let’s be charitable and call a down payment of 10% or more substantial. Over the period 1992-2007 Fannie and Freddie acquired $1.3 trillion in home purchase loans with a 5% or less, amounting to 62% of all such conventional loans originated nationwide over the same period.
These loans are now defaulting at 7-8 times the level of the GSEs’ traditionally underwritten loans with <=90% LTV. Fannie started buying loans with only 3% down as early as 1994 and by 2000 Fannie was buying loans with no downpayment. How about Krugman’s claim that the GSEs didn’t do any subprime lending? Over the period 1997-2007 they acquired a total of $2.2 trillion in subprime loans and private securities backed by subprime loans. Conventional subprime loans came in two “flavors”. The first group consisted of loans with a FICO score of less than 660 (a regulatory definition of subprime), loans which Fannie now says are similar to subprime loans in risk but have not been classified by it as subprime. The GSEs acquired $1.5 trillion of this type of subprime loan. These loans are now defaulting at 8-9 times the level of their traditionally underwritten loans with a FICO >=660. A second group consisted of private mortgage backed securities backed by subprime loans denominated as such by the originator. The GSEs acquired $700 billion of these securities, amounting to 33% of all such privately issued subprime securities. The loans backing these securities are now defaulting at 18-19 times the level of theGSEs’ traditionally underwritten loans with a FICO >=660.[Pinto 2009d]
Are government affordable housing initiatives absolved from blame because primary fault lies with the middle class suburbs? No, according to the anarcho-capitalist radicals at the Boston Federal Reserve, which published a study in 2008 concluding that "in the current housing crisis foreclosures are highly concentrated in [urban] minority neighborhoods." Furthermore, "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" [Schweizer 2009].
Other defenses of the CRA (and related initiatives) have the left reversing course from their earlier praise. Take the argument that the CRA was not large enough to do significant damage. Aside from the fact that "from 1992 to 2008, announced CRA commitments totaled $6 trillion." [Pinto 2009a], it ignores earlier praise, like from the Bookings Institute in 2004, which bragged that "over the last decade, Treasury studies have shown that CRA helped to spur $1 trillion in home mortgage, small business, and community development lending to low- and moderate-income communities" [Carney 2009]. Either the CRA (with help from related government activities) was large enough to have an impact, or it was not. It cannot be large enough to do significant good, but too small to possibly do any harm. If the impact of the CRA is so small, why do banks establish separate CRA departments, why has a CRA consultant industry come into existence, and why do financial services firms offer prepackaged portfolios of CRA loans to allow institutions to quickly solve issues with their CRA ratings? [Husock 2000]
It is also argued that since the CRA was passed in 1977, it cannot be the cause of any later damage. However, Paul Krugman tried to blame a law Ronald Reagan signed in 1982 [Krugman 2009] (some consistency about "it was too soon" would be nice, and do not forget which party controlled the Congress that passed the bill for Reagan to sign). Besides, the CRA was not passed and then forgotten:
During the seventies and eighties, CRA enforcement was perfunctory. Regulators asked banks to demonstrate that they were trying to reach their entire "assessment area" by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A's for effort. Only results-specific loans, specific levels of service-would count. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods? [Husock 2000]
The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition-a foundation-funded umbrella group for community activist groups that profit from the CRA-issued a clarion call to its members in a leaflet entitled "The New CRA Regulations: How Community Groups Can Get Involved." "Timely comments," the NCRC observed with a certain understatement, "can have a strong influence on a bank's CRA rating." [Husock 2000]
As an aside, the law that prohibited banks from owning other financial institutions (part of the Glass-Steagall Act) was repealed in 1999. Defenders of government affordable housing initiatives point to this as a cause of the housing crash. If a Clinton era "deregulation" did not happen too far in the past to be a contributor to the crash, then neither did Clinton era changes to affordable housing initiatives. The charge against Glass-Steagall repeal is easily refuted: not only had multiple Glass-Steagall exemptions been granted before the repeal and this separation of commercial and investment banks not been required in Europe (which is not exactly a hotbed of libertarianism), repeal allowed diversification, which can strengthen an institution during a crisis. Significantly, "the Rutgers economist Eugene Nelson White, for example, has found that national banks with security affiliates-the sort of institutions Glass-Steagall was designed to prevent-were much less likely to fail than banks without affiliates" [Mangu-Ward 2009].
