Community Reinvestment Act (CRA) - Bad Dog
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.