"More CRA Idiocy"

Anyone who has looked closely and honestly at the evidence regarding the Community Reinvestment Act's role in the financial crisis has concluded that it played no role it all - the CRA isn't responsible. Yet the myth persists, and the New York Timed editorial page decided to help it along recently by publishing an op-ed blaming the CRA for causing troubles in financial markets. Barry Ritholtz tries - yet again - to set the record straight:

More CRA Idiocy, by Barry Ritholtz: Howard Husock has an exercise in cognitive dissonance in today’s NYT Op-Ed pages titled Housing Goals We Can’t Afford, and it begins:

“The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible.”

What can you say about an Op-Ed whose very first sentence is a giant pile of steaming bullshit? That statement is demonstrably false. As the prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods.

California leads the nation in foreclosures. The state’s foreclosure activity was up 51% from a year ago. These are not CRA communities, they are what were hoped to be surburban bedroom communities east of the major cities (San Diego and L.A.)

Next up is Florida; The state’s foreclosure activity was still up 68 percent from November 2007. The enormous overbuilding of Condos, and not CRA, is to blame. These weren’t inner city loans to minorities, ... they were "...highly amenitized condos ... (no subprime purchasers welcome there)” ...

Let’s put some context around what the CRA is and isn’t.

In the 1960s and 70s, banks would ... literally put a map on a wall, and with a red magic marker, draw a redline enveloping certain neighborhoods. If you lived within the redlined areas, regardless of your income, credit score, assets, debt servicing ability, if you were in the redlined area you could not qualify for a mortgage.

Although Redlining was made illegal by the Fair Housing Act of 1968, the practice still surreptitiously continued. The Community Reinvestment Act of 1977 was the next attempt to stop redlining. There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. ...

Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to ... at least try to lend the locals back their own money.

Note that there are no quotas, minimums or mandates. This is a very soft rating system.

The rest of Husock’s article is filled with the usual dissembling and half-truths. He mentions “in 1995 the Clinton administration added tough new regulations,” but omits any mentions that the Bush administration substantially watering down the act in 2004. ...

[S]ince Bear Stearns collapsed in March, there has been a veritable parade of bankers, mortgage originators, lenders, fund managers, and investment banks CEOs all testifying in Washington D.C. about the causes of the crisis. By some strange coincidence, not a single one blamed the CRA (Dick Fuld, CEO of Lehman Brothers was even asked about it). Not a one.

And of course, vast numbers of sub-prime mortgages were written by non-CRA banks. Indeed, none of the 300+ mortgage originators that imploded were depository banks covered by the CRA.

This is a an intellectually silly argument from other perspectives also. Why was there no credit/housing meltdown from 1977 to 2005? Why did 30 other countries, none of which have are covered by the CRA, have a remarkably similar housing boom and bust to the USA? Husock’s arguments not only fail legally and factually, they also fail in terms of time and space . . .

More debunking:

• Private sector loans, not Fannie or Freddie, triggered crisis, McClatchy
• It Wasn't the Community Reinvestment Act
• Yet Again, It Wasn't the Community Reinvestment Act...
• It Wasn't the CRA