CRA Not to Blame for Housing Debacle

[Toro]

The idea that the CRA was a big contributor to the housing debacle keeps popping up. Thus, I'm creating a new thread to refute this assertion.

The San Francisco Fed says that the CRA was not a primary contributor to the housing bubble.

A pair of economists from the Federal Reserve Bank of San Francisco added another piece of evidence to the case that the 1977 Community Reinvestment Act wasn’t the cause, or even a major contributor, to the subprime mortgage debacle.

In a paper focused on California that was presented at a Fed conference on housing and mortgages in Washington, D.C., Elizabeth Laderman and Carolina Reid say the data “should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low and moderate-income lenders.” Fed governor Randall Kroszner made a similar case earlier this week.

Among the specific findings in “Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown”:
# Overall, lending to low and moderate income communities comprised only a small share of toal lending by CRA lenders, even during the height of the California subprime lending boom.
# Loans originated by lenders regulated under CRA in general were “significantly less likely to be in foreclosure” than those originated by independent mortgage companies that weren’t covered by CRA.
# Loans made by CRA lenders within their geographic assessment areas covered by the law were “half as likely to go into foreclosure” as those made by the independent mortgage companies.
# 28% of loans made by CRA lenders in low income areas within their geographic assessment areas were fixed-rate loans, compared with 18.2% of loans made by independent mortgage companies in low income areas.
# 12% of the loans made by CRA lenders in these areas were high-priced loans, a technical definition of subprime, compared with 29% of the loans made by those lenders outside their assessment areas and 52.4% of loans made by independent mortgage companies in low-income areas.

Real Time Economics : Don't Blame CRA (The Sequel)

Federal Reserve governor, Randall Kroszner, says the CRA had little effect on home prices.

The “striking result,” Kroszner said: “Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.

Real Time Economics : Fed's Kroszner: Don't Blame CRA

FDIC Chairwoman, Sheila Bair, and Comptroller of the Currency John Dugan say that the CRA was not a significant factor.

FDIC’s Bair Sets to Shatter CRA “Myth” : HousingWire || financial news for the mortgage market

 

[Toro]

Another good post

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The Big Picture | Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs

 

[Toro]

More on the genesis of the CRA

Let’s put some context around what the CRA is and isn’t.

In the 1960s and 70s, banks would redline neighborhoods. They would literally put a map on a wall, and with a red magic marker, draw a redline enveloping certain neighborhoods. If you lived within the redlined areas, regardless of your income, credit score, assets, debt servicing ability, if you were in the redlined area you could not qualify for a mortgage.

Although Redlining was made illegal by the Fair Housing Act of 1968, the practice still surreptitiously continued. The Community Reinvestment Act of 1977 was the next attempt to stop redlining. There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. Credit Score, Loan-to-value, percentage of monthly take home, etc. had to be the same across different areas.

Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to loan the money locally. Banks have no obligation to open branches in Harlem, but if they did, they are required to at least try to lend the locals back their own money.

Note that there are no quotas, minimums or mandates. This is a very soft rating system.

More CRA Idiocy | The Big Picture

 

[Zoomie1980]

The idea that the CRA was a big contributor to the housing debacle keeps popping up. Thus, I'm creating a new thread to refute this assertion.

The San Francisco Fed says that the CRA was not a primary contributor to the housing bubble.

A pair of economists from the Federal Reserve Bank of San Francisco added another piece of evidence to the case that the 1977 Community Reinvestment Act wasn’t the cause, or even a major contributor, to the subprime mortgage debacle.

In a paper focused on California that was presented at a Fed conference on housing and mortgages in Washington, D.C., Elizabeth Laderman and Carolina Reid say the data “should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low and moderate-income lenders.” Fed governor Randall Kroszner made a similar case earlier this week.

Among the specific findings in “Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown”:
# Overall, lending to low and moderate income communities comprised only a small share of toal lending by CRA lenders, even during the height of the California subprime lending boom.
# Loans originated by lenders regulated under CRA in general were “significantly less likely to be in foreclosure” than those originated by independent mortgage companies that weren’t covered by CRA.
# Loans made by CRA lenders within their geographic assessment areas covered by the law were “half as likely to go into foreclosure” as those made by the independent mortgage companies.
# 28% of loans made by CRA lenders in low income areas within their geographic assessment areas were fixed-rate loans, compared with 18.2% of loans made by independent mortgage companies in low income areas.
# 12% of the loans made by CRA lenders in these areas were high-priced loans, a technical definition of subprime, compared with 29% of the loans made by those lenders outside their assessment areas and 52.4% of loans made by independent mortgage companies in low-income areas.