Regarding later changes to government housing policy, the anti-government extremists at the Federal Reserve Bank of San Francisco defend the act with the same point I made above:
Three changes in the late 1980s and the 1990s may help explain a delay in the CRA's effectiveness. First, in 1989, the CRA was amended to require public access to CRA examination evaluations and performance ratings. This likely helped motivate banks to comply with the CRA in order to avoid adverse publicity. Second, and perhaps more importantly, in 1995, the CRA evaluation process increased the emphasis on actual lending and decreased the emphasis on banks' documentation of their efforts to assess community needs [FRBSF 2004].
If later changes were claimed to be the reason the act did not do as much good at first, those later changes would also explain why it did not do as much harm until later. You can see the impact of these changes in CRA lending commitments: "from 1977 to 1991, $9 billion in local CRA lending commitments had been announced...growing to $6 trillion [since 1993]" [Pinto 2009c]. To further address the "it was passed way back in 1977" defense, other expansions of the government's affordable housing initiatives include:
In 1989, President George H.W. Bush signed into law the Financial Institutions Reform Recovery and Enforcement Act that included provisions to increase public oversight of the way the CRA was enforced. Regulators were required to issue public, written performance evaluations of banks, including a system that rated bank compliance as Outstanding, Satisfactory, Needs To Improve or Substantial Non-Compliance. This public scrutiny began to push banks to make more loans to low-income borrowers, a process that often involved putting in place relaxed lending standards. [Carney 2009]
Beginning in 1992, Fannie and Freddie received increasing pressure by Congress and the Department of Housing and Urban Development ("HUD") to increase their "affordable lending" operations. For 1996, HUD instructed Fannie and Freddie that 42% of their mortgage financing had to go to borrowers with income below the median in their area, a target that increased to 50% in 2000 and 52% in 2005. HUD also increased Fannie and Freddie's obligations with respect to "special affordable" loans, those borrowers with income less than 60% of their area's median income. In 1996, Fannie and Freddie were expected to make 12% of their loans as "special affordable," a figure that rose to 20% in 2000, 22% in 2005, and a goal of 28% by 2008. To meet these ambitious targets, Fannie and Freddie encouraged lenders to dip further into the risk pool of borrowers and to take on loans with increasingly risky terms, such as ARMs, interest-only, and high-LTV loans. [Zywicki 2009]
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which opened the door for interstate banking and encouraged a new wave of banking M&A, made the ratings under the CRA a test for determining whether acquisitions would be allowed. That same year, the Fed refused to allow a Hartford, Connecticut bank to acquire a New Hampshire bank on fair housing and CRA grounds. [Carney 2009]
In 1995, regulators began to enforce the CRA in a very different way than they had in the past. Instead of focusing on the process of bank lending, the new regulations were focused on objective performance evaluations. At the same time, regulators began disclosing more information about particular banks. As one commenter put it at the time, "We have learned from 30 years of CRA policy that what is measured gets done." [Carney 2009]
In November 2000, then-HUD Secretary Andrew Cuomo announced that Fannie Mae and Freddie Mac were committed to purchasing $2 trillion of "affordable housing" mortgages. This greatly increased the willingness of banks to make the kind of mortgages being promoted by the regulators. As the push factor of the CRA was increasing, the pull factor of Fannie-driven securitization was also increasing. [Carney 2009]
In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their "investment" and "service"-two long-standing categories of assessment under the CRA. [Carney 2009] More on that below; this is not the 'deregulation' it may appear to be at first.
