How the CRA Fueled the Housing Bubble

President Obama wants to expand the Community Reinvestment Act. Thus it should be no surprise that a self-serving report by the Obama Administration concludes that CRA "greenlining" (forcing banks to lend to low-income neighborhoods) did not contribute to the housing bubble or the financial crisis.

Investor's Business Daily takes apart ACORN and the CRA in an editorial Community Reinvestment Act: Separating Fact From Fiction

In light of the Obama administration's stated goal of expanding the CRA, separating fact from fiction regarding this issue is of towering importance — to set the historic record straight and to prevent another financial calamity.

FICTION: Because the CRA was passed in 1977, long before the subprime crisis, it couldn't have caused the recent explosion in bad loans.

FACT: The toothless 1977 regulations fully expired in July 1997, when President Clinton rewrote them to toughen CRA enforcement as part of a crusade to close the "mortgage gap" between blacks and whites.

For the first time, banks were required to show results. One of the five performance criteria in the "lending test" — the most heavily weighted component of the CRA exam — was adopting "flexible lending practices" to address the credit needs of poor borrowers in "predominantly minority neighborhoods." Banks that didn't bend their underwriting rules risked flunking the exam.

Ex-Federal Reserve Board Gov. Lawrence Lindsey, a staunch CRA defender, acknowledges that the changes "did contribute to a downgrading of credit standards."

FICTION: "Many of these (CRA) loans were not very risky," the FCIC report claims.

FACT: Studies show that CRA loans have higher delinquencies and defaults and act as a major drag on bank earnings. In 2008, CRA loans accounted for just 7% of Bank of America's total mortgage lending, but 29% of its losses on home loans. Also, banks with the highest CRA ratings tend to have the lowest safety and soundness ratings.

FICTION: Only 6% of subprime loans were originated by banks subject to the CRA, so the vast majority of risky lending was not tied to the law.

FACT: Among other things, the figure does not count the trillions of dollars in CRA "commitments" that WaMu, BofA, JPMorgan Chase, Citibank, Wells Fargo and other large banks pledged to radical inner-city groups like Acorn, Greenlining and Neighborhood Assistance Corp. of America (NACA) after they used the public comment process to protest bank merger applications on CRA grounds.

All told, they shook down banks for $4.6 trillion in such commitments before the crisis, boasts a report by the National Community Reinvestment Coalition, or NCRC, the nation's top CRA lobbyist (which conveniently removed the report from its website during the FCIC hearings).

FICTION: "These loans performed well," the FCIC report maintained.

FACT: Brookings found that the loan commitments were set aside for low-income minorities with "marginal credit scores" and posed a higher risk. They were even riskier than regular CRA loans, because the banks delegated underwriting authority to the nonprofit shakedown groups, which had no experience judging credit risk.

NACA thinks traditional underwriting standards are "patronizing and racist." It advertises that anyone — "regardless of how bad your credit is" — can qualify for the mortgages it's arranged through special deals with banks. Not surprisingly, one study found that its delinquency rates were eight times higher than the national average.

Banks reported delinquency rates ranging from 5% to 50% on loans made pursuant to their merger-related commitments.

Yet the FCIC refused to investigate the more than 300 CRA agreements that banks and community organizers entered into before the subprime bubble burst.

Despite repeated requests by Commissioner Peter Wallison, the panel never examined the performance of the trillions in loan commitments.

Why would Chairman Angelides steer blame away from the CRA? Because he's a big fan of the CRA. And as California state treasurer, from 1999 to 2007, he steered billions in state funds into unsafe CRA mortgages securitized by Freddie Mac.

At the time, Greenlining advised Angelides on where to invest California state funds, even providing him with its own CRA report card on "good" and "bad" banks. He has also personally benefited from CRA projects brokered by his real estate development firms, according to "The Great American Bank Robbery."

As part of the CRA racket, Angelides should have been a witness in the crisis investigation, not its chief inquisitor. With the cover-up complete, he now hopes that CRA critics will go away.

"The debate about the role of the CRA should now be over as evidence presented in the commission's report is clear," Angelides declared earlier this month.

Sorry, sir, but the debate will end when the public has all the facts, not just your cooked report.

The CRA certainly did not cause the financial crisis. However, it did contribute to it.

Ironically, the very same people who insisted money be lent to people who could not afford houses are the very same people now bitching about those same "predatory loans".

Forcing banks to lend money is a piss poor idea. Piss poor loans help neither the lender nor the borrower. Yet, those who added fuel to the housing bubble have now whitewashed their role in the affair and beg for still more funds.

President Obama want to expand the CRA. Instead it should be added to the scrap heap of history along with Fannie Mae, Freddie Mac, HUD, HAMP, and thousands of affordable home programs all of which did anything but make homes affordable.

Now that home prices are falling, one might think the affordable home advocates would be happy. They are not. The hypocrites now want to prop up home prices on the belief that falling home prices hurt neighborhoods.

When dealing with misguided activists and self-serving fools you simply cannot win.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List