Quick Fact: WSJ op-ed advances tired and discredited claim that affordable housing caused the housing crisis
A November 13 Wall Street Journal op-ed claimed that loans made "under the pressure of" the Community Reinvestment Act helped to "fuel the greatest housing bubble our nation has ever seen." The claim that affordable housing initiatives were responsible for the housing crisis is a widely discredited myth.
From Edward Pinto's Wall Street Journal op-ed:
Congress's goal was to force these two government-sponsored enterprises (GSEs) to purchase loans that had been originated by banks -- loans that were made under the pressure of another federal law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and moderate-income communities.
From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements."
The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse?
[...]
Fifty percent of the high-risk loans are estimated to be CRA loans, with much of the remainder useful to the GSEs in meeting their affordable-housing goals.
The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates-to 5% in 2003 from 10% in early 1991-resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006.
Now this history may repeat itself as many of the same community groups are pushing Congress to expand CRA to cover all mortgage lenders, credit unions, insurance companies and others financial industry segments. Are we about to set the stage for another catastrophe? [The Wall Street Journal, 11/13/09]
Myth that CRA and affordable housing initiatives caused crisis has been widely discredited
Bernanke: Experience "runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties." In a November 25, 2008, letter, Federal Reserve chairman Ben Bernanke stated: "Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties."
SF Reserve Bank's Yellen: "[S]tudies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households." Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, stated in a March 2008 speech that "studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households."
The housing crisis was caused, plain & simple, by 3 things:
1. Over-production of houses
2. Over-production of loans to fill those houses
(which includes loans that should have never been offered or accepted)
3. Inflated values of houses given that available loans were outpacing even the torrid rate at which the houses were being built.
Read this article from BusinessWeek and tell us that it's as simple as you state. Regardless, no rational person can examine the crisis and conclude that it was caused in any real way by CRA.
Are you serious?
Econ 101: Supply and demand.
If there was a "glut" in housing supply, prices would have fallen, not soared into a price "bubble". Could the easy access to low interest mortgages been helping to drive the demand up? Why would lenders fund overvalued loans unless they were making money off of them? Why would they take the risk of losing money unless there were a way to protect themselves? That's where the CDO's came in. This problem was wholly created by greedy banks and lenders. The CRA is a right-wing scapegoat to deflect the underlying cause which was pure greed and lack of sound regulatory policy.
http://krugman.blogs.nytimes.com/2009/11/10/armey-of-ignorance/
1. The Approval of Sub-Prime mortgaging, which put people in houses that they could not afford if the market turned the wrong way.
2. The repeal of the Glass-Steagall Act that prevented rampant speculation in the financial industry as well as the combination of the financial and securities industries.
Both were done under a Republican Congress, and they want you to forget that and place the blame on Carter for the country going badly, like they always do.
1. The Approval of Sub-Prime mortgaging, which put people in houses that they could not afford if the market turned the wrong way.
2. The repeal of the Glass-Steagall Act that prevented rampant speculation in the financial industry as well as the combination of the financial and securities industries.
Both were done under a Republican Congress, and they want you to forget that and place the blame on Carter for the country going badly, like they always do.
It appears to me that you're willing to stretch to blame government when the most they should be blamed for is lax oversight of the financial sector.
In order to buy into the "widely discredited" some of us are going to need far more than a couple of short quotes. Where is the data to substantiate?
There is nothing in CRA, by the way, that requires lenders to reduce underwriting standards. It does require lenders to make loans in the same communities from which they take deposits. What the heck is wrong with that?
The sub-prime mess was caused by non-Federally regulated lenders making risky home loans that were then packaged by Wall Street investment banks and sold (mostly overseas, particularly in the early days of the business).
Domestic, FDIC-insured banks and thrifts were not making these loans.
Pinto must have reading "Liberty and Tyranny" that repeats these myths, along with the usual load of The Little Guy's garbage.