...federal regulators implemented several important changes in September 2005...The new rules also expanded the definition and geographic scope of CRA-eligible community development by creating two new categories of CRA-eligible activities and/or geographies. The first new category includes activities that either revitalize or stabilize state and federally designated disaster areas during the official disaster period. The second includes activities that either revitalize or stabilize middle-income distressed or underserved areas that are located in rural areas. For the CRA, rural areas are those census tracts located outside the boundaries of the nation's metropolitan statistical areas, or MSAs. By adding these distressed or underserved rural areas to the rural census tracts already designated as low- or moderate-income, federal regulators expect to increase the number of rural areas in which activities are eligible for community development consideration under the CRA.[Grover 2007]
Another factor in escalating government involvement in housing prior to the crash was Fannie's and Freddie's reactions to their own scandals: "It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises" [Zywicki 2009]. Freddie Mac protected itself from accountability with political donations that resulted in a $3.8 million fine to the Federal Election Commission, having been accused of "illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $1.7 million for federal candidates" which "benefited members of the House Financial Services Committee, a panel whose decisions can affect Freddie Mac" [Poor 2008]. Finally, if Proposition 13 (passed in 1978) can be claimed (falsely, in my opinion) by the left as the cause of all of California's budget woes, they cannot then turn around and claim 1977 is too far in the past for the CRA to have harmful impact today, particularly if they also believe it has helpful impact today.
One last strike against the CRA (and government affordable housing regulations in general) is that their impacts are not limited to their intended targets:
The key question, however, is the effect of relaxed lending standards on lending standards in non-CRA markets. In principle, it would seem impossible--if down payment or other requirements were being relaxed for loans in minority-populated or other underserved areas--to limit the benefits only to those borrowers. Inevitably, the relaxed standards banks were enjoined to adopt under CRA would be spread to the wider market--including to prime mortgage markets and to speculative borrowers. Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers. This is exactly what occurred. Writing in December 2007 for the Milken Institute, four scholars observed: "Over the past decade, most, if not all, the products offered to subprime borrowers have also been offered to prime borrowers. In fact, during the period from January 1999 through July 2007, prime borrowers obtained thirty-one of the thirty-two types of mortgage products--fixed-rate, adjust-able rate and hybrid mortgages, including those with balloon payments--obtained by subprime borrowers." [Wallison 2008]
Similarly, "Dahl, Evanoff, and Spivey (2000) point out ... that mortgage companies may be influenced by potential regulations even though they are not currently subject to the CRA" [Ardalan 2006]. An example of this can be found in the Sears Mortgage Corporation:
To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.
Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown. [Malanga 2009]
John Carney explains further:
Mortgage companies like Countrywide began to serve this entirely artificial demand for CRA loans. Countrywide marketed its loans directly to banks as a way for them to meet CRA obligations. "The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit,” a Countrywide advertisement on its website read. [Carney 2009c]
Countrywide even appointed an "executive vice president for Community Reinvestment Act [CRA] lending and community development" [HBD 2007]. As it always seems to, it comes back to Senator Dodd:
Countrywide was for years the biggest single customer of Fannie Mae, the giant government-sponsored mortgage securitizer that has since gone into federal conservatorship. Much of Countrywide's business was built around its ability to sell loans to Fannie, and Mr. Mozilo helped push Fannie to accept dodgier and dodgier paper. Mr. Dodd in turn supported this goal by pressing Fannie to do more for "affordable" housing.
This nexus between Mr. Dodd's public duties and Countrywide's interests is a serious matter involving the Senator's personal ethics and accountability to taxpayers who will be paying for Fannie's bad loans for years to come.
[WSJ 2009]
Having seen what happens to entities that do not fall into line voluntarily gives others an incentive to conform. This calls into question the defense that brings up "all those non-CRA loans". Were those other loans really uninfluenced by the CRA? No. When reading the first section below, keep in mind Edward Pinto's statement above that "default risk on an original loan increases geometrically the closer you get to no money down".
What about "No Money Down" Mortgages? Were they required by the CRA?
Actually, yes they were. The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required. A Treasury Department study published in 2000 found that the CRA had successfully lowered down payments not just for CRA loans, but for all mortgages. (Emphasis mine)...
Weren’t the majority of the subprime loans made by mortgage service companies not subject to the CRA?
This is true. But it is largely beside the point. A huge driver of the demand for subprime loans was the demand for CRA bonds. Banks operating under the CRA could meet their obligations by buying up CRA loans or MBS built from CRA loans. The CRA created a demand that the mortgage servicers were meeting.
