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

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.

Comments

[mxrider]

This is pretty hard to believe seeing as Clinton himself has come out and said this did indeed aid the problem. Nobody is blameless here. It took bad lenders and borrowers to make it happen with a little bad gov't backing and a whole lotta greed.

[jpsd]

see the light

http://giovanniworld.wordpress.com/2008/09/26/what-caused-our-economic-crisis/

[LetMeUnderstandThis]

It's is a big joke to blame the Democrats for this mess, remember when Bill was in office? The economy was strong, had a surplus, You and I had money in our pockets and bank accts.


Obama/Biden

[RoryTalbot]

Wake up, Democrats!!! Don't you slow-wits realize that Rove & Co. are "blast-faxing" these talking points in a VERY concerted effort to shift the blame. I read the article and the author completely failed to see how such a claim can be so effective.

Here's the GOP playbook: blame a minority group for white woes. It works every time.

And the unsaid implication, Barack (a minority) can't be trusted to fix a problem created for, and by, minorities.

Yes, the real problem is deregulation and the invisible CDOs (sold as low-risk assets). But that takes time to explain. TO ALL DEMOCRATS: BLOG, BLOG, BLOG!!!! Get the information out before the Rovian lie sticks!

We all have to act together to stop this lie from taking root. DO NOT LET ROVE SWIFTBOAT ANOTHER DEM!

BLOG with good information. BLOG with a mind towards the lie they are trying to create. BLOG with a friend. GET THE WORD OUT! TAKE THE COUNTRY BACK!

Do not allow the "bumpersticker" Republicans to go unchallenged!

[LetMeUnderstandThis]

Don't worry (fellow Dem) even white america is actually getiing it. There will be those who won't vote for BO just becuase he is black (nothing new). It is the ground attack by BO campaign that is hurting J-Mc. He is losing many of his supporters, Repubs were not happy about him being on the hiil this week. That speaks volumes, trust me.

[kellygrrrl]

ENOUGH!!!!!

The Neos have hijacked and corrupted and perverted this Nation

TAKE IT BACK!!!!!!

[castlerider]

This is the problem with Rush Limbaugh.. Besides being a fraud and criminal,

He is constantly re-writing history, even when he knows it's an out-right lie.

he denigrates the very meaning of what journalism means in this country, and should be held accountable.

[LetMeUnderstandThis]

I agree, but he is not a Journalist so that disqualifies him

[jmello]

Come on now, this is really getting old. Seems like when the financial systems in this country sneezes, we the tax payer catch a cold to the tune of trillions of dollars. It is like many have said, this is socialism for the corps, they run up all this bad debt then expect the tax payer to bail them out. Enough is enough, I don't know if the Democrats have what's needed to reform any of this, so maybe bring back Ross Perot.

[IdiotsAll]

Thomas Sowell is the worst of the right wing nut-bag-o-­sphere,con­tinuall spouting "studies" from AEI and the Heritage Foundation et.al. Like Bill Maher says you can't call it a "think tank " if all your ideas are stupid

[RobinSeattle]

Are Republicans ever capable of telling the truth? Sheesh!

[biabouman41]

A great deal of the subprime problem starts with 9-11. After the terrorist attacks the Bush administration first told Americans to "go shopping" and in order to facilitate that he leaned on Greenspan to lower the interest rates, which he did to unprecidented levels. That was the initiation of the crisis. Then Financial institutions tried to mask their risk exposure by "bundling" these loans. The process was unsupervised by the Federal government or anyone else and so these rotten apples found themslves in all sorts of financial instruments, that everyone was under threat or assumed to be. Consequently Banks will not lend to other banks. No one was paying attention. We assumed that "the market will take care of itself" How wrong we were!

[Gidster]

Yet several dozen CEOs and hedge fund managers became exceedingly rich.

[Stanley]

How's this all add up? If you look at the number of foreclosures, it is not historically that high. If you take all the people in trouble and just give them the money lost it doesn't add up to the real problem. It's a misnomer to call this a housing crisis.

There are a supposedly 2 million weak loans who may be in foreclosure and if the housing market drops 10% with an average price of about 200k per house. 2 million x 20k = 40 billion

The math only ads up to 40 billion of real losses. Yes there is still a liquidity issue but its still firmly collateralized by a house and land. The liquidity risk is 2 million x 180k or just 360 billion of cash needed in the system to keep it all liquid.

The problem really is if you leverage the same 2 million problem loans, meaning borrow against the income from the mortgage and then lend it out, and do it again thirty times, which is the case, then the 40 billion balloons to a 1.2 Trillion dollar problem.

So the Fed is not really helping homeowners in need but criminally negligent lenders and accountants who incorrectly assigned risk, accounted for it on the balance sheet and then leveraged it out of pure greed.

This is an accounting and accountability problem and calling it a housing crisis is all a snow job.

[LeftRight]

Not only do we have the problem of taking a bad loan and then borrowing against it, we are also dealing with the fact that they were packaging loans together, which means that we don't know which ones will be strong and which will be weak in which security.

In addition to that, we are also dealing with the fact that once a house goes on the market and doesn't sell, all the properties in the area fall some. Then those who still own those houses which don't make quite enough money to pay for everything that they own try to take a loan out on their equity, and they find that they don't have any equity since the values have fallen. THAT'S where the two problems are.

