Guest Blogged by des…
The emerging meme last week from the conservative corner is that the 1977 Community Reinvestment Act (CRA) is to blame for the economic meltdown on Wall Street. The CRA was intended to confront decades of institutionalized discriminatory lending practices by banks in refusing loans to women and minorities. The twisted logic behind this newest meme is that the CRA forced formerly prudent lenders to abandon their previously cautious ways, and forced them to throw sound lending practices out the window because that’s what the law demanded, and gosh, it’s not their fault that they made bad loans in the bargain.
You may not be surprised to learn that’s not the case. Read below, in full, for some facts that counter the insidious prejudice — with racism at its heart — inherent in the latest lie drummed up in the conservative blame game. You’d think they couldn’t cry “Political Correctness made me do it!” with a straight face, but alas, they do…
Rick Perlstein, OurFuture.org [strikethroughs in original]:
…So what did I do in that Chicago radio studio last Friday when a wingnut (who, incidentally, is African American) spewed forth some excrement about how Jews harvest the blood of children for their Passover matzohs handouts to swarthy people are responsible for the meltdown of the American economy? I did my job. I called it a “lie and a slander,” explaining in simple and forceful terms that lending institutions covered by the CRA have a lower mortgage default rates than ones that aren’t, and that even if the former were the worst companies in the history of the universe, they wouldn’t have helped produce the financial contagion had not conservative deregulation green-lighted the buying and selling of insanely irresponsible mortgage-backed securities.
…Then, the next day, waiting in the drive-through line at a Burger King, I heard myself on the radio. But not my debunking of the right-wing smear. That part was cut.
You may also be surprised to see that the Federal Reserve disagrees with the racist meme, as they are quoted by The Big Picture [emphasis in original post]:
…What are the requirements of the CRA?
The CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:
- to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;
- to assess their records of performance under the CRA during examinations; and
- to take those CRA records into account when evaluating proposals for expansion.
Robert Gordon, The American Prospect [emphasis added]:
…
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending. CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”
…
It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.
And that is not political correctness. It is correctness.
More facts, analysis, and sourcing at the original links.
I’ve been countering this crap at wingnut blogs all week. They’re trying to blame Fannie and Freddie too and I have no doubt that they’ll be quoting that NYT piece out today with Sen. Jack Reed pressuring Freddie’s manager to buy more low income loans back in 2004. I also have no doubt the reporter found 5 Repub senators saying the same thing at that hearing but chose not to use it. Isn’t that what the Republican “ownership society” was all about?
Some idiot at US News wrote an op-ed Friday suggesting McCain take it to Obama about Fannie and Freddie. About 100 wingnuts agreed whining McCain is being much too nice and has to attack, attack, attack! The problem for McCain is that he has 19 campaign advisers that have lobbied for Fannie and Freddie including his manager Rick Davis who only stopped receiving his $15,000 a mth from Freddie I think it is in August when the “communists” in the Bush adminstration nationalized it.
It’s fun to write this stuff and watch their heads explode. You can almost see the little little starbursts coming through the screen and ricocheting around the living room. ;-}
the meltdown has little to do with RACISM.The clear facts are that Fannie/Freddie had no real assests behind them and they continued on their mission of buying mortgages.Then lobbied and fought any oversight.This was done in 2003-2004.Just watch the C_SPAN tapes of those hearings where Congressmen like Maxine Waters,Barney Franks et al attack the AUDITOR(who is telling Congress that Fannie is 10.6 Billion in the red) and contend there is nothing wrong with Fannie/Freddie.
Your attempt to hide the above by raising a RACE isssue will lead us to not be able to FIX the problem.You should be ASHAMED
One point for Brad to consider.It was 2004 when the Auditor made his findings to Congress showing the 10.6 billion lossess.In Jan 2005 Franklin Raines is forced to step down. (over the issues raised in the Audit)It is from this point on that Obama starts receiving his campaign contributions from Fannie/Freddie (appox 140,000).Oh yes Obama did write a letter to the Sec of Treas in late 2007 about compensation and accting issues.Sounds like an extension of Voting PRESENT or “if you need me just call”.What an absolute JOKE
Just take out two hours and watch this movie. It will make a lot of things going on in the current “meltdown” clearer to you.
Thanks Des, for carrying on in the war against ignorance…the only war I’ll fight in!
“Then lobbied and fought any oversight.” And all those lobbyists are now running McCain’s campaign. Davis himself headed the Homeownership Alliance, the lobbying group formed by Fannie and Freddie in 2000 to fend off any oversight. From 2000 to 2005 his company received $35,000 a month for that work. Then when the FMs closed HA in 2005 Davis asked for and received $15,000 a month personally for nothing more than his access to McCain.
The people running McCain’s campaign successfully fought off efforts to stop Fannie and Freddie from doing the same stupid unregulated deals as the now dead, absorbed, or floundering big five investment banks on Wall St.