What's more, many smaller mortage service companies hoped to be acquired by larger banks. Increasing their CRA lending made them more attractive take-over targets.
A study put out by the Treasury Department in 2000 found that the CRA was encouraging the mortgage servicers to provide loans to low-income borrowers... [Carney 2009b]
Some studies (such as the one by the Minneapolis Fed), attempt to minimize this by only examining sales of individual loans, claiming that "less than 2 percent of the mortgage originations sold by independent mortgage companies in 2006 were higher-priced, CRA-credit-eligible, and purchased by CRA-covered banking institutions" [Bhutta 2009]. If your objection to 'securitization' is a complaint about loans changing hands multiple times, with the originator not being responsible for the result, then you cannot merely look at the first sale of a loan to draw your conclusions. As noted above, the Basel regulations encouraged banks to hold mortgage backed securities instead of mortgages, which would lead to a low level of direct mortgage sales to banks. This also brings back up an earlier question - if the CRA was too small to do any harm, how could it be large enough to do any good? One last comment concerning non-CRA covered institutions:
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.[DiLorenzo 2008]
Finally, CRA defenders were certainly willing to accept 'credit' for "mortgage innovation" when it suited their purposes:
...Attempts to eliminate discrimination involve strengthened enforcement of existing laws… There have also been efforts to expand the availability of more affordable and flexible mortgages. The Community Reinvestment Act (CRA) provides a major incentive...Fannie Mae and Freddie Mac… have also been called upon to broaden access to mortgage credit and homeownership. The 1992 Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) mandated that the GSEs increase their acquisition of primary market loans made to lower income borrowers…Spurred in part by the FHEFSSA mandate, Fannie Mae announced a trillion-dollar commitment.
The result has been a wider variety of innovative mortgage products. The GSEs have introduced a new generation of affordable, flexible, and targeted mortgages, thereby fundamentally altering the terms upon which mortgage credit was offered in the United States from the 1960s through the 1980s. Moreover, these secondary-market innovations have proceeded in tandem with shifts in the primary markets: depository institutions, spurred by the threat of CRA challenges and the lure of significant profit potential in underserved markets, have pioneered flexible mortgage products. For years, depositories held these products in portfolios when their underwriting guidelines exceeded benchmarks set by the GSEs. Current shifts in government policy, GSE acquisition criteria, and the primary market have fostered greater integration of capital and lending markets.
These changes in lending herald what we refer to as mortgage innovation. [Liebowitz 2008]
Another negative consequence of the various government "affordable housing" initiatives is that they opened the door for "community groups" to extort funding for themselves:
...banks, engaged in a frenzy of mergers and acquisitions, soon learned that outstanding CRA ratings were the coin of the realm for obtaining regulators' permission for such deals. Further, nonprofit advocacy groups-including the now famous Acorn and the Neighborhood Assistance Corporation of America (NACA)-demanded, successfully, that banks seeking regulatory approvals commit large pools of mortgage money to them, effectively outsourcing the underwriting function to groups that viewed such loans as a matter of social justice rather than due diligence. "Our job is to push the envelope," Bruce Marks, founder and head of NACA, told me when I visited his Boston office in 2000. He made clear that he would use his delegated lending authority to make loans to households with limited savings, significant debt, and poor credit histories. [Husock 2008]
