Reinvestment Act not to blame for money woes / LJWorld.com

Business

By Michelle Singletary

October 14, 2008

I was raised by a grandmother who had to assign blame when anything went wrong. For Big Mama, there were never any accidents.

When I got into a car crash while driving her to a doctor's appointment, she blamed me. Never mind that it was the other driver who failed to yield the right of way.

"You shouldn't have chosen that street to turn down," Big Mama argued.

What my grandmother did following that accident is exactly what some politicians, columnists, television hosts and bloggers are doing right now when they blame America's economic earthquake on the Community Reinvestment Act of 1977, or CRA.

Passed by Congress in an effort to stop discriminatory banking practices against minorities and low- and moderate-income families, CRA compels banks to lend responsibly to customers in local communities where they take deposits.

As we fall deeper into financial trouble, people are looking to assign blame. Critics of CRA say that it has put pressure on banks to make subprime mortgages to poor people and minorities. Therefore, it's CRA's fault for the financial upheaval we're experiencing in our economy.

CRA "legalized the idea that lending institutions could not make loan decisions based solely on criteria such as income and ability to pay the loan back," a reader wrote to me.

That accusation and others like it are worth about as much as the stock of the failed mortgage companies - the true culprits of this crisis.

CRA specifies that financial institutions cannot be forced to make loans or investments or provide services inconsistent with safe and sound banking practices.

No sir, it wasn't lending under CRA rules that took down the mortgage industry. It was greedy, reckless banking executives, lending officers and mortgage brokers who were supposed to properly screen borrowers and apply prudent loan underwriting standards that triggered this catastrophe. It was lax and inadequate federal and state regulation that allowed exotic and predatory mortgages to be sold to borrowers.

"There is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust," wrote Luci Ellis, an economist for the Switzerland-based Bank for International Settlements, last month in her working paper "The housing meltdown: Why did it happen in the United States?"

In her study, which examined the calamity enveloping global financial markets, Ellis wrote that deposit banks covered by CRA "showed a lesser tendency to write subprime loans than lenders not subject to the act."

Even if you include subprime loans made by CRA-covered banks and thrifts, the vast majority of the toxic loans stinking up mortgage-backed securities had nothing to do with CRA compliance.

More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of the loans were made by affiliates of banks or thrifts subject to routine examination or supervision, according to congressional testimony given earlier this year by Michael S. Barr, a professor at the University of Michigan Law School.

"The worst and most widespread abuses occurred in the institutions with the least federal oversight," Barr testified.

Traiger & Hinckley, a New York-based law firm that represents lenders complying with CRA regulation, took a look at whether the law encouraged irresponsible lending.

"CRA banks were significantly less likely than other lenders to make a high-cost loan," the law firm's report found. When CRA banks did originate high-cost loans, the average APR (annual percentage rate) was appreciably lower than the average APR on high-cost loans originated by other lenders.

Further, CRA banks were more than twice as likely as other lenders to retain originated loans in their portfolio, said Warren Traiger, a partner at Traiger & Hinckley.

"If more lenders were covered by CRA, the crisis would have been mitigated," Traiger said in an interview.

The investment banks who purchased, bundled and securitized subprime loans were not covered by CRA, points out Matthew Lee, executive director of Inner City Press, a nonprofit community advocacy group based in the New York borough of the Bronx.

"I see why this argument has gained traction," Lee said. "You have a law telling banks to lend to poor people. So now people wonder whether CRA is good."

It's important to dismiss this atrocious accusation against CRA. Going forward as financial institutions rein in their lending, we cannot go back to a time when low- and moderate-income families, including minorities, had great difficulty getting loans to buy a home. This group of borrowers can make good and profitable mortgage customers when the loans are made wisely and with sound and safe lending criteria.

"I'm offended that the poor are being blamed for this crisis when the exact opposite is true," Traiger said. "The well-to-do looking to become more well-do-to are to blame - not folks looking to get a mortgage."

Discussion

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14 October 2008
at 5:59 a.m.

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bkgarner (Brent Garner) says…

I have heard from loan officers as far away as Utah and Idaho who state unequivocally that the CRA, especially as it is now being interpreted, contributed to the beginning of this mess. Additionally, I have articles from the New York Times, LA Times, and Bloomberg where economists and fed governors warned that the CRA could lead to this kind of problem. Forgive me, but you are full of baloney!
14 October 2008
at 7:23 a.m.

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preebo (Anonymous) says…

CRA was originally passed 1977…Amended in 1999 with the Gramm-Leach-Bliley Act…Democrats gained a marginal majority in both houses of Congress in January 2007.Current financial crisis began late 2006, early 2007…My question is how can Fox News, Bill Kristol, Rush Limbaugh, and various other Rightwing bobbleheads claim that this is a instrument of liberal ideology when this crisis occured primarily under the watch of the very “conservatives” that railed against the erosion of traditional American values?
14 October 2008
at 8:16 a.m.

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Godot (Anonymous) says…

Michele Singletary has given some really bad financial advice in her columns in the past. At that time, I thought she was just uninformed or not too smart. Now I see that she is so much of an indealogue that she is a willing participant in the liberal, partisan, propaganda machine. Yes, without a doubt, the CRA played a seminal role in the credit crisis that has caused the US to become a semi-socialist state. Upon Obama's election, the trasformation to pure socialism will be complete.
14 October 2008
at 8:37 a.m.

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preebo (Anonymous) says…

Godot,Baseless claims should not supercede facts here. If you are going to make an assertion like that, you need to bring facts to the breakfast table.”CRA played a seminal role in the credit crisis…”, How, exactly?
14 October 2008
at 8:41 a.m.

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just_another_bozo_on_this_bus (Anonymous) says…

I see that Godot and Brent are having yet another allergic reaction to facts.
14 October 2008
at 6:54 p.m.

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Godot (Anonymous) says…

preebo, read something on a website where the content is not provided solely by operatives of moveon.org and the democrat party, and you will discover for yourself.
14 October 2008
at 7:08 p.m.

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Godot (Anonymous) says…

I realize this requires some time to think about, and requires a great deal of attention, as it is not inflammatory, it is not a blast of easy-to-repeat talking points, and it definitely will not fit on a protest poster or bumper sticker, so it will probably be lost on Singletary, preebo and bozo, but if you are interested in learning the truth, take a long listen to someone who knows:www.netcastdaily.com/broadcast/fsn2008-1011-2.asx

14 October 2008
at 7:13 p.m.

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just_another_bozo_on_this_bus (Anonymous) says…

Nothing but a blank yellow page at that link, godot.
14 October 2008
at 7:43 p.m.

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Godot (Anonymous) says…

Bozo, I am listening through the link I posted right now. When I click the link it brings up windows media player and plays radio show that is hosted by Jim Puplava, and the guest is Bud Burrell, from October 10, 2008.www.netcastdaily.com/broadcast/fsn2008-1011-2.asx
14 October 2008
at 7:50 p.m.

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tangential_reasoners_anonymous (Anonymous) says…

I clicked “Play” at the link and got a score of -2000.
14 October 2008
at 7:52 p.m.

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Godot (Anonymous) says…

Here is more reading material, which, hopefully, will lead you to read more about finance and economy on the finance blogs rather than on the political blogs.Oct. 14 (Bloomberg) — Investors advised by “Black Swan'' author Nassim Taleb have gained 50 percent or more this year as his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades……….”““The financial ecology is swelling into gigantic, incestuous, bureaucratic banks — when one fails, they all fall,'' Taleb wrote in “The Black Swan: The Impact of the Highly Improbable,'' which was published in 2007. “The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.'' ……………..”Taleb is angry that Wall Street is continuing to use traditional tools such as value at risk, which banks use to decide how much to wager in the markets. “We would like society to lock up quantitative risk managers before they cause more damage,'' Taleb said. “ fromhttp://www.bloomberg.com/apps/news?pid=20601087&sid=aDVgqxiT9RSg&refer=home
14 October 2008
at 8:02 p.m.

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Godot (Anonymous) says…

Bozo and tangential-lack-of desire-for-reason, in unison, put your fingers in your ears and say, “la la la la la la la…”
14 October 2008
at 8:08 p.m.

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tangential_reasoners_anonymous (Anonymous) says…

I still have the low score, tho'.
14 October 2008
at 9:35 p.m.

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just_another_bozo_on_this_bus (Anonymous) says…

Well, bully for Taleb. But it has absolutely nothing to the CRA, or the point that Singletary was making. And your first link is still a deadend.
15 October 2008
at 6:36 a.m.

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just_another_bozo_on_this_bus (Anonymous) says…

“Being forced to lend money to those that can't afford to pay it back is what got us into this mess.”Did you read the article, bowhunter? The CRA did no such thing. Loaning to unqualified borrowers was strictly the decision of lenders looking for a quick buck, who packaged it up and sold it to other investors who quite often had no idea how bad security they were buying was.