Media conservatives baselessly blame Community Reinvestment Act for foreclosure spike

››› ››› JEREMY HOLDEN & LILY YAN

Several conservatives in the media have recently blamed the Community Reinvestment Act for the current financial crisis -- when, in fact, the CRA does not apply to institutions making the vast majority of troubled loans underlying the crisis. It applies only to depository institutions, such as banks and savings and loan associations. Experts have estimated that 80 percent of high-priced subprime loans were offered by financial institutions that are not subject to the CRA.

Several conservatives in the media have recently blamed the Community Reinvestment Act (CRA) for the current financial crisis -- when, in fact, the CRA does not apply to institutions making what some experts have estimated to be the vast majority of troubled loans underlying the crisis. In a September 28 Boston Globe column, Jeff Jacoby asserted: "The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to 'meet the credit needs' of 'low-income, minority, and distressed neighborhoods.' Lenders responded by loosening their underwriting standards and making increasingly shoddy loans." Likewise, during the September 25 edition of The Radio Factor with Bill O'Reilly, guest Jonathan Hoenig, a regular panelist on Fox News' Cashin' In and managing member of Capitalistpig Asset Management LLC, asserted that the CRA "makes banks give loans to bad risks." Similarly, during the September 25 edition of Fox News' The O'Reilly Factor, radio host Laura Ingraham said that "the problem here is government intervention in the free markets" and baselessly suggested that 1995 rules strengthening the CRA "pushed all these institutions to lend to minority communities, many were very risky loans." A September 25 Investor's Business Daily editorial claimed the CRA "forced banks to make many more subprime loans." Contrary to the accusation that the CRA is responsible for the current crisis, experts have said that approximately 80 percent of high-priced subprime loans were offered by financial institutions that are not subject to the CRA. Moreover, the president of the Federal Reserve Bank of San Francisco earlier this year said the CRA has actually increased the volume of responsible lending to low- and moderate-income households, as Center for American Progress senior fellow Robert Gordon noted in an American Prospect blog post.

On The Radio Factor, host Bill O'Reilly asked Hoenig whether he had "a plan B" for the proposal for the U.S. Treasury to purchase up to $700 billion in mortgage-backed securities. Hoenig replied, "Let the bad actors fail, let bad banks fail, kick deadbeats out of their homes, get rid of the Community Reinvestment Act that makes banks give loans to bad risks, no more easy money from the Fed, no more bailouts for anybody, and no Fannie, Freddie, or government [inaudible]." During The O'Reilly Factor that evening, Ingraham claimed:

They say, "Well, this is a failure of the markets. Oh, this is about greed on Wall Street." And Bill, the problem here is government intervention in the free markets. 1995, when Bill Clinton decide to tell, you know, [then-Treasury Secretary] Robert Rubin to rewrite the rules that govern the Community Reinvestment Act and push all these institutions to lend to minority communities, many were very risky loans. That was a noble idea, perhaps, but that certainly wasn't following free-market principles. This big pressure on institutions to dole out money and these risky loans started this whole ball rolling at Fannie and Freddie.

In fact, the federal Community Reinvestment Act -- enacted in 1977 -- applies only to depository institutions, such as banks and savings and loan associations. In testimony before the House Financial Services Committee, Michigan law professor Michael Barr stated that while problems in the subprime lending industry were a driving force behind the housing crisis, he estimated that only 20 percent of subprime mortgages were issued by depository institutions under the CRA. In his testimony, Barr stated:

Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.

Moreover, in comments to the National Interagency Community Reinvestment Conference in March, the president and CEO of the Federal Reserve Bank of San Francisco, Janet Yellen, criticized efforts to blame CRA lending for weaknesses in the mortgage market, stating:

There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.

From the September 25 edition of the Westwood One's The Radio Factor with Bill O'Reilly:

O'REILLY: I don't know if it's gonna solve it. I can't say with certainty that --

HOENIG: It's not, Bill, it's not.

O'REILLY: OK. But there's no other alternative other than a deep, deep recession, or -- slash depression, depending on what the foreign investors do. OK? There's no other alternative. There's no plan B.

HOENIG: Well, they're going to turn what probably could be 18-month slowdown -- Bill, they're going to turn that into a decades-long depression.

O'REILLY: I'm gonna give you 30 seconds to give me a plan B. You got one?

HOENIG: Let the -- yeah, absolutely.

O'REILLY: Go.

HOENIG: Let the bad actors fail, let bad banks fail, kick deadbeats out of their homes, get rid of the Community Reinvestment Act that makes banks give loans to bad risks, no more easy money from the Fed, no more bailouts for anybody, and no Fannie, Freddie, or government [inaudible].

O'REILLY: All right, and let the chips fall, right? All the people who lose their jobs, all the people who lose their savings, all the panic that will ensue -- all the panic, remember --

HOENIG: Yeah, that's the --

O'REILLY: -- panic that will ensue, you're going to sit by and say, "It's OK, because we'll emerge five years from now stronger."

HOENIG: You're so concerned with the folks, Bill, but you rattle off the same drivel that comes out of both the Democrats --

O'REILLY: You don't believe there would be panic from your plan?

HOENIG: Bill, the panic's being caused by the government. They're making up the rules as they go along. They're distorting markets and prices every day. Every little thing that comes out of [Treasury Secretary Henry] Paulson or [Rep.] Barney Frank's [D-MA] mouth has trillions of dollars worth of impact for those of us who are the folks working for a living, trying to navigate this market.

O'REILLY: All right, last question.

From the September 25 edition of Fox News' The O'Reilly Factor:

O'REILLY: All right, [ABC News correspondent] John Stossel just said -- took a contrarian point of view and said, "Look, you know, you're enabling an inefficient government to be even more inefficient by doing this." I say you have to do the bailout. What say you?

INGRAHAM: Well, I think that I'm probably more closely aligned with Stossel than you, Bill.

Here's what I think we have to be very concerned about here is that the narrative being written about how we got here is the following. And you've heard [Sen. John] McCain and [Sen. Barack] Obama say similar things.

They say, "Well, this is a failure of the markets. Oh, this is about greed on Wall Street." And Bill, the problem here is government intervention in the free markets. 1995, when Bill Clinton decide to tell, you know, Robert Rubin to rewrite the rules that govern the Community Reinvestment Act and push all these institutions to lend to minority communities, many were very risky loans. That was a noble idea, perhaps, but that certainly wasn't following free-market principles. This big pressure on institutions to dole out money and these risky loans started this whole ball rolling at Fannie and Freddie.

O'REILLY: I don't disagree with you.

INGRAHAM: That's the problem.

O'REILLY: I don't disagree with you there. But see, that's hindsight. That was a mistake. But now we have to deal with reality of foreign investors pulling out of here unless they get assurances the federal government won't let the whole thing collapse. That's where I am, because I don't want people getting hurt from some mistake during the Clinton administration, because the Bush administration didn't practice oversight either, as I've said many times.

From the September 25 Investor's Business Daily editorial:

Congressional leaders contend that Wall Street is to blame and must be punished. Yet they're the ones who during the Carter years approved the Community Reinvestment Act that forced banks to make many more subprime loans.

And it was President Clinton who dramatically accelerated the rules that coerced banks to make far more subprime loans to people who couldn't normally qualify.

Three of every four foreclosures have involved these subprime loans. Most should never have been made, but big government mandated that they be made or else. Once again, a big government with the best of intentions created terrible unintended consequences. It was big government that started the whole mess.

From Jacoby's September 28 Boston Globe column:

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

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