[Mason]

"The problem really is if you leverage the same 2 million problem loans, meaning borrow against the income from the mortgage and then lend it out, and do it again thirty times, which is the case, then the 40 billion balloons to a 1.2 Trillion dollar problem."

BINGO!

[landonpm]

Robert Reich on MSNBC a few days ago

REICH: " In the latter years of the Clinton administration -- when I was not there any longer, I should add -- there was an attempt by Alan Greenspan and Bob Rubin and a few others to deregulate financial markets, and they did. They split commercial banking off from investment banking. And many people say, "Well, that was the beginning of the problem," and then, of course, in 2003-2004, Alan Greenspan reduced short-term interest rates to the point where every single bank wanted to lend money. I mean, if you could stand up straight you could get a bank loan because there was so much pressure to get that money out the door. Money was so cheap. So, yes, there is some responsibility on Democrats, some responsibility on Alan Greenspan and the Fed."

There seems to be plenty fo blame to go around.

[Veri]

Alan Greenspan knew what he was doing. To claim ignorance is criminal. History taught us and our financial leaders sold us. Conspirators will remark on the following:

Charles A. Lindbergh, Sr. remarking upon passage of 'The Federal Reserve Act of 1913':

"This Act establishes the most gigantic trust on earth. When the President signs this Act the invisible government by the Money Power, proven to exist by the Money Trust Investigation, will be legalized. The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created."

Our economy is out of control. How much truth is there to Lindbergh's statement I have no knowledge of. However, Greenspan, Paulson, and Bernanke, being educated men knew the dangers of the last eight years of fiscal policy. The can claim ignorance of these dangers. However, we will know them to be liars.

Our financial leaders purposely and knowingly pursued policies known to destroy. The government just demonstrated that by providing $1 trillion dollars of tax-payer guaranteed profit to those who destroyed our economy. If Congress passes Paulson's disastrous plan. Welcome to America's centrally planned economy, ala The U.S.S.R.

[hoopesaz]

A president rarely get's to choose which crisis they have to deal with "on their watch". Your article, I'm sorry to say, is just another example of useless finger pointing. No one party is ever entirely responsible for government failure or success.

We all like to act as though that those who implemented the policies that perhaps have led to the current trouble did so with 20/20 hindsight of the consequences. And THAT is the most ridiculous assertion one could possibly make.

This article was informative on two accounts. First, I now have a better understanding about the CRA and it's role (if any) in the curent crisis. And second, realize that all of the research you did about this had nothing to do with shedding light on the real problem, but rather only to excuse and justify your position and party from having any accountability. Clearly both sides have and will continue to do this.

Hopefully someone will stand up after this ordeal has passed and right an unapologetic account of what happened and why, without an agenda to justify either party and their clearly failed attempt at economic stability.

[LeftRight]

And yet the policies that are created by that president, and the regulation (or lack thereof) that they enforce are the facts which CREATE the economy!

[Veri]

I like this. Sort of "We The People..." blame.

[proreality]

It is right wing ideology and philosophies that have been shoved down the American people's throat for 15 years. "Destroy the new deal" "weaken government enough to drown it in a bathtub". For years there have been people willing to stand up against it, those people have been dismissed and ridiculed for the short term profit of theses supposed "conservative" thinkers. What (R)'s are is nothing less than tyrants and liars. The idiots that refuse the truth that is laid out before them is why this nation is in trouble. 30% of people are incapable of reason, thought, substance, or truth. Identify them and excoriate, dismiss, ridicule and disenfranchise them in the way they have done everybody else, and we will once again have a strong country and strong society.

[PioneerKing]

Current problems are similar to the problems that caused Silver Star Bank to fold.

McCain's son Andrew was involved in Silver Star Bank costing American taxpayers billions of dollars in debt, just as the Keating Five scandal left American taxpayers with billions of debt.

“Nevada regulators closed Silver State and the FDIC was appointed receiver of the bank, based in Henderson, Nev.“

“Construction and development loans have been the fastest-growing category of troubled loans for U.S. banks, and many banks have heavy concentrations of them in their portfolios, according to the FDIC.”

“Silver State Bank ran into difficulty because of a substantial amount of "poor-quality loans primarily related to real estate development" in southern Nevada and other distressed markets, FDIC spokesman David Barr said. “

‘Not a single reporter in the main stream media has looked how the McCain's were able to have their family investments and their family foundation's interests protected while Silver State went belly up.”

“MSM has ignored the McCain's Wall Street portfolio and the investments of McCain's campaign advisors that will be protected by the bailouts.”


http://www.cbsnews.com/stories/2008/09/06/business/main4422652.shtml

http://www.huffingtonpost.com/jayne-lyn-stahl/andrew-mccain-resigns-fro_b_115233.html

http://www.faulkingtruth.com/Articles/BlogFest/1097.html

[Veri]

Who gets saved? I bet those that are the most politically connected. Investigation, anyone?

[gwendeleon]

All anyone has to do is watch the home buying shows on HGTV, especially shows like Property Virgins and My First House. People are buying $200-300-400,000 homes with no money down, funded by multiple mortgages, some with no principal reduction periods, adjustable rates, etc. None of these homes is in a distressed area to which the CRA would apply and none of the purchasers appears to be low-income. Once the real estate market tanks in these areas, the purchasers are underwater, i.e. debt exceeding value.