We have been told over and over by many including those in the government that the CRA had no impact on the current crisis. This article looks a little deeper.
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Did the Community Reinvestment Act—the 1977 federal law pressing banks to lend to low- and moderate-income borrowers—fuel toxic lending and thus play a significant role in causing the financial meltdown? “CRA was not the cause of the crisis,” Comptroller of the Currency John Dugan maintained this past August. Though he had little quantitative detail about the performance of CRA-related loans, Dugan claimed that they had performed better than loans made by lenders not subject to the CRA. Further, he contended, borrowers of CRA loans had defaulted at much lower rates than borrowers of subprime mortgages. Other defenders of the act assert that almost all CRA loans originated at “prime” interest rates, rather than the higher rates that lenders offered risky “subprime” borrowers. And they add that the mortgages made under CRA were almost entirely fixed-rate, not the notorious adjustable-rate mortgages with quick rate resets and high payment shock that led so many borrowers to default.
The question of how well CRA loans have performed is of vital importance because of the trillions of dollars in such lending. During the first 15 years of the act’s existence, total announced commitments under the CRA totaled $9 billion. But starting in 1992, volume exploded. Over the next 16 years, from 1992 to 2008, announced CRA commitments totaled $6 trillion. And incredible though it may seem, the same federal regulators who forced the CRA on banks have neglected to track the performance of trillions of dollars of loans made to satisfy it. But there is a strong prima facie case that they constitute toxic lending—that is, lending that leads to unsustainable loans, resulting in an unacceptable level of foreclosures.
To begin with, the CRA defenders’ claim that CRA lending mostly wasn’t subprime is highly misleading. It would be more accurate to say that 90 percent of CRA lending wasn’t classified as subprime. CRA lenders, along with Fannie Mae and Freddie Mac—the two government-sponsored entities that bought loans from lenders, enabling them to make more loans—commonly classified CRA loans as “subprime” only if they contained such features as high fees, high rates, or low initial payments with adjustable interest rates. But approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores—characteristics that indicated high credit risk. Whether or not anyone called these loans “subprime,” in other words, the chances are good that many of them have defaulted or remain at high risk of doing so.
Though the feds, again, haven’t collected figures for CRA loans’ performance as a whole, we do have statistics from a few lenders that are troubling indeed. In Cleveland, Third Federal Savings and Loan has a 35 percent delinquency rate on its CRA-mandated “Home Today” loans, versus a 2 percent delinquency rate on its non–Home Today portfolio. Chicago’s Shorebank—the nation’s first community development bank, with largely CRA-related loans on its books—has a 19 percent delinquency and nonaccrual rate for its portfolio of first-mortgage loans for single-family residences. And Bank of America said in 2008 that while its CRA loans constituted 7 percent of its owned residential-mortgage portfolio, they represented 29 percent of that portfolio’s net losses.
Whatever the precise magnitude of the CRA’s role, there is no question that as the government pursued affordable-housing goals—with the CRA providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5 percent or less down more than tripled, from 8 percent in 1990 to 29 percent in 2007. Adding to the default risk: of these loans with 5 percent or less down, the average down payment declined from 5 percent to 3 percent of the loan’s value.
More importantly to the crisis was the Bush 'ownership society' creation (actually a continuation and then acceleration of Clinton's 'National Homeownership Strategy').
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Increasing the homeownership rate required either making homes more affordable or raising real incomes for would-be homeowners. Yet with home values rising rapidly (as was desired) and real income stagnant, this meant reducing the price of or barriers to borrowing. Lending standards were therefore relaxed, as Fannie Mae, Freddie Mac, and private investment firms began investing in high-risk Mortgage Backed Securities. This new capital caused a large expansion of questionable loans, such as so-called sub-prime mortgages, many of which offered seemingly cheap loans to high risk borrowers who couldn't afford them over the long run. Ultimately, these mortgages collapsed under their own weight, bringing down global financial markets along with them. Incidents of foreclosure have skyrocketed, home values have plummeted, mortgage availability has disappeared for many Americans, and the prospect of an ever-expanding homeowning class seems to have become a thing of the past.
Originally posted by floersh: We have been told over and over by many including those in the government that the CRA had no impact on the current crisis. This article looks a little deeper.
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---snip---
But approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores—characteristics that indicated high credit risk. Whether or not anyone called these loans “subprime,” in other words, the chances are good that many of them have defaulted or remain at high risk of doing so.
Wow, that's awesome! According to them, I hold a subprime mortgage! You see, I put less than 5% down on my mortgage - never mind that my low credit score was over 750 or that I was given a 5% interest rate - so I am apparently a bad credit risk!
