Yet Again, It Wasn't the Community Reinvestment Act...
Another attempt to blame the Community Reinvestment Act for the subprime crisis. Don't believe a word of it:
Don't Blame the Markets, by Jerry Bowyer, Commentary, NY Sun: The government compels banks to make loans in poor neighborhoods even if the applicants are not considered prime borrowers. You may not know about that because the Community Reinvestment Act is not exactly a household ... name.
But the commercial banks do know about it. ... They get a CRA rating. They know that the way to get a high CRA rating is to make loans to poor applicants or in poor urban neighborhoods regardless of the financial prudence of the loans.
They know that if they don't do this, they will be punished severely by the regulators... So, they grit their teeth and stamp a big inky "yes" on an application which they know, according to traditional financial standards, deserves a "no."
Up until 1995 the Community Reinvestment Act was largely a requirement to support "community groups" in poor neighborhoods. ... But after 1995 the scope of the law was dramatically increased.
Over the strenuous objections of the banks themselves and some Republicans in Congress, CRA was renewed and modified in such a way that it gave far more power to the federal government to punish banks for not lending more widely in poor neighborhoods. The classic "fair housing" laws from the Martin Luther King Jr. era of civil rights were deemed insufficient. ... Subprime loans to minority applicants exploded ten fold in the mid-1990s as a result. ...
Under New Deal-era regulatory rules of Glass-Steagall, commercial banks and investment banks were separated. When that act was repealed as part of banking deregulation in 1999, commercial banks and investment banks were able to merge, subject to approval by regulators.
However, the banks' CRA rating was taken into account in the decision. This meant that a high CRA rating became an important prerequisite for mergers, which increased the pressure on the banks to make these risky loans. The banks also were given permission to put these loans into packages of securities that could then be sold into investment markets.
Last week, a front page Wall Street Journal article set off a national debate about the legacy of Alan Greenspan. ... But it is not Mr. Greenspan's fault that Congress substituted identity politics for financial prudence...
The fault lies with the small army of hard left political hustlers who spent the early 1990s pushing risky mortgages on home lenders. And the fault lies especially with the legislators that gave them the power to do it.
As noted below, what a load of crap (which is the null hypothesis, or better, the exceptionally strong prior, whenever you see anything with byline on the article above). Here's Ezra Klein:
The new line we're hearing is that the financial meltdown was really the product of the Community Reinvestment Act, a piece of legislation from the late-70s that required federally-insured banks to lend throughout the areas from which they take deposits, including poor neighborhoods, which were being systematically excluded from credit. The legislation, by all accounts, worked. Now, however, conservatives are trying to argue that it's behind the crisis: If the CRA hadn't been pushing these banks to make all these unsafe loans, then the birds would still sing...
As Robert Gordon shows, however, this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off. Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory. Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppycock. It's just a false charge...
Ezra didn't cover the change in 1995, except indirectly by noting the timing of the crisis, but for completeness, here's Robert Gordon. He also covers why the merger argument is flawed:
In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened...
The real agenda behind this shameless push to blame the CRA is evident.
Update: See here too.
Posted by Mark Thoma on Friday, April 18, 2008 at 12:33 AM in Economics, Housing, Politics, Regulation |
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