Real Time Economics : Don't Blame CRA (The Sequel)

Federal Reserve governor, Randall Kroszner, says the CRA had little effect on home prices.

The “striking result,” Kroszner said: “Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.

Real Time Economics : Fed's Kroszner: Don't Blame CRA

FDIC Chairwoman, Sheila Bair, and Comptroller of the Currency John Dugan say that the CRA was not a significant factor.

FDIC’s Bair Sets to Shatter CRA “Myth” : HousingWire || financial news for the mortgage market

This was caused by house flippers using jumbo mortgages....

 

[manu1959]

lets see those passing out the loans did a study and found they and the policy they exploited was not at fault.......shocking i tell you ...shocking....

 

[xsited1]

A pair of economists from the Federal Reserve Bank of San Francisco...

 

[Ravi]

Although Redlining was made illegal by the Fair Housing Act of 1968, the practice still surreptitiously continued. The Community Reinvestment Act of 1977 was the next attempt to stop redlining. There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. Credit Score, Loan-to-value, percentage of monthly take home, etc. had to be the same across different areas.

Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to loan the money locally. Banks have no obligation to open branches in Harlem, but if they did, they are required to at least try to lend the locals back their own money.

Good thread, Toro, though since you aren't Glenn Beck or Rush Limbaugh you have no credibility with people that are bound and determined to scapegoat low income blacks.

It's basic common sense to realize that the sum total of property mortgages owned by lower-income people is no where valuable enough to have more than the tiniest blip on the overall economy.

 

[Ravi]

Can any of you boneheads post the verbiage of a law that required banks to lend money to people that couldn't pay it back?

I'll wait patiently for a response.

 

[editec]

lets see those passing out the loans did a study and found they and the policy they exploited was not at fault.......shocking i tell you ...shocking....

The people in charge WERE responisble for this mess but the CRA wasn't why or how this mess happened.

The fact that Fannie and Freddie would accept NINA loans is the root cause of the mortgage meltdown.

The CRA existed for decades without causing a meltdown.

But once Fannie said it was OKAY to sell a mortgage to people who had no income and no assets, AND THE BANKS WENT ALONG WITH THAT TO MAKE A LOT OF SALES, then this crises took root in our fiancial system.

I do not understand why some of you have problems understanding this.

It's fairly easy to understand.

If the CRA was the problem then all the bad mortgages would be found in the GHETTOS of America.

Are they?

Now, actually very few of them are in those bad neighborhoods.

Most of them are in CALIFORNIA and FLORDIA AND NEVADA's supposedly middle class neighborhoods.

The CRA had nothing whatever to do with those houses being built or sold to people with NINA loans.

 

[jillian]

Can any of you boneheads post the verbiage of a law that required banks to lend money to people that couldn't pay it back?

I'll wait patiently for a response.

There wasn't any such requirement. The requirement was that minority communities not be red-lined and that qualified borrowers in minority communities be given appropriate consideration.

The banks tossed away their OWN risk assessment requirements because property values kept going up and up and up and they made money on every re-fi. Then when housing values started to drop, the people who borrowed ended up owing more than the current value of their house, so weren't eligible any longer. They ended up with ARM's (which their mortgage peoplse swore to them they wouldn't be subject to b/c they would re-fi) which they couldn't afford.

The simultaneous change in the bankruptcy law which prohibited most people from getting rid of their commercial debt and protecting their secured debt (their home) also helped to contribute to the current crisis.

If the banks re-negotiated the loan amounts to their intitial values, most people would be able to make their payments, anyway. Hence the talk about courts re-structuring the debt (same as they do in bankruptcy).

 

[Ravi]

Can any of you boneheads post the verbiage of a law that required banks to lend money to people that couldn't pay it back?

I'll wait patiently for a response.

