Battling the CRA Myth

By
Wednesday, March 18, 2009 at 6:00 am
Rep. Barney Frank (D-Mass.) (WDCpix)

Rep. Barney Frank (D-Mass.) (WDCpix)

Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before Congress last week and debunked the myth — popular among conservatives — that a law encouraging loans to low-income communities has been largely responsible for the nation’s housing crisis.

“I can state very definitively,” Sandra Braunstein, director of the Federal Reserve’s consumer and community affairs division, said during a House Financial Institutions subcommittee hearing Wednesday, “that from the research we have done, the Community Reinvestment Act is not one of the causes of the current crisis.”

Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

The statement may have come as a surprise to some of the panel Republicans, who have made a habit of fingering the CRA as a leading cause of the financial downturn. Enacted under the Carter administration, the law has been a lightning rod for conservative criticism for years, but the scorn really took off when the housing market collapsed last year. Critics claim that the CRA forced lenders to make bad loans to low-income borrowers who ultimately couldn’t pay them back.

Braunstein’s testimony, supported by a Fed analysis and echoed by other finance regulators in recent months, could add force to a recent Democratic push to expand the CRA to cover non-bank financial institutions, including mortgage companies, securities firms, credit unions and insurance companies. The bill aims to boost not only lending, but also investments and other services in minority and low-income neighborhoods.

Yet some myths don’t die easy. And Republicans — backed by the finance industry and encouraged by conservative pundits — appear as willing as ever to blame the CRA for the collapse of the housing market. Indeed, Rep. Jeb Hensarling (R-Texas) reiterated that argument at last week’s mortgage reform hearing, claiming that the CRA “helped put the federal government’s seal of approval, not so much on helping raise the economic opportunities of the borrower, but instead bringing down the lending standards of the lender.”

“I know the intent was noble,” Hensarling added, “but the effect has been devastating.”

Yet Braunstein’s testimony told a different tale. She cited a Federal Reserve Board analysis which found that, in 2006, CRA-covered banks operating in CRA-targeted neighborhoods accounted for just six percent of the risky, high-cost loans largely responsible for the housing crisis. Mortgage loans are considered high-cost when interest rates are at least three percentage points higher than those of conventional mortgages.

“So I can tell you,” Braunstein said, “if that’s where you’re going, that CRA was not the cause of this loan crisis.”

The debate arrives as Democrats are pushing an array of finance regulation reforms in efforts to stabilize the housing market and discourage the bad loans that led to the current crisis. Supporters are hoping that the economic turmoil — not to mention the finance industry’s role in bringing it about — will provide an opportunity to move those reforms.

Yet many of those proposals — like legislation allowing struggling homeowners to file for bankruptcy protection to keep their homes — are opposed by most in the finance industry. The banks — even those accepting billions of dollars in federal bailout funds — continue to lobby against such legislation and contribute to political campaigns, granting those institutions enormous sway even despite their own economic woes and reliance on federal lifelines.

Indeed, the mortgage bankruptcy bill, which the House approved earlier this month, has since stalled in the Senate in search of the 60 votes it needs to pass. Despite industry-friendly concessions added in both chambers, most banks remain opposed to the bill.

Not that that’s stopping some Democratic leaders from charging ahead. House Financial Services Committee Chairman Barney Frank (D-Mass.) said he hopes to pass anti-predatory lending legislation before the Easter recess, while bills to reform the credit card industry and create a systemic risk regulator are also in the works. Frank also supports the push to expand the CRA, though Frank spokesman Steve Adamske said it’s not yet clear whether Democrats will try to attach it to one of the other finance reform bills. In the Senate, Banking Committee Chairman Christopher Dodd (D-Conn.) has his eyes on a similar package of reforms.

Yet no single housing proposal will likely inspire the outcry of the push to expand the CRA. Passed in 1977, the CRA requires banks to “help meet the credit needs of the local communities in which they are chartered,” regardless of income levels. The law was enacted to prevent banks from denying loans based on the poverty levels of certain neighborhoods — a practice known as redlining. Though the CRA doesn’t mandate that a certain number of loans be made to low-income borrowers, it rates banks according to their willingness to meet community needs. Regulators consider those ratings when the banks apply for expansions, acquisitions and mergers.

The CRA modernization proposal, introduced Thursday by Rep. Eddie Bernice Johnson (D-Texas), would also require the institutions to consider the racial profile — not just the income level — of the targeted community.

“The banks have made money under these guidelines,” Johnson said, “and so will the mortgage institutions.”

Writing in The Washington Post last September, conservative op-ed columnist Charles Krauthammer summarized the right’s opposition to the CRA: “It led to tremendous pressure on Fannie Mae and Freddie Mac — which in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads,” Krauthammer wrote. “That’s called sub-prime lending. It lies at the root of our current calamity.”

Yet the Fed’s research points to a different reality. “Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis,” Fed board member Elizabeth Duke said in a speech before representatives of the banking industry last month. “The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting.”

Advocates are quick to point out that the CRA includes a safety and soundness provision that discourages bad loans. “It has a built-in check saying that [banks] have to lend in a way that’s good for the institution and good for the community,” said Danna Fisher, legislative director at the National Low Income Housing Coalition.

The Obama administration is also voicing its support for efforts to get more low-income and minority families into their own homes. Appearing before a room of housing advocates on Capitol Hill on Thursday, Shaun Donovan, secretary of the Department of Housing and Urban Development, all but charged the finance industry with preying on minority neighborhoods. Donovan said that 60 percent of all 2006 loans in the Jamaica section of Queens, in New York City — the only county in the country where the average black income is higher that the average white income — were risky, high-cost loans. Not coincidentally, foreclosure rates in Jamaica have been among the highest in the city.

