1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act.

2. The housing bubble reached its point of maximum inflation in the middle years of the naughties:

Robert Shiller

3. During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization:

FCIC

while securitization by private players surged:

FCIC

Of course, I imagine that this post, like everything else, will fail to penetrate the cone of silence. It’s convenient to believe that somehow, this is all Barney Frank’s fault; and so that belief will continue.

An ambitious plan to update the Carter-era Community Reinvestment Act that supporters hope to see signed into law in 2010 comes amid charges that this legislation was responsible for nothing less than the subprime crisis and the resulting collapse of the residential real estate market.

The plan, sponsored by Rep. Eddie Johnson (D-Tex.), would close some loopholes in the original act that let non-bank financial firms operate with relative impunity. It would levy negative ratings on a much wider array of institutions that practiced predatory or discriminatory lending, and it would require that non-bank entities like mortgage providers and insurance companies comply with all CRA tenets.

[Economy1] Why this piece of legislation is still such a lightning rod more than 30 years after its introduction is something both its supporters and detractors struggle to explain from their respective camps. “The idea that this was just some sort of carrot-stick regulation that didn’t work is a perception that goes very much in hand with a right-wing agenda,” said Jose Garcia, associate director for research and policy at advocacy group Demos. Demos is one of several progressive groups seeking to have the bill, the Community Reinvestment Modernization Act of 2009, made into law.

On the other hand, Mark Calabria, director of financial regulation studies at the Cato Institute, asserts that political pressure drives CRA support. “It fundamentally gets to some very emotional issues. [Supporters] see this as an issue of racism and social justice,” he said. The Cato Institute held a forum in November that was broadly critical of the CRA, asserting that the financial models at its core are faulty.

Federal Reserve chairman Benjamin Bernanke called the CRA a “catalyst” in 2007, although he touched on the trouble already brewing in the subprime mortgage sector as an imperative to revisit the Act in the wake of significant changes in the banking industry since its implementation.

At its heart, the CRA was created to try and legislate out some of the institutional discrimination in the financial services industry. It was conceived in a very different era from today’s world of global banking behemoths. In the wake of the civil rights movement, most banks were still small, often single-branch operations. Many would operate selectively in low-income and minority neighborhoods, accepting the deposits of local residents but only writing home or business loans in more affluent communities.

Regulatory changes in banking plus an agenda embraced by Fannie Mae and Freddie Mac to boost homeownership cracked the mortgage market wide open beginning in the 1990s, and the CRA was initially credited with higher rates of homeownership among low-income and minority Americans. According to Kathleen Day, spokesperson for the Center for Responsible Lending, “The purpose of the CRA is to go into underserved areas and look for credit-worthy borrowers you overlooked because of red-lining,” she said, referring to the bank practice of categorically refusing to lend in certain neighborhoods.

The result of reckless lending practices is by now apparent to everyone, although concerns were swept under the rug in the go-go years of the mid 2000s. CRA supporters say brokers and non-bank mortgage outfits wrote nearly 95 percent of the bad loans, while the Act took the fall when these loans turned out to be unsustainable.

“Nine out of 10 of the people who got bad loans already had homes,” said the Center’s Day. “Six out of the 10 were refinances and three were selling one home and buying another.”

Often, Day adds, the unscrupulous vendors that preyed on subprime mortgage candidates cloaked their malfeasance in the language of the CRA’s mission, a sleight of hand that muddied the waters and assigned undue blame on the regulation when mortgages — and the huge numbers of securities backed by them — began to sour.

Even Lawrence White, a New York University who wants to see the CRA scrapped, says it’s not to blame for the financial meltdown. “The CRA has very little to do with the subprime lending debacle,” he said.

Aside from mortgage lending, the other goal of the CRA is to provide basic banking services to low-income and minority citizens. In these locations, “Pawnshops and the like literally became the banking services,” said John Taylor, president and CEO of the National Community Reinvestment Coalition, the organization spearheading the modernization of the CRA.

“In some communities there are no financial institutions,” asserted Demos’s Jose Garcia. Geographic impediments and language barriers create a two-tier system that leaves low-income Americans, minorities and immigrants without access to the banking and lending services the middle class takes for granted.

If the legislation were better-enforced — something the NCRC’s Taylor believes the modernization bill would facilitate — banks wouldn’t be able to do things like close branches in these communities without repercussions. But preventing closures would just be the beginning.

In a 12-page statement, the NCRC spelled out major features of modernization. Key among them are inclusion of non-bank financial firms under the umbrella of CRA oversight, and a greater emphasis on the neighborhoods in which institutions write loans, not just the locations where their branches or offices are located. This is partially due to the rise of online and branchless financial institutions, but Taylor says the switch will also prevent companies like subprime mortgage-peddlers from operating under the radar.

Advocates also want to see enforcement of the CRA transferred to the not-yet-created Consumer Financial Protection Agency. The CFPA, as its supporters envision it, would consolidate regulatory oversight and enforcement of banking and lending activities in a single agency, rather than the patchwork of regulators some say let ruinous business practices slip through the cracks.

