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Monday, October 25, 2010

The Community Reinvestment Act, revisited

Posted by Scott Tibbs at 4:30 AM

I have been personally attacked for bringing up the Community Reinvestment Act in my last post, specifically regarding banks being pressured to make loans to people who would not be able to pay them back.

Here the is documentation for that claim.


The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Source: Wall Street Journal, October 3, 2008


CRA was meant to encourage banks to make loans to high-risk borrowers, often minorities living in unstable neighborhoods. That has provided an opening to radical groups like ACORN (the Association of Community Organizations for Reform Now) to abuse the law by forcing banks to make hundreds of millions of dollars in "subprime" loans to often uncreditworthy poor and minority customers.

Any bank that wants to expand or merge with another has to show it has complied with CRA - and approval can be held up by complaints filed by groups like ACORN.

In fact, intimidation tactics, public charges of racism and threats to use CRA to block business expansion have enabled ACORN to extract hundreds of millions of dollars in loans and contributions from America's financial institutions.

Source: New York Post, September 29, 2008. (Hat tip to HotAir.com)


Using provisions of a 1977 law called the Community Reinvestment Act (CRA), Chicago ACORN was able to delay and halt the efforts of banks to merge or expand until they had agreed to lower their credit standards — and to fill ACORN’s coffers to finance “counseling” operations like the one touted in that Sun-Times article. This much we’ve known. Yet these local, CRA-based pressure-campaigns fit into a broader, more disturbing, and still under-appreciated national picture. Far more than we’ve recognized, ACORN’s local, CRA-enabled pressure tactics served to entangle the financial system as a whole in the subprime mess. ACORN was no side-show. On the contrary, using CRA and ties to sympathetic congressional Democrats, ACORN succeeded in drawing Fannie Mae and Freddie Mac into the very policies that led to the current disaster.

Source: National Review, October 7, 2008


The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

Source: Boston Globe, September 28, 2008


“The private sector got us into this mess. The government has to get us out of it.” This is Barney Frank’s view of the current financial mess our country is in, and nothing could be further from the truth. Barney Frank has been a major supporter of every policy that got us into this mess, from the Community Reinvestment Act to President Clinton’s mandate for banks to extend a minimum number of “affordable loans.” Instead of blaming everything on the “Wall Street fat cats”, Barney Frank needs to be held responsible for his actions!

The mistakes did not stop at supporting these policies. After they were enacted and in place, Frank refused to admit that there was a problem. As Fannie and Freddie were taking on billions in subprime debt, Barney Frank continued to assure us that that there was no financial crisis and press for more affordable lending.

Source: Forbes.com, October 15, 2010

Previous sources already cited:

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.

Source: Investor's Business Daily, September 22, 2008

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them.

Source: Wall Street Journal, September 23, 2008

The painful readjustments in the housing market are a direct result of failed government policies that fueled the housing bubble. A political bias that favored home ownership (through the tax code and programs such as the Community Reinvestment Act, coupled with the implicit — now explicit — federal guarantee of the government-sponsored enterprises Fannie Mae and Freddie Mac, led to a housing boom fueled by loans that were often not worth the paper they were written on. At the same time, ratings agencies, under the auspices of the SEC, vouched for the quality of these loans, allowing them to be bundled into new financial instruments and sold around the world. The Federal Reserve aided and abetted these distortions with loose monetary policies that distorted price signals, artificially boosted investments in the housing sector, and ultimately throughout the financial services sector as mortgages were securitized and repackaged for sale across the globe.

Despite the publicly voiced concerns of many of us — both in and out of government — about Fannie and Freddie, the GSEs’ defenders in Congress turned a blind eye to the inherent weaknesses in the system. The financial system held together as long as housing prices continued to increase. As the housing market weakened, it became evident that the value of mortgages underlying the new financial instruments was too low to meet the necessary financial obligations. As the true market value became evident, the market for these mortgage backed securities (originated by Fannie and Freddie) dried up as investors triggered a flight to safety. Considering the fact that many of these firms were leveraged by as much as 30-to-1, the retrenchment was severe.

Source: National Review, September 29, 2008

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