Fannie and Freddie have lots of assets but like most of Wall St. so much of it is unsellable right now. Just like my deceased parents house my siblings and I inherited this spring. It’s worth $400,000 but if no prospective buyers can get a mortgage in a frozen credit market we can’t sell it anymore than Fannie can sell mortgage backed securities even if the mortgages backing them are 96% sound.
TBrown, it helps to read the post before commenting; you are talking about mismanagement and debunked rumors relating to Fannie Mae and Freddie Mac, not the Community Reinvestment Act that is the subject of this post.
Secondly, the factual evidence, as excerpted in the post above and available elsewhere for anyone who chooses to look, shows that the CRA is not at fault in the meltdown on Wall St.
This industry report released in July 2008 shows that the majority of subprime-rate loans originated in 2006 were made to non-Hispanic Whites and upper-income borrowers.
To what would you ascribe the reasoning behind this demonstrably false accusation from the rightwing media, pointing to the CRA, if not thinly-veiled racism? Seriously, I’d like to know.
Thirdly, whether in reference to Fannie, Freddie, the CRA, or any other entity involved in the banking system, if you can find ONE CASE in which the lenders were FORCED by the law to give a bad loan that they otherwise would not have made, forced by law or “pressure” to endanger their own banks and their own jobs and ultimately the entire financial system, please by all means link to it here.
“Pressure” to increase investment in low-income and minority communities is simply not a plausible excuse for the lending industry to justify their utter abandonment of sound banking practices. The CRA is a convenient scapegoat.
The culprit is plain GREED. Lots of lenders created that abominalion called the “Variable rate loan.” Now, anyone with any sense KNOWS that a “Variable Rate” NEVER goes DOWN! People who could afford 5% and were making their payments watched as the interest rates doubled or worse, suddenly making the interest deadly. Had the lenders been willing to renegotiate much of the disaster could have been avoided, but the selfish greedy bastriches held out for loot, and lost it all. CRIME PAYS – but sometimes not very well.
The wingers have been targeting Obama through FM2 for months as an attack and dodge away from McCain’s Keating involvements. And the notion that poor (black) folks who could not afford their loans are now looting taxpayers (like Reagan’s non-existent welfare queens) is an attempt, as it was with Reagan, to fly in below overt attack levels.
Re Tedeger #8: Actually, variable rates have been known to go down. When I bought my house in 1984, all I could afford was a one year variable rate at 12-3/4% (this was the best rate available, even though I had good credit); fixed rates were over 13% at that time, and I just couldn’t qualify at that rate. Every year my interest rate went down.
Until fairly recently, variable rate loans did have teaser rates, which were expected to go up. The most abusive ones were monthly variables, which went up the very next month after the closing, but the required payments only adjusted annually, creating negative amortization. With some of those, there was a cap on the amount by which the required payment could increase, with a provision for catching up with all of the negative amortization every five years. I’m guessing that could be really painful. When I used to be the lawyer closing these loans, I explained to the borrowers that, the way their loans were structured, if they only made the minimum monthly payments, they would owe more at the end of a year than they did at that moment.
These days, the variable rate mortgages I see have the opposite of teaser rates to start with. In other words, the initial rate is actually higher than it would be if you just added the margin (usually 2.75%) to the index (usually the one-year Treasury bill rate or sometimes the LIBOR). If conditions don’t change, your rate will go down when it resets with one of these loans.
For what it’s worth, based on my experience in the boom and bust of the late 1980s and early 1990s, with the accompanying foreclosures and bank failures all over the place, I predicted a similar meltdown when I saw the reappearance of negative amortization loans a few years ago. I was far too optimistic.
So-called “liar loans” are nothing new; we saw them back then, but we just called them no-doc loans. Even at the time I couldn’t figure out why it would make any sense for a lender to agree not to verify any of the borrower’s financial information as long as there was a 20% down payment if the lender then didn’t confirm the actual existence of the down payment (sound at all familiar?). There was even a certain amount of securitization of various sorts of loans going on then as well (Twenty years ago I worked for a law firm that represented a well-known investment bank that went bankrupt a few years later, and I used to hear about securitization and tranches in the halls. Luckily, I never got closer to those deals than that.).
The differences now seem to be more a matter of degree than substance, as the mortgage industry has become much more a producer of “product”, which is then sold, repackaged and divided up, so that the originator has no stake in whether the loan is actually paid back, creating what looks to me like giant institutional “liar loans”. The no-doc loans of 20 years ago were also sold a lot of the time, but I don’t believe they were repackaged and sliced up the way they are now, which made it easier back then to find someone to work things out with if the borrower got into trouble. It would be great to think that the financial industry and the government have finally learned their lesson, but I predict that greed and recklessness have become far too entrenched now for any New Year’s resolutions to last much past January 2.