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Community Reinvestment Act (CRA) - Bad Dog



January 02, 2009 – Comments (4)

I hereby state: IMHO, the cause of the current financial disaster is the CRA. Period. QED. Done and Done. Hair of the Dog. And any other cliché I can think of.

CRA seems to be a classic case of unintended consequences. Owning your home is the American dream. OK: so pass a law requiring lenders to make this possible for more people. Good thing, eh? Who could possibly be against this force for good? The Carter administration created it, and the Clinton administration strengthened it and put teeth into the law.

Well, now: think a moment. Before CRA, everyone who could afford it and meet financial standards already got a loan. After CRA, you are entitled to a home loan by virtue of your geographic proximity to a savings-and-loan branch. Is this not a recipe for disaster, forcing the giving of loans to someone who cannot afford it under normal rules? Yes, yes, I know: hindsight is 20-20. But if there is one major cause, if unintentional, surely the CRA is it?? Is it hoping too much that Prez-elect and his “team” will be smart enough to rescind this monstrosity?

Do you remember Bailey Savings and Loan from “It’s a Wonderful Life”? Under current CRA rules, it would not be permitted to exist. In fact Before CRA (BCRA), there were any number of neighborhood savings and loans, thrifts, etc. BCRA, there were many friendly, neighborhood S&L’s chartered by the state (and, incidentally, not FDIC covered, because BCRA, they were low-voltage operations that did not make home loans, and often not even car loans).

OK, how do you legally execute CRA, since existing financial institutions were not capable of handling them? You create and give teeth to Fannie Mae and Freddie Mac, of course. AND: you give them mucho financial power to the point that they back 50% of all mortgages with implicit federal permission and backing. AND they do something new: they “securitize” these iffy mortgages and get AAA ratings and turn them into legit financial instruments, so these quasi-NGO’s (or whatever you call ‘em) can get these questionable loans off their books so they can make room for yet more iffy mortgages, satisfying the mandates of the wonderful, happy CRA rules. It is easy to blame Bear, Lehman, GS, MS, and Merrill for “greed” as the cause. OTOH, if FNM and FRM had not securitized these ghastly CRA Frankenstein’s in the first place, there would have been no iffy financial mortgages for these guys to grab ahold of, and everything would still be rosy. Course, not to say that this 30-to-1 leverage ratio would not have come to grief somewhere else down the road on something else, but the Dow would still be hovering around 14000 if it were BCRA. And, yes, I do mean to implicate EVERYONE who supported CRA, FNM, FRM, stronger financial resources as an un-indicted co-conspirator in the current financial meltdown. Their participation is clearly not intentional, but nevertheless indisputable.

If you have info or opinions that are different or illuminating, do not hesitate. Please: I need to understand.

4 Comments – Post Your Own

#1) On January 02, 2009 at 6:33 PM, OtherOracleOfOMA (65.00) wrote:

"Before CRA, everyone who could afford it and meet financial standards already got a loan."

Nonsense. Banks frequently refused to grant loans to people who lived in "undesireable" (read: black or Hispanic) neighborhoods, irregardless of their financial status, a practice known as redlining.

Now, if you actually knew anything about the legislation on which you're pontificating, you'd know that the CRA required intense review of the borrower's ability to repay. Accordingly, the overwhelming majority of the reckless loans were made by loosely-regulated institutions like Countrywide and Ameriquest, who were NOT, I repeat, NOT SUBJECT TO REGULATION UNDER THE CRA. Had they been forced to adhere to CRA lending standards, we would not have had anything like the real estate bubble that developed. Few subprime mortgages, for instance, were regulated by the CRA. Generally speaking, the most reckless loans were made in the areas in which there was the least federal regulation and oversight.

With the irresponsible monetary easing on the part of the Fed and the forced savings policies of China and Japan, we probably would have had another bubble, but that's a different story.

I've heard right-wing/libertarian ideologues parrot this pathetic attempt to blame the poor and middle class ad nauseum, rather than the obscenely-compensated executives who manipulated, gamed, and defended the banking system to the point of financial insanity. They - the people at the top - are who bear the responsibility for this, period. The buck stops with the people making 8 figures, not the people making $30k; to look past the accounting to the social conditions which created this, the pervasive lack of leadership and the "blame the little guy first, last, and always" attitude served as a major contributing factor as well. Certainly government played a big role in bringing this about, but not in the way in which you posit. To focus on the very minor role played by FRE, FNM and the CRA, and not on the Fed's flood of liquidity or Congress' blind adherence to free-market dogma - leading to the gutting of regulations mandating transparency, the establishment of the unregulated CDS market, the unchecked proliferation of securitization and derivatives, etc. - is asinine.

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#2) On January 02, 2009 at 8:44 PM, jerryguru69 (93.72) wrote:

OK, let us grant the bulk of your objections as legitimate, for the sake of arguement.

Repeat my question:

Under current CRA regs, for Carter rules, much less for Clinton regs, would "Bailey Savings and Loan" be permitted to open its doors on Monday, Jan. 5, 2009?


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#3) On January 02, 2009 at 10:04 PM, devoish (99.06) wrote:

Can you produce some imaginary loan data for your imaginary bank...

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#4) On January 03, 2009 at 4:19 PM, evenstephen4 (< 20) wrote:

I'll lead off with the disclaimer that I consider myself mostly a conservative, (and maybe not so much a republican any more.) I think the CRA of 1995 was one of a hand full of things that contributed to the economic crisis of today. I haven't been able to find the vote count on that legislation, and would appreciate if anyone could reply with those stats.
Clinton appointed Andrew Quomo secretary of HUD with directives, and quotas for the purpose of increasing the number of risky loans Freddie, and Fannie would buy.  When we talk about "deregulating the banking industry", does that mean repealing "Glass Seagal"? That passed with pretty much bi-partisan support, and was signed by democrat, Bill Clinton, so there must be about equal blame for that.
    Another piece of legislation that may have played a big role was the Commodities Futures Modernization act of 2000. Phill Grahm, republican from Texas, snuck it through as a rider to something else, at the 23rd hour of the Clinton administration, just before they adjourned for Christmas break. It wasn't even discussed in either chamber of congress. It passed with overwhelming bi-partisan vote in the house, and was unanimous in the senate, and again, Clinton signed it.
    In light of all this, it is hard for me to fix any lop sided blame on either side. I hope someone can carry the ball a little further for me on that last legislation I mentioned above: the CFMA (Commodity Futures Modernization Act of 2000). I think I heard that it gave rise to the "shadow banking system", which allowed lending institutions that are not officially categorized as banks, and don't have to comply with the same standards as banks, to lever up 30:1 on the "loans to reserves" ratio. Also, what was the legislation, and when was it passed, and with what kind of partisanship, that began the practice of securitizing home loans?
    I guess my last question is about the rating agencies. Have they always gave false ratings to securities they rate? If they made any significant changes of practice, in the time leading up to this economic disaster, what caused them to start doing their jobs wrong?
    The most important thing now, is to undo any of the things that got us here. Forget about pointing fingers for the moment, and let's undo the CRA, CFMA, re-instate Glass Seagal, straighten up Freddie, and Fannie, and the rating agencies. Is that asking too much?

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