There wasn't any such requirement. The requirement was that minority communities not be red-lined and that qualified borrowers in minority communities be given appropriate consideration.

The banks tossed away their OWN risk assessment requirements because property values kept going up and up and up and they made money on every re-fi. Then when housing values started to drop, the people who borrowed ended up owing more than the current value of their house, so weren't eligible any longer. They ended up with ARM's (which their mortgage peoplse swore to them they wouldn't be subject to b/c they would re-fi) which they couldn't afford.

The simultaneous change in the bankruptcy law which prohibited most people from getting rid of their commercial debt and protecting their secured debt (their home) also helped to contribute to the current crisis.

If the banks re-negotiated the loan amounts to their intitial values, most people would be able to make their payments, anyway. Hence the talk about courts re-structuring the debt (same as they do in bankruptcy).

Yep.

I realize there is no such requirement, but since so many people that post here think it exists I'd like to see them at least make an effort to produce it.

 

[jillian]

I know you know that. But good getting them to admit it. lol.. let me know if any of them actually respond to you.

 

[editec]

I know you know that. But good getting them to admit it. lol.. let me know if any of them actually respond to you.

Given that this challenge to produce evidence to support the contention that the CRA is the root cause of mortgage crises has been made many times already, and it has been completely ignored (except to announce again and again that it is true, of course) I think you're going to be disappointed.

Tenacious things facts.

We can deny them till the cows come home, and we can find supporters who will deny them with us, but still these facts refuse to buckle under to popular opinion.

 

[PoliticalChic]

The idea that the CRA was a big contributor to the housing debacle keeps popping up. Thus, I'm creating a new thread to refute this assertion.

The San Francisco Fed says that the CRA was not a primary contributor to the housing bubble.

A pair of economists from the Federal Reserve Bank of San Francisco added another piece of evidence to the case that the 1977 Community Reinvestment Act wasn’t the cause, or even a major contributor, to the subprime mortgage debacle.

In a paper focused on California that was presented at a Fed conference on housing and mortgages in Washington, D.C., Elizabeth Laderman and Carolina Reid say the data “should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low and moderate-income lenders.” Fed governor Randall Kroszner made a similar case earlier this week.

Among the specific findings in “Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown”:
# Overall, lending to low and moderate income communities comprised only a small share of toal lending by CRA lenders, even during the height of the California subprime lending boom.
# Loans originated by lenders regulated under CRA in general were “significantly less likely to be in foreclosure” than those originated by independent mortgage companies that weren’t covered by CRA.
# Loans made by CRA lenders within their geographic assessment areas covered by the law were “half as likely to go into foreclosure” as those made by the independent mortgage companies.
# 28% of loans made by CRA lenders in low income areas within their geographic assessment areas were fixed-rate loans, compared with 18.2% of loans made by independent mortgage companies in low income areas.
# 12% of the loans made by CRA lenders in these areas were high-priced loans, a technical definition of subprime, compared with 29% of the loans made by those lenders outside their assessment areas and 52.4% of loans made by independent mortgage companies in low-income areas.

Real Time Economics : Don't Blame CRA (The Sequel)

Federal Reserve governor, Randall Kroszner, says the CRA had little effect on home prices.

The “striking result,” Kroszner said: “Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.

Real Time Economics : Fed's Kroszner: Don't Blame CRA

FDIC Chairwoman, Sheila Bair, and Comptroller of the Currency John Dugan say that the CRA was not a significant factor.

FDIC’s Bair Sets to Shatter CRA “Myth” : HousingWire || financial news for the mortgage market

It seems that you consider this topic proprietary, but in my view, you neglect to give proper weight to the political climate and the pressure it put on the financial atmosphere, i.e. the Community Reinvestment Act. If you look at the Time article under Bill Clinton, there is further reference to the CRA.

Bill Clinton - 25 People to Blame for the Financial Crisis - TIME

 

[Ravi]

Still waiting.

 

[Toro]

It seems that you consider this topic proprietary, but in my view, you neglect to give proper weight to the political climate and the pressure it put on the financial atmosphere, i.e. the Community Reinvestment Act. If you look at the Time article under Bill Clinton, there is further reference to the CRA.

