« The role of the CRA | Main | No money down, revisited» Russell Roberts
September 22, 2008
It's not the CRA
Russell Roberts
Mark Thoma explains why the CRA is not the cause of the current crisis. This is from April, 2008. He summarizes a post of Ezra Klein's arguing that the CRA started in 1977, the banks covered by it weren't a big part of the mortgage market, etc:
Now, however, conservatives are trying to argue that it's behind the crisis: If the CRA hadn't been pushing these banks to make all these unsafe loans, then the birds would still sing...
As Robert Gordon shows, however, this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off. Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory. Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppycock. It's just a false charge...
Here is the Gordon analysis:
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." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened...
OK. The CRA didn't CAUSE the crisis. But it sure contributed. More on this point down the road. And while the CRA activity may have "come to an end by 2001," that was around the time that Fannie and Freddie started getting into the subprime market.
Posted by Russell Roberts in Government intervention in housing | Permalink
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Comments
This is wrong. The 1995 change was significant because it changed the way banks had to comply with the CRA, and changed the rules to make more people qualify. Banks that didn't make the loans the government wanted were accused of "red-lining."
And the Bush administrations warnings that all these high risk loans were going to lead to disaster were severely criticized by Barney Frank, Chris Dodd and Chuck Shumer. The Bush proposals were rejected by Democrats and some RINO Republicans over the warning of conservative Republicans and the Bush administration.
All this is historical fact in spite of the present denials of the Democrats. It's all in the record and verifiable by anyone who cares to look at it, which the media does not.
Posted by: Flash Gordon | Sep 22, 2008 12:20:01 AM
Bush with a Democrat or split Congress. Clinton with a Republican Congress. Who cares. The problem now is that none of the "solutions" being proposed address the root cause. The whole thing is built on a foundation of quicksand and no matter how many outriggers you put on it, it still won't float.
Or perhaps the horse will sing.
Posted by: Keith | Sep 22, 2008 6:34:56 AM
Flash Gordon,
How about backing up your opinion with some quantitative data?
Posted by: T L Holaday | Sep 22, 2008 8:28:06 AM
Russ,
Do you blame the CRA for this $4.8 million foreclosure?
Posted by: T L Holaday | Sep 22, 2008 8:35:59 AM
TL Holoday
You don't need "quantitative data" to verify events that actually occurred and are a matter of historical record.
Posted by: flash Gordon | Sep 23, 2008 2:16:56 AM
flash gordon wrote: "You don't need "quantitative data" to verify events that actually occurred and are a matter of historical record."
If CRA were the issue, lenders wouldn't have pressured people to overstate their income.
The problem is not that 'poor' people were given mortgages. The problem is that people, poor and otherwise, were given mortgages they couldn't later afford. This is because the whole point was simply to generate as many mortgages as possible, as quickly as possible, for bundling and resale.
The no-money-down loans had *nothing* to do with CRA or trying to get poor folks into homes or serve poor communities. The cheap loans were purely about building volume to raise short-term returns.
Posted by: Jon H | Sep 24, 2008 1:21:53 PM
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