...the examination process to determine the level at which a bank is meeting its CRA obligations can sometimes take several months. This has become a major point of leverage-and source of funding-for "community" activist groups. Lending institutions, rather than face the increased expense of a slowed deposit facility application due to a CRA challenge, have committed over $7 billion to such groups and $23 billion to community development lending projects since 1977. Some companies seek to mitigate the threat by funding activist groups' projects, instead of reforming their overall approach to community reinvestment, according to Jonathan Macey of Yale Law School. Groups like the Association of Community Organizations for Reform Now (ACORN), aware that even small delays in approval can result in substantial losses of money for financial institutions, have been exploiting such a strategy for years. For example, Chase Manhattan and J.P. Morgan donated hundred of thousands of dollars to ACORN around the time that they applied for permission to merge. [Minton 2008]
By intervening-even just threatening to intervene-in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do." [Husock 2000]
[Neighborhood Assistance Corporation of America (NACA) chief executive Bruce Marks], a Scarsdale native, NYU MBA, and former Federal Reserve employee, unabashedly calls himself a "bank terrorist"-his public relations spokesman laughingly refers to him as "the shark, the predator," and the NACA newspaper is named the Avenger. They're not kidding: bankers so fear the tactically brilliant Marks for his ability to disrupt annual meetings and even target bank executives' homes that they often call him to make deals before they announce any plans that will put them in CRA's crosshairs. A $3 billion loan commitment by Nationsbank, for instance, well in advance of its announced merger with Bank of America, "was a preventive strike," says one NACA spokesman....Marks is unhesitatingly candid about his intent to use NACA to promote an activist, left-wing political agenda. NACA loan applicants must attend a workshop that celebrates-to the accompaniment of gospel music-the protests that have helped the group win its bank lending agreements. If applicants do buy a home through NACA, they must pledge to assist the organization in five "actions" annually-anything from making phone calls to full-scale "mobilizations" against target banks, "mau-mauing" them, as sixties' radicals used to call it. [Husock 2000]
In the 1990s, Mr. Marks leaked details of a banker's divorce to the press and organized a protest at the school of another banker's child. He says he would use such tactics again. "We have to terrorize these bankers," Mr. Marks says. [Hagerty 2009]
By the way, in 2000 "when the national average delinquency rate was 1.9 percent, Marks told [Howard Husock] that the rate for his organizations' loans was 8.2 percent" [Husock 2008]. When NACA was operating under "delegated underwriting authority" from the banks, and was determining whether an applicant was qualified, it received a $2,000 origination fee on each loan it closed in its own offices [Husock 2000]. NACA's charming behavior continues through 2009:
It recently added a photo of William Gross of Pacific Investment Management Co., the big bond house known as Pimco, along with pictures of his home and other information. Mr. Marks says his contacts in banking and government tell him Pimco doesn't support the administration's push to modify mortgages. "We're exposing them," Mr. Marks says. A spokesman for Pimco said neither it nor Mr. Gross would comment.
Mr. Marks says financial executives should be held personally responsible for actions that affect people's lives, and "if they interpret that as intimidation, so be it." He says that "we're not talking about violence. We don't do violence." [Hagerty 2009]
Predatory behavior on the part of "community activists" was not limited to Bruce Marks, our own President began his law career engaging in this sort of activity:
Obama's battle against banks has a long history. In 1994, freshly out of Harvard Law School, he joined two other attorneys in filing a lawsuit against Citibank, the giant mortgage lender. In Selma S. Buycks-Roberson v. Citibank, the plaintiffs claimed that although they had ostensibly been denied home loans "because of delinquent credit obligations and adverse credit," the real culprit was institutional racism. The suit alleged that Citibank had violated the Equal Credit Opportunity Act, the Fair Housing Act and, for good measure, the 13th Constitutional Amendment, which abolished slavery. The bank denied the charge, but after four years of legal wrangling and mounting legal bills, elected to settle. According to court documents, the three plaintiffs received a total of $60,000. Their lawyers received $950,000. [Schweizer 2009]
One reason "community groups" had this much power is that "Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates" [Pinto 2009c].