Low-income borrowers, Donovan argued, “can be successful homeowners — if they’re given the right tools.”

Comments

43 Comments

ajm8127
Comment posted March 18, 2009 @ 6:20 am

If the banks were still prohibited under the Glass Steagall Act from being involved in both commercial lending, and investing, the money of the borrowers that defaulted on their mortgages would have never been used in speculatory practices. This means that when the money from the mortgages dried up, it would not have had such a direct effect on Wall Street. These people's mortgages would not have been chopped up, repackaged and resold as investment vehicles, all over the world. Plainly put, Wall Street would not be using the money we deposit in our banks to fuel their wide-eyed speculatory investment craze. If Phil Gramm had kept his greedy hand off of Glass Steagall, this would not be nearly as bad. Of course the banks aren't fond of lending to low income borrowers. They would much rather hand out a couple of large loans to make their money than do a bunch of small loans. Less paper work that way, less overhead.

http://en.wikipedia.org/wiki/Glass-Steagall_Act
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley…


» Battling the CRA Myth
Pingback posted March 18, 2009 @ 9:56 am

[...] Originally posted here: Battling the CRA Myth [...]


Battling the CRA Myth
Pingback posted March 18, 2009 @ 12:10 pm

[...] Random Feed wrote an interesting post today onHere’s a quick excerptRep. Barney Frank (D-Mass.) (WDCpix) Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before Congress last week and debunked the myth — popular among conservatives — that a law encouraging loans to low-income communities has been largely responsible for the nation’s housing crisis. “I can state very definitively,” Sandra Braunstein, director of the Federal Reserve’s consumer and community affairs division, said during a House Financial Institutions [...]


Battling the CRA Myth - The Washington Independent
Pingback posted March 18, 2009 @ 12:17 pm

[...] Random Feed wrote an interesting post today onHere’s a quick excerpt [...]


The CRA myth debunked « Later On
Pingback posted March 18, 2009 @ 1:44 pm

[...] is pushing a myth about the cause of the subprime crisis. Mike Lillis of the Washington Independent debunks that myth: Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before [...]


knowbuddhau
Comment posted March 18, 2009 @ 5:30 pm

Myth is the word, great article. Keep up the fine writing, and I might just become a fan.

Just as McCarthy jacked America with threats of Commies under every bed, we got jacked into Iraq by myths of terrorists with WMDs; the McCain campaign tried to jack the election with myths about Obama; Chas Freeman got jacked by the Lieberman Lobby (neé Israel); and as the Stewart/Cramer debate shows, “news” organizations helped jack us into this economic Waste Land.

I call it myth-jacking, the state of the art in manuFRACTURing consent.

Did you know that Joseph Campbell began lecturing in 1956, for I don't know how long, at the Foreign Service Institute? Some have taken his lessons to heart. Some of us are using a warped “power of myth” to power weapons-grade domestic propaganda: a strategic domestic disinformation campaign, in lifeless bureaucratese.

Looks like a concerted effort to jack the nation with not just mere lies, but with myths.

Myths aren't simple lies, they are metaphors, they are vessels, into which we are easily lured. The myths of our day, that is, deliver us as a people into our Promised or Waste Land, exactly as we load them with our intentions. Like kittens into burlap sacks, or Jews in cattle cars en route to Dachau, or investors in Madoff's scam, malign myths are used to jack us to hell, and stick us with the bill.

On second thought, a better image is of us in Mother Nature's Waste Stream. Is the earth already voiding us?


unite4change
Comment posted March 19, 2009 @ 8:47 am

Once again, America is being controlled by our corporate media and the GOP. The AIG bonuses are a sideshow and an attempt to bring down President Obama's approval rating.

Did anyone see Mr. Libby's testimony yesterday? I did, however, our corporate media is not reporting the facts. So far, our government has not loaned AIG $170 billion that is being reported. It appears, our corporate media and the GOP doesn't know the difference between the Federal Reserve (Fed), a private institution, and the US Government. They keep blending to the two together when discussing the AIG loans. Listen to what he said:

http://cspan.org/Watch/watch.aspx?MediaId=HP-R-…


Boehner testing a new GOP lie « Later On
Pingback posted March 20, 2009 @ 12:47 pm

[...] Posted in Daily life, GOP at 8:46 am by LeisureGuy The GOP seems regularly to pick some outrageous lie (e.g., the Great Depression was due to FDR and his policies made it worse), amply contradicted by readily available facts and history, and then repeat it ad nauseam until the Dittoheads take it as truth. One example is that the current financial crisis was not caused by subprime mortgages and derivatives and default credit swaps bas on them, but by the Community Reinvestment Act, which helped minority homeownership. (This is part of a general racist posture embraced by the GOP.) Mike Lillis debunks the CRA myth here. [...]


asfdasd
Comment posted March 21, 2009 @ 8:14 am

The Obama administration is also voicing its support for efforts to get more low-income and minority families into their own homes.

This will end well.

http://www.nytimes.com/2008/12/21/business/21ad…

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.


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Balloon Juice » Blog Archive » Stop Blaming It On The CRA
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[...] More testimony and evidence that the CRA is not to blame for the current crisis: [...]


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Klaus Flauten
Comment posted April 8, 2009 @ 7:50 am

I assume you mean Liddy, the former chairman of Allstate, and not Libby (Scooter?). Perhaps our “corporate media” kept this information from you.
To say that the Federal Reserve is a private institution is misleading, it was created by a law signed by Wilson (the racist).


Klaus Flauten
Comment posted April 8, 2009 @ 2:50 pm

I assume you mean Liddy, the former chairman of Allstate, and not Libby (Scooter?). Perhaps our “corporate media” kept this information from you.
To say that the Federal Reserve is a private institution is misleading, it was created by a law signed by Wilson (the racist).


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