The modernization effort isn’t without roadblocks, though. The current House bill has yet to progress to the Senate, although Taylor says the NCRC’s goal is to have the modernization signed into law sometime this year. The CFPA doesn’t even exist yet, and might never come to fruition. Last week, Senate Banking Committee Chair Christopher Dodd (D-Conn.), the lawmaker who has championed the idea, indicated he may be willing to abandon the idea of a consumer protection agency.

In the end, it’s not clear what is ahead for the CRA. Some, like the Cato Institute’s Mark Calabria, think the need has run its course. “There was a logical raison d’être for the creation of the CRA at the time but that justification is no longer there,” he said. He admits that an outright repeal of the Act is unlikely, though. NYU’s Lawrence White also wants to get rid of the CRA, although he wants to replace it with a cap-and-trade system of credits similar to the protocol used to eliminate acid rain-causing sulfur dioxide in the 1980s.

Progressive and social-justice groups say that the CRA, while not perfect, needs to be improved, not thrown out. “We’re talking about trillions of dollars of private resources that could be available to low- and moderate-income neighborhoods,” said the NCRC’s Taylor. “We believe in banks. If we don’t have them active in these neighborhoods, it’s very unlikely they’re going to prosper. We want banks to see these neighborhoods as an important part of the economic future of this country and of their business plans.”

In the end, it might come down to that. If the notoriously profit-hungry banking industry sees economic potential in lower-income areas, this would go a long way towards keeping the predatory players out of the arena.

The lawsuit, filed in federal court in Tennessee, marshaled a raft of statistics to argue that Wells Fargo offered one lending reality for whites and another for blacks. In Shelby County, which includes Memphis, one of every eight Wells Fargo loans in predominantly black neighborhoods resulted in foreclosure, compared with only one in 59 such loans in white neighborhoods, the lawsuit said.

Such charges, if proven, amount to reverse redlining — marketing expensive loan products specifically to black customers.

For anyone who’s been following the reporting of TWI’s Mary Kane on Wells Fargo, this should come as no surprise. First, there was that Cleveland case in which Wells was found to be violating public nuisance laws by failing to clean up its foreclosed properties. Next came the charges from the state of Illinois that Wells had targeted Latino residents for subprime loans, even in cases when potential borrowers could afford less expensive options. Then came the California-based class-action lawsuit alleging subprime discrimination against the bank. And finally, Mary uncovered the bank’s alleged strategy of hiring high-profile black figures such as Tavis Smiley to lure potential black borrowers to “Wealth Building” seminars, where Wells employees would be waiting to sign attendees up for more expensive subprime loans, according to a lawsuit filed by the Illinois attorney general.

Almost seems like there’s a trend here.

While one might have expected Washington to recover some civility after the mudslinging of the campaign season, the year instead saw the rise of the “just asking” paranoiac style on Fox News, the return of serial health care misinformer Betsy McCaughey, and the accusation “You lie!” hurled at the President as he addressed Congress. No untruths were more flagrant, pervasive or distracting, however, than the five listed here.

Click here to begin slideshow.

The 1977 Community Reinvestment Act was intended to end redlining, a practice in which banks in effect walled off many inner-city neighborhoods from mortgage loans. But some GOP lawmakers say it has outlived its purpose and is being used inappropriately by ACORN to shake down banks for money. They want to repeal the law, scale it back or at least block a Democratic proposal to expand it.

Critics of the law are linking it to ACORN — a subject many Democrats wish would go away — at every opportunity.

This is just silly. The idea that the CRA is to blame for the subprime mess is nothing more than an urban myth, picked up and repeated by people in power who should know better. We’ve said this many times before, but let’s repeat it again, for all those lawmakers who continue to cling to the idea of the CRA as an easy target: The overwhelming majority of subprime loans made during the housing crisis came from unregulated lenders not covered by the CRA.

And although CRA opponents portray it as a burdensome regulation that forced banks into making bad loans to poor people, the mortgage industry never looked at the CRA that way. Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, told us last year the CRA was seen as a loose regulation that caused little concern.

Banks were routinely found in compliance with the CRA, and an insider joke among bankers was that you’d have to mug a disabled, elderly, minority homeowner to lose your outstanding CRA rating, Cecala said.

Beyond that, as the housing boom grew, so did the number of unregulated mortgage lenders, who made the bulk of subprime loans and who didn’t even have to comply with CRA rules, said John Taylor, president of the National Community Reinvestment Coalition, which represents housing and community development groups. Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.

The blame-the-CRA movement has grown into a debate almost entirely divorced from the facts. Throwing ACORN and its troubles into the mix only makes that situation worse. A robust, informed discussion on homeownership and low-income borrowers would be welcome. The CRA/ACORN dustup is just the opposite, an exercise in ignorance and headlines that adds nothing to the worthy investigation of America’s housing policies and prudent financial regulation.

But what I really liked about her piece — in addition to taking on a subject few have paid attention to during the crisis — is her description of a new subprime documentary, set in Baltimore.

In a new documentary film about the subprime crisis, “American Casino,” solid black citizens — a high school social studies teacher, a psychotherapist, a minister — relate how they lost their homes when their monthly mortgage payments exploded. Watching the parts of the film set in Baltimore is a little like watching the TV series “The Wire,” except that the bad guys don’t live in the projects; they hover over computer screens on Wall Street.