Overall Performance Statistics
There have been some wide ranging (as opposed to single-institution) studies of CRA loan performance and profitability. One of the earliest I found referenced a study of the period 1991-1996 which revealed that "the financial soundness of CRA covered institutions decreases the better they conform to the CRA. Gunther compares certain institutions' CRA ratings to their CAMELS rating-a formula used by bank regulators to assign safety and soundness ratings that takes into account capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risks. He found that the better a lender was rated by CRA standards, the worse was its CAMELS rating" [Minton 2008]. Later statistics from around the year 2000 include:
As early as 1999, the Federal Reserve Board found that only 29 percent of loans in bank lending programs established especially for CRA compliance purposes could be classified as profitable. [Husock 2008]
Delinquency rates for CRA loans are twice that for non-CRA loans in the market for home purchase and refinance (1.57 percent v. 0.79 percent). [Silvia 2000]
In the home purchase and refinance market, unprofitable lending is three times greater with CRA loans as compared to other loans. Only 6 percent of non-CRA lending in this category was non-profitable, compared to 18 percent for CRA lending. [Silvia 2000]
Delinquency rates for CRA loans in the home purchase and refinance market are twice that for non-CRA loans. [Silvia 2000]
More recent data, limited to specific institutions, tells a similar tale. All but one of the examples below involves smaller institutions, which perform differently than large ones under the CRA, but they do counter the likes of the North Carolina Center for Community Capital example (note the prime/subprime designation games, first mentioned above, played by Third Federal):
Third Federal Savings and Loan's (Cleveland) has a 35% delinquency rate on its "Home Today" loans versus a rate of 2% on its non-Home Today portfolio. Home Today is Third Federal's CRA lending program, which targeted low- and moderate-income home buyers who prior to March 27, 2009 (the date it suspended the program's innovative and flexible underwriting requirements due to poor performance) would not otherwise qualify for its loan products, generally because of low credit scores and high LTVs. ...it did not classify its Home Today loans as subprime lending, however, it noted that the credit profiles of Home Today borrowers "might be described as sub-prime" [Pinto 2009b]
Chicago's Shorebank-the nation's first community development bank, with largely CRA-related loans on its books-has a 19 percent delinquency and nonaccrual rate for its portfolio of first-mortgage loans for single-family residences. [Pinto 2009a]
Bank of America said in 3Q 2008 that while its CRA loans constituted 7 percent of its owned residential-mortgage portfolio, they represented 29 percent of that portfolio's net losses. [Pinto 2009a] The annualized loss rate from the CRA book was 1.26 percent and represented 29 percent of the residential mortgage net losses. [Husock 2008] For the first quarter of 2009, the Bank of America residential mortgage portfolio showed an increase in losses to $785 million, and the community reinvestment act portfolio was "about 7% of the residential book, but about 24% of the losses". [BoA 2009]
Some might complain that the final bullet point leaves out 71% of Bank of America's losses. Reverse the situation and pretend a government mandate resulted in 7% of Bank of America's residential portfolio, which was 29% of its hypothetical profits. Would the same people ignore that or make that a huge point in favor of the mandate?
Edward Pinto calculates a proxy statistic for nationwide CRA performance, based on the fact that 50% of CRA originations since the mid 1990s were acquired by Fannie and Freddie in order to meet HUD mandated affordable housing goals. Fannie/Freddie had a total of $1.5 trillion in high risk loans (85% of those being affordable housing loans), and those loans had a delinquency rate of 15.5% in June 2009. "This is about 6.5 times the 2.4% delinquency rate on the GSEs' traditionally underwritten loans" [Pinto 2009b].
