Wednesday, April 29, 2009

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."


Anonymous said...

It wasn't CRA lending to previously unserved markets that caused this -- it was lending at loan shark rates!! Why is it these folks were a "risk" at a fair market mortgage, but not at 10,12 and even 15%? And for those who say" they should have known what they were getting into"? I say, And just how would they? If you never owned a home, or knew anyone who owned a home, and some "educated" suit-wearing banker assurred you you could refi b4 the mortgage went up, wouldn't you believe him? Quit blaming the victim. And no matter how savvy and forward thinking you are, only the most wealthy among us can still pay the mortgage for extended period without a job.

Anonymous said...

Really, Mary – This is kind of shallow – Most times life is complicated and there are more then one faults in a situation – it’s the simple minded that try to find the one thing to blame over the other. Where in each should bare their own weight. Did the avoidable fire kill the people or chain locked door? Both hold equal weight. Was CRA to blame yes, not partially but equally. It was a bad and irresponsible program built in flawed theories that owning a house is a right not a privilege.

Don’t play politics – and don’t throw rocks just to stir people up – you should be beyond that.

And you are sourcing Wikipedia?

Anonymous said...

All this whining is making me sick. If you can't afford a home don't buy one. If you bought one and it's foreclosed rent an apartment until you save money to buy another house. If you can't rent an apartment go live with friends or family. If you don't either live at a shelter. Get real. People should be ashamed of themselves for being such pathetic whiners.

Rick said...

The CRA was just one piece of a many spoked wheel that caused all this.

The CRA and the liberal motivations behind it that big banks are evil and that the poor "deserve" to own homes just as much as those who can actually afford them provided the momentum from the left.

Deregulation and the belief that big business is always good provided the momentum from the right.

Having bond rating agencies rate bonds for corporate mortgage lender customers who were paying them and who depended on high ratings to sell those bonds created a conflict of interest. If the bonds weren't rated high enough, then those corporate customers couldn't sell the bonds and become repeat customers.

Corporate greed, shareholder greed, and homeowner greed all played their part and crossed all income and educational levels. It wasn't just the poor, uneducated, jobless guy who was "tricked" into buying a $200K house. It was the fact that every house in major cities in Florida, California and Nevada were outrageously overpriced. Watch some of those HGTV shows sometime and see what $500k would get you in California. There are whole series on flipping houses to make a quick buck. A very small percentage of people make enough to support a $500k mortgage as a first time home buyer who's puting a downpayment out of their savings. But everyone seemed to be buying them. To say every one of those people didn't know they were doing something crazey is dishonest. They knew. They did it anyway, and now we're paying their mortgage.

Then there are the suburban foreclosure neighborhoods that Mary loves to hate. Where did those people come from do you think? Could it be some came from closed public housing complexes? I'm sure the gentrification of neighborhoods close to town to make way for mixed use developments, trains, and "cool" neighborhoods populated by the "creative class" had nothing to do with it. All the people who can no longer afford to live there, moved somewhere didn't they?

Finally, I saw somewhere recently that the average household has $10,000 in credit card debt. If you're rich, that's just stupid. If you are middle class or poor, that's suicidal.

No it wasn't just the CRA - a red herring statement designed to absolve the liberals behind it of any responsibility. It was a lot of things - most of them dealing with americans wanting something they hadn't earned.

Anonymous said...

"Giving money and power to government is like giving whiskey and car keys to teenage boys" P.J. O'Rourke