It Ain’t CRA , Stupid

Here’s what the punditocracy has been saying about the cause of our large looming financial crisis:

Commentators say that’s what triggered the stock market meltdown and the freeze on credit. They’ve specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie’s and Freddie’s financial problems…

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent.

And national news networks on the bandwagon. Recently, Neil Cavuto of Fox News said, “I don’t remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster,”  Or as a friend of mine recently said, lets just blame it on the brown people.

But the truth is out there. And here is the truth:

Federal housing data reveal that the charges aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

And further more, according to Federal Reserve data:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. 

   

• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. 

   

• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics. 

That’s right folks, only one of those top 25 lending institutions was subject to CRA.  Personally, I am highly perturbed by the fact that folks on the Hill, particularly our conservative representatives and Senators continually use CRA has a target for any mortgage market turmoil that occurs. Under the Bush administration, the teeth of CRA has slowly been dismantled in the name of the “free unfettered market”.  I am tired of hearing people say that poor and moderate income AND minority homeowners brought the market to its knees.

If this was a card game of a certain name, I’d call bull.

First of all, mortgage brokers, investment banks and finance companies like now defunct New Century and Countrywide are not subject to CRA. Only banks and thrifts are required to follow CRA regulations.  These companies only have to follow state banking regulations, which vary by state.

I guess one could say there was a lack of oversight and consistent regulation, perhaps?

Second, lending institutions that have made it their business to lend to low and moderate income buyers like CDFI’s, community development credit unions, and community development banks, have proportionally, one-tenth the default rate of their larger competitors.  According to my own research, banks like ShoreBank in Chicago had a default rate of less than 5%  (proportionately) to  the number of mortgage defaults then larger banks and thrifts through out the nation–which was more than double at 17%.  

Less regulation?  Significantly greater default. More oversight, tighter underwriting standards? Significantly less default. Well, isn’t that funny? 

But what is even funnier is that two of soundest lending institutions in the nation–JP Morgan Chase and  Bank Of America (which, did not have liquidity problems until it started trying to work out the loans held by Countrywide–formerly a private lending institution), also had very high CRA ratings.

But the money quote of the day sums it all up:

“Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans,” she said. “The CRA has increased the volume of responsible lending to low- and moderate-income households.”

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, “that this new lending is good business.”

Huh. Perhaps, one can do good and make money…and find a sound market with those pesky brown folks after all.