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.’”

In the housing crisis, poor people — of all the likely suspects — are playing the role of scapegoats. Conservatives support the idea that the Community Reinvestment Act, an anti-redlining law, caused the subprime mortgage meltdown. They contend government regulations forