CRA to blame? No way

(More from "The Next City" conference last weekend in Cambridge. I encountered blogus interruptus when my Mac laptop went on strike. I'm doing a series of notebook-dumping posts.)

One more from Wellesley College economist Chip Case. Then, later today when my other opinion-writing duties are finished, I'll dive into such topics as the myth that housing impact fees are always shifted to homebuyers.

Do you get the sense Case likes to skewer conventional wisdom? He opined on the belief, particularly dear to some political conservatives, that the Community Reinvestment Act is what caused all those mortgage companies to give mortgages to unqualified people.

Now before you go off on me, I'm not saying the Democrats were blameless. The ideal of homeownership has been up there with apple pie, motherhood and the American flag for many Americans for many years, nudged along by Democrats and Republicans, conservatives and liberals, social policymaker wonks and numerous homebuilder and Realtor associations. Everyone seemed to accept as given truth that homeownership is the ticket to wealth, stable neighborhoods and family values. Which is one reason -- among many -- that the out-of-control mortgages didn't get nearly enough scrutiny from people who might have stopped it.

This is about the Community Reinvestment Act, a Carter-era federal banking law that applied to banks (not to hedge funds or mortgage brokers or insurance companies) and required them to make loans to qualified customers in poor and minority neighborhoods and to ensure banks were serving those neighborhoods. It clearly was not perfectly enforced, or you'd see a heckuva lot more Wachovias or BofA branches in Charlotte's poorer neighborhoods. But I digress. If you were a bank looking at buying another bank, the feds would look to see if you were following the CRA, and if not, perhaps might not let you make that acquisition.

Here's Case's view: I believe in the CRA. That legislation didn't cause this mess [the foreclosure and credit crisis]. Lehman Brothers [the Wall Street investment bank that went bankrupt in September] didn't give a damn about the CRA.

His point was that Lehman Brothers, as well as Bear Stearns, weren't into commercial banking anyway, or giving mortgages to poor people. The CRA applied only to FDIC regulated banks. As Floyd Norris wrote in The New York Times in September, " ... most of the worst loans appear to have been made outside of the banking system, by mortgage brokers not subject to its [CRA] rules." For a balanced discussion of the CRA-foreclosure issue, see the Wikipedia entry on CRA, particularly the section on "Relation to 2008 Financial Crisis."