Large vs. Smaller Institutions
The Community Reinvestment Act impacted larger and smaller institutions differently. According to George Benston of Emory University, larger banks' loans to low to moderate income borrowers are operated as a strategic loss to get a satisfactory CRA rating for regulatory approval for mergers and acquisitions. This means larger banks charge extremely low rates that smaller banks cannot match [Minton 2008]. An executive with a major national financial-services firm states that "the problem with CRA,is that banks will simply throw money at things because they want that CRA rating." [Husock 2000]
In addition to having to deal with the likes of ACORN and NACA, large institutions also experienced new regulations aimed specifically at them:
In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their "investment" and "service"-two long-standing categories of assessment under the CRA....This had two unintended consequences that would later prove to be very costly. In the first place, it increased CRA scrutiny of larger banks, who were now the main focus of regulators. This put even more pressure on the banks to make CRA loans. Secondly, by allowing banks to de-emphasize "investment" and "service," the new regulations created an even greater incentive for banks to meet CRA obligations by making home loans. [Carney 2009]
The Minneapolis Fed ignores this when attempting to defend the CRA, but inadvertently concedes the timing fits:
The first point is a matter of timing. The current crisis is rooted in the poor performance of mortgage loans made between 2005 and 2007. If the CRA did indeed spur the recent expansion of the subprime mortgage market and subsequent turmoil, it would be reasonable to assume that some change in the enforcement regime in 2004 or 2005 triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995. [Bhutta 2009]
Remember what organization wrote that "...federal regulators implemented several important changes [to the CRA] in September 2005..."? That would be the same Minneapolis Fed that employs Bhutta and Canner, in [Grover 2007]. Their own organization does not back up their claim that "the CRA rules and enforcement process have not changed substantively since 1995". The period between 2005 and 2007 also encompasses Freddie's and Fannie's post-scandal period:
It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises. ... As a result, not only did the number of subprime loans explode in the 2005 to 2007 period, but a disproportionate number of these loans were made to the riskiest borrowers or had extremely high risk characteristics, such as negative amortization, interest-only, high-LTV, or very low FICO scores. [Zywicki 2009]
Some statistics from the Federal Reserve that pre-date the changes in 2005 mentioned above:
While 39 percent of the smallest banking institutions in the sample report that the profitability of their CRA-related home purchase and refinance lending is either somewhat lower or lower than the profitability of their non-CRA-related lending, 69 percent of the largest banking institutions report this experience. [Fed 2000]
A greater proportion of large banking institutions (assets of $30 billion or more) report that their CRA-related home purchase and refinance lending is either marginally unprofitable or unprofitable than medium- (assets between $5 billion and $30 billion) or smaller sized (assets between $950 million and $5 billion) institutions. [Fed 2000]
The mean and median 30-89 day delinquency rates for both the CRA-related and overall lending of large banking institutions are more than two times the mean and median 30-89 day delinquency rates for smaller institutions in the sample. Differences for other measures of performance are about the same. [Fed 2000]
Nearly 90 percent of large banking institutions report higher 30-89 day delinquency rates for CRA-related home purchase and refinance lending than for overall home purchase and refinance lending. By comparison, 41 percent of smaller banking institutions in the sample report this kind of relative experience. Similarly, half of the large institutions report that credit losses are higher for CRA-related home purchase and refinance lending, while only 22 percent of smaller institutions in the sample report a similar experience. [Fed 2000]
Among all institutions, about 40 percent of CRA special lending programs are not profitable. For large institutions, 58 percent report that their CRA special lending programs are not profitable. [Silvia 2000]
Delinquency rates are higher on a per program dollar basis than on a per program basis. The study interprets this result as "suggesting that larger programs have higher delinquency rates." [Silvia 2000]
Large banks, for obvious reasons, will be the bulk of your banking-related losses in a downturn:
In spring 2008, at the request of the Treasury Department, the Fed and the Comptroller of the Currency supervised a special process of stress testing by the nineteen largest U.S. financial institutions (most of which were bank holding companies with large subsidiary banks). Table 1 is taken from a report by the Fed on the stress tests and shows the aggregate projected losses for all nineteen institutions in an economically adverse scenario.[22] For purposes of this discussion, two items in this table stand out--the very large projected losses on first and second lien mortgages and the projected trading and counterparty losses. The former is consistent with the hypothesis advanced at the outset of this Outlook--that the largest banks committed themselves to make large numbers of CRA-qualifying loans in order to gain regulatory approval for expansions in the late 1990s and 2000s. The total projected residential mortgage losses for Bank of America, Citibank, JP Morgan Chase, and Wells Fargo are $167 billion out of a total for all nineteen institutions of $185 billion. The mortgage losses of the other banks in the survey were negligible. [Wallison 2009c]
The dollar amounts involved with large institutions are huge. Washington Mutual pledged $1 trillion in mortgages to those with credit histories that "fall outside typical credit, income or debt constraints". In recognition of this sort of behavior, it 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. [Schweizer 2009] Other large CRA and "affordable housing" commitments include:
Countrywide (1): in 2001 committed to finance $100 billion in community lending through 2005. It exceeded this goal by early 2003. In 2003 it announced an expanded $600 billion goal, extended to 2010. In 2005 it announced an expanded $1 trillion goal. Countrywide was the first national lender to sign HUD’s CRA-like Declaration of Fair Lending Principles and Best Practices in 1994.
