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Memo to Republicans: CRA Has Nothing To Do With the Current Problems

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There's a meme going around the right wing blogs. Deregulation has nothing to do with the current problems in the market. The real culprit is the Community Reinvestment Act signed into law by President Carter in 1977. Nothing could be further from the truth as a reading of the facts of the matter reveal.

Let's look at a root cause of this garbage. John Hawkins at Right Wing News has a classic analysis :

Those corporations? The government set up the system that encouraged them to make bad loans and they're only worsening things by buying them out. They've set up a situation where the companies were rewarded for making foolish loans and now the same companies are being rewarded for not being able to pay their bills with a bailout.

The Democrats, being socialists at heart -- are trying to blame deregulation for this. That's pure, unadulterated horsecrap. In fact, Thomas Sowell, who has probably forgotten more about economics than most of the members of Congress have ever known, pointed out the Congressional link back in August of last year,

He links to an article by Thomas Sowell which claimed the Community Reinvestment Act was to blame.

The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise -- and the same politicians are quick to cry "exploitation" when the interest charged to high-risk borrowers reflects that risk.

There are two huge problems with this analysis. The first one alone should dismiss this claim as a farce. The CRA was signed into law in 1977 -- almost 30 years ago. So, what do you think the possibilities of a law passed 30 years ago causing the lending problems now? That's one heck of a law to have that kind of effect.

But wait -- Clinton changed the law That was the real problem No it wasn't, regarding those changes:

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.

But here's the real kicker. The Community Reinvestment Act only applies to banks and thrifts:

The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and thrifts to
offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as redlining. The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.


The vast majority of the subprime loans over the last 8 years did not originate from banks or thrifts:

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

In other words, the CRA isn't even an issue. But that won't stop the the likes of Rush and his progeny from saying it over and over again until all sorts of people believe it.

While we're on the topic -- the CRA had nothing to do with the problems at Fannie Mae and Freddie Mac either:

Note, too, that Fannie and Freddie have nonpareil lobbying operations and formidable political strength, owing to their hefty donations and penchant for hiring former political operatives. Besides, the agencies claim they've landed in their current predicament through no fault of their own. As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a 100-year storm in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.

The latter contention is more than disingenuous. A substantial portion of Fannie's and Freddie's credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers' income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers. In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

A simple Google search with help from Wikipedia would have revealed how clueless the CRA caused this mess claim is. But that's not the point. The entire financial system is under tremendous stress on the Republican's watch. It's their policies that are under the microscope right now. And they just don't look that good. So now the political game is to shift the blame to Democrats. And who better then to blame then ... Jimmy Carter.