Palin advances bogeyman that affordable housing initiatives “force[d]” financial institutions to make irresponsible loans

Palin: "[D]esire to increase home ownership among people who could not yet afford to own a home" to blame. From Page 388 of Palin's memoir, Going Rogue: An American Life:

We got into this economic mess because of misplaced government interference in the first place. The mortgage crisis that triggered the collapse of our financial markets was rooted in a well-meaning but wrongheaded desire to increase home ownership among people who could not yet afford to own a home.

Politicians on the right and left wanted to take credit for an increase in middle-class home ownership. But the rules of the marketplace are just as constraining as human nature. Government cannot force financial institutions to give loans to people who can't afford to pay them back and then expect that somehow things will all magically work out. Sooner or later, reality catches up with us.

History of finger-pointing at CRA. Conservatives have long claimed that efforts to expand homeownership among low-income and minority Americans caused the financial crisis. Their accusations are frequently focused on the 1977 Community Reinvestment Act (CRA) -- which is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.

Experts say CRA did not contribute to financial crisis “in any substantive way”

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, 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.”

Slate's Gross: "[t]he notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd." In an October 7, 2008, Slate article, Daniel Gross, a business columnist for Newsweek and author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, criticized the notion that affordable housing initiatives caused the financial crisis, writing that “the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd” and that “lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all.” Gross further explained, “On the other hand, lending money recklessly to obscenely rich white guys ... can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity.”

From Gross' October 7, 2008, Slate column:

Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper -- economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

Here's why.

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities -- unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.

Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans -- loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton's fault?

Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them -- frequently using borrowed capital.

At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: “De minimis.”

Lending money to poor people doesn't make you poor. Lending money poorly to rich people does. [Slate, 10/7/08]