The funny thing to me is that the CRA does not mandate any of these requirements - it requires banks to lend where they take deposits. In other words, if you want to open a bank in a slum, you are required to offer some obtainable form of credit to the residents of said slum.
If the money you would make by handling the deposit accounts of said residents does nto exceed the cost of the credit (including default) ... wait for it ... DON'T OPEN A BANK THERE!! While deregulation and declawing of CRA steadily allowed banks to take on unhealthy levels of risk, it in no way mandated it!
Doesn't change the fact that CRA based loans at these three banks had a much higher default rate then non-CRA based loans.
Also doesn't change the fact that the government does not track in anyway these loans and thus couldn't possibly say they did or didn't contribute to the crisis.
Attempting to say CRA had nothing to do with this is as silly as saying Grahm-Leachy didn't have anything to do with it.
Doesn't change the fact that CRA based loans at these three banks had a much higher default rate then non-CRA based loans.
Also doesn't change the fact that the government does not track in anyway these loans and thus couldn't possibly say they did or didn't contribute to the crisis.
Attempting to say CRA had nothing to do with this is as silly as saying Grahm-Leachy didn't have anything to do with it.
All the CRA required is that the SAME criteria be used in all areas the Banks do business. It did NOT force any criteria it just stated if you wanted to do business in an area you had to use the same loan criteria as in other areas.
Originally posted by rayld2: All the CRA required is that the SAME criteria be used in all areas the Banks do business. It did NOT force any criteria it just stated if you wanted to do business in an area you had to use the same loan criteria as in other areas.
The numbers don't lie.
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In Cleveland, Third Federal Savings and Loan has a 35 percent delinquency rate on its CRA-mandated “Home Today” loans, versus a 2 percent delinquency rate on its non–Home Today portfolio.
Community Reinvestment Act had nothing to do with subprime crisis Posted by: Aaron Pressman on September 29
Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)
There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog.
You do realize that SUBPRIME loans are only but a piece of this crisis don't you?
Of course.
And you still can't refute the fact that CRA loans defaulted at a MUCH HIGHER RATE then non-CRA based loans.
Can't refute, nor would I accept without hard data.
Also what laws were passed or executive orders put in place by Bush that weakened CRA enforcement? Not that I doubt it I just want to know. I doubt there was any ex order, more like policy.
It should also be noted that not all of these CRA loans are subprime. I would guess a good share are FHA and VA loans which are not considered subprime.
Originally posted by rayld2: All the CRA required is that the SAME criteria be used in all areas the Banks do business. It did NOT force any criteria it just stated if you wanted to do business in an area you had to use the same loan criteria as in other areas.
The numbers don't lie.
quote:
In Cleveland, Third Federal Savings and Loan has a 35 percent delinquency rate on its CRA-mandated “Home Today” loans, versus a 2 percent delinquency rate on its non–Home Today portfolio.
So because the Bank used BAD criteria to make more profit it is not their fault it is the fault of a law that did NOT force them to make ANY loans only to use the same criteria in the covered area as elsewhere. If to increase profits in a market were house prices are going up you use bad criteria for loans so you can make more loans to people that are poor risks then of course these loans are going to have a higher default rate when house prices fall than the loans to people that would have qualified under stricter criteria, but that was the BANK'S decision it had NOTHING to do with anything in the CRA. The ONLY requirement in the CRA is that that SAME criteria be used for loans in every area the bank does business. The BANKS decided what criteria to use.
Doesn't change the fact that CRA based loans at these three banks had a much higher default rate then non-CRA based loans.
Also doesn't change the fact that the government does not track in anyway these loans and thus couldn't possibly say they did or didn't contribute to the crisis.
Attempting to say CRA had nothing to do with this is as silly as saying Grahm-Leachy didn't have anything to do with it.
I think that CRA's role in here is relatively minor. If banks had looked at CRA loans as a "cost of doing business" issue, something that they hoped to make money on by playing it conservative but weren't hopeful, then I would say massive losses in this area were directly related to that actual government regulations. The crisis was because they looked at these loans, where there was a lot of risk and little profit, and decided to make it a cash cow. Having made that decision, the one which was one of the largest factors in the housing bubble, I do not see how CRA could have done anything other than remind them that this questionable revenue base was out there.
For example, the government currently mandates a minimum average mpg rating on cars and trucks, measured across the company. This does force auto manufacturers to produce a certain number of less-profitable vehicles. If 30 years in the auto industry then decided to stop making trucks and suv's entirely, would that then be the government's fault too?
The housing crisis was one big pyramid scheme - everyone involved knew that the value was not there, and were just trying to get a profit before dumping it off on someone else. Blaming CRA for that kind of behavior is a little off.