Washington Mutual (3): in 1998 committed $120 billion, gets OTS approval of Dime merger in 2003, simultaneously establishes 10-year, $375 billion commitment to low- and moderate-income borrowers. Enters into an $85 billion 5-year strategic alliance with Fannie for similar borrowers.
Chase Home Finance (4): In 2003 announces $500 billion commitment to meet home financing needs of underserved borrowers and is pleased to work with Fannie Mae to help millions of families from underserved segments with the American dream of homeownership.
CitiMortgage (5): in 1998 committed to $115 billion in community lending through 2007, in 2003 committed to finance $200 billion in community lending through 2010 and exceeded this goal in 2005, with lending to date totaling $224.5 billion. It received the highest possible CRA rating - “outstanding” for all 5 of its constituent banks.
Bank of America (6): at 2004 hearing on its merger with FleetBoston notes “a remarkable national commitment to loan and invest $750 billion for community economic development over the next 10 years.” For 2005-2007, 44% in CA, AZ, FL, and NV. In 2009 announces it’s doubling commitment to $1.5 trillion ($1 trillion for housing).[Pinto 2009e]
Why is this important? Because 94% of the $6 trillion in CRA commitments made between 1992 and 2008 "were made by banks and thrifts that were or ended up being owned by just four banks: Wells Fargo, JP Morgan Chase, Citibank, and Bank of America" [Pinto 2009b]. These four banks, in addition to Fannie Mae and Freddie Mac, are responsible for "an estimated 70% or more of outstanding CRA loans" [Pinto 2009b]. We have seen the performance of CRA related loans at Bank of America. Fannie and Freddie are in such dire straights that the Treasury Department had to remove the "$400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent" [Wallison 2009].
Yes, some of the loans being held by the largest banks could have originally been issued by smaller banks which were acquired by the larger one. Yes, not all loans held by Fannie and Freddie came from the largest institutions, but if you put the "origin of" and "current responsibility for" statistics together, it is apparent that large institutions did most of the CRA heavy lifting. Think about it; while the CRA could have exposed both large and small institutions to the likes of NACA and ACORN, which do they go after, Bank of America or North Carolina's Center for Community Capital? Where is the money? Until the large institutions' loans are examined in detail, no meaningful defense of the Community Reinvestment Act can be made. No study of 500 loans made by "Tiny Community Savings and Loan" will suffice.
Unfortunately, the left's strategy is to use the CRA to target large institutions, then evaluate the harm done by the CRA (and related initiatives) by examining smaller institutions. This is much like the strategy of defending the CRA by talking about loans made or sold (Fannie and Freddie did not make loans, banks did not buy many CRA loans directly from non-CRA institutions) and ignoring the encouragement institutions received from government for buying loan-backed securities.
Even after the crash, not only is the government meddling in the housing market, it is bragging about it. Put that together with pre-crash praise for the CRA (and other affordable housing initiatives) and you have the government bragging about getting people into expensive homes, denying it was involved in getting people into expensive homes, then bragging about getting people into expensive homes. This is from February 2010:
Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”
In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income.
Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases. [Alloway 2010]
Did the passage of the Community Reinvestment Act in 1977 guarantee a housing crash in 2008 all by itself? Of course not. Did government smart growth policies [O'Toole 2009], [Sowell 2009] and low interest rates [Matthews 2010], [Taylor 2010] (advocated and endorsed by leftists like Paul Krugman [Doherty 2009]) contribute to the crash? In my opinion, most definitely. Did the CRA, and government affordable housing policies in general contribute significantly? Yes. There is only a conflict if you look for the cause of the crash instead of the causes. Multiple government activities can all work together to lead to the same disaster. One thing that should not be overlooked is that the threats to institutions outside the CRA, and the stress on affordable housing goals, were not always direct orders to lower standards. The government, using the word of choice of Obama regulatory czar, Cass Sunstein, just nudged lenders. If that kept the government's hands clean of the resulting disaster, so much the better.
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