As TWI noted last week, lawsuits over racial discrimination in subprime lending are winding their way through the court system. Some of the allegations are nothing short of shocking; in one suit recently classified as a class action case, Wells Fargo is accused of using loan software with discounts on rates and fees in white communities, but forbidding loan officers in minority communities from access to it.

Wells Fargo has strongly denied these and other charges. But Ehrenreich’s report is further evidence that the conversation over the racial implications of subprime lending is shifting. It’s no longer just about blaming poor and minority borrowers for the crisis. Instead, the focus is turning to questions about the the morality of lenders, who discovered a gold mine in selling high-rate mortgages to minority communities, and took full advantage of it.

Are consumers “protected” when they are denied the opportunity to buy products and services that are available to others? Is that what consumers want? Does it matter what they want?

Well, yes it does, actually. I’d say, as a consumer, that I don’t want to go to my loan closing and find out the terms I thought I agreed on for my loan had been altered. I don’t want to pay my mortgage broker for bringing my loan in at a higher rate than what I qualified for — and if I do have that pay that broker, I want it disclosed at settlement. Generally, I don’t want to be steered into a higher rate loan simply because I’m a minority borrower. And when it comes to my credit card, I don’t want my interest rate arbitrarily hiked because I took out another loan somewhere else. If there’s an agency created to make the lending industry stop those practices and offer clearer and more detailed disclosures, I would think it’s a good idea, and there’s nothing elitist about that.

I’ll defer here to James Kwak at Baseline Scenario, who offered a more detailed critique:

You’ve heard the critics’ argument before: The CRA hasn’t so much empowered low-income borrowers as it has lowered lending standards, thus forcing banks to make the bad loans that led to the crisis.

Rep. Trent Franks (R-Ariz.), the subpanel’s senior Republican, summed up the sentiment nicely Thursday when he claimed the downturn was caused not by predatory lenders preying on people, but by a predatory government preying on banks for political ends.

Never mind that no less an authority than the Federal Reserve’s director of consumer and community affairs said the CRA was “not one of the causes of the current crisis.” Instead, the Fed found that CRA-covered banks were responsible for just 6 percent of the risky, high-cost loans that sparked the financial wildfire.

Franks’ comments weren’t overlooked by Rep. William Delahunt (D-Mass.), who used most of his Q&A time debunking the myth, picking from witnesses statistics like those reported by the Fed. Not that he imagined the Republicans were listening.

“When you’re looking for whipping boys,” Delahunt said, “the CRA is just a prime target.”

I’ve run out of patience with tired memes and discredited claims by fools and partisans.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate  — the phrase is “agnotology” –  only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: “Is the CRA significantly to blame for the credit crisis?”

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

I can’t help but applaud this. No matter how many times it has been shot down, the blame-the-CRA myth keeps coming back to life. As TWI has explained, the CRA, a 1977 anti-redlining law, didn’t even cover the unregulated lenders who made most of the subprime loans during the housing boom. There’s simply no evidence for this assertion.

The movement to blame the CRA started during the fall campaign season, seized by conservatives as a convenient scapegoat for the financial crisis. It  came back to life recently, when bloggers like The Atlantic’s Megan McArdle picked up on Clusterstock postings by John Carney, once again citing the CRA as regulation gone wrong.

As McArdle put it, the CRA’s role in the crisis is “understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences.”

Felix Salmon at Reuters has knocked down most of this. But I’d like to add something that’s regularly missed in the CRA debate. What the anti-regulation types miss is that the CRA never was much of a regulation to begin with. As Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, told TWI, lenders never took the CRA all that seriously to begin with. The lending industry viewed the CRA as an extremely loose regulation. Lenders joked about how you’d have to mug an elderly, disabled, minority woman in a wheelchair to lose your positive CRA rating.

How that got turned on its head so that the CRA has become a symbol of regulation gone wrong is an example of what happens when idealogues who don’t know how an industry really works take over the debate. If Ritholtz’s bold offer gets some of this out on the table — and then off the table for good — it’s all for the better.

Salmon reports that Carney may be willing to take up Ritholtz on the challenge. So let the games begin. And let them put an end to the blame-the-CRA movement for good.

Headlines noted that Greenspan acknowledged his misplaced faith in the ability of free markets to correct themselves. But he also did something else — he didn’t point to the Community Reinvestment Act as the cause of the foreclosure crisis, a belief widely embraced by many conservatives.

According to the New York Times, Greenspan told Congress that “excess demand from securitizers” fueled the subprime bubble. He didn’t contend that civil- rights activists had overrun the administrations of Bill Clinton and George W. Bush to force the government to make loans to poor borrowers.

So now it’s all on the record.  Let’s put the whole blame-the-CRA thing to rest. Greenspan’s credibility might not be what it once was, but he’s hardly a bleeding heart, either. And even he’s not blaming low-income borrowers.

Or, as Morris put it:

“The Maestro has spoken. As the sportscasters say, ‘Put it in the books.’”