Bill Clinton - 25 People to Blame for the Financial Crisis - TIME

The article gives its opinion on what caused the financial crisis. It does not reference any empirical evidence that the CRA was a significant factor in the housing debacle, let alone caused it. Thus far, the empirical evidence suggests that the CRA was not a significant factor in the crisis.

The only people who are making this claim vociferously are highly politically partisan and ideological people.

 

[xsited1]

Can any of you boneheads post the verbiage of a law that required banks to lend money to people that couldn't pay it back?

I'll wait patiently for a response.

There's an interesting discussion on Wikipedia about this with several references:

Community Reinvestment Act - Wikipedia, the free encyclopedia

In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[58] In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.[59] Jeffrey A. Miron, a senior lecturer in economics at Harvard University, in an opinion piece for CNN, calls for “getting rid” of Fannie Mae and Freddie Mac, as well as policies like the Community Reinvestment Act that “pressure banks into subprime lending.”[60]

During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the “fuel” for increasing subprime loans, former Fannie Mae CEO Franklin Raines said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA. Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004, said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.” He also said “When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”[72][73]

This article appears to have a lot of the details you requested:

How Government Stoked the Mania - WSJ.com

I believe it's a stretch to say "CRA to Blame for Housing Debacle," but it most certainly could have been a contributing factor. I'll let you guys sort it out.

 

[PoliticalChic]

It seems that you consider this topic proprietary, but in my view, you neglect to give proper weight to the political climate and the pressure it put on the financial atmosphere, i.e. the Community Reinvestment Act. If you look at the Time article under Bill Clinton, there is further reference to the CRA.

Bill Clinton - 25 People to Blame for the Financial Crisis - TIME

The article gives its opinion on what caused the financial crisis. It does not reference any empirical evidence that the CRA was a significant factor in the housing debacle, let alone caused it. Thus far, the empirical evidence suggests that the CRA was not a significant factor in the crisis.

The only people who are making this claim vociferously are highly politically partisan and ideological people.

Wish I could say that I am convinced, but the weight of experience inveighs against. If figures could not be made to lie, we wouldn't need a judicial system.

It feels counter intuitive to believe that the multiple items re: CRA, videos of Frank, Dodd, Cuomo, the redistributary policies of Dems, would have no involvement in current financial crisis.

Since well over 90% of homes are up to date on mortgage payments, how many of the remaining are due to policy factors?

As far as current evidence, let's remember that in 1920 the NYTimes editorial stated that rockets could never fly, and, the best evidence against your premise: Ravi agrees with you.

 

[Truthmatters]

Gramm , Leach , Bliley act of 1999 caused the flood gates to open.


By allowing the lending industry to purchase too many aspects of the market.

Glass Steagal protected us from this for years until the whittling away of that law was complete after the siging of the GLBact 1999 by Clinton.

Phil Gramm fought for years to pass this idea.

Clinton should not have signed it.

Bush and team should have created a new law and barriers to this mess.

The sub prime loans were not a problem until they became a profit machine by the passing of GLB act 1999.


These are facts folks and history has repeted its self and history will in time get rid of all these other stupid and false ideas created for political purposes.

 

[Ravi]

Can any of you boneheads post the verbiage of a law that required banks to lend money to people that couldn't pay it back?

I'll wait patiently for a response.

There's an interesting discussion on Wikipedia about this with several references:

Community Reinvestment Act - Wikipedia, the free encyclopedia

In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[58] In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.[59] Jeffrey A. Miron, a senior lecturer in economics at Harvard University, in an opinion piece for CNN, calls for “getting rid” of Fannie Mae and Freddie Mac, as well as policies like the Community Reinvestment Act that “pressure banks into subprime lending.”[60]

During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the “fuel” for increasing subprime loans, former Fannie Mae CEO Franklin Raines said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA. Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004, said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.” He also said “When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”[72][73]

This article appears to have a lot of the details you requested:

How Government Stoked the Mania - WSJ.com

I believe it's a stretch to say "CRA to Blame for Housing Debacle," but it most certainly could have been a contributing factor. I'll let you guys sort it out.

And you call yourself a scientist??? Someone's opinion isn't what I'm looking for. Show me the verbiage of a law that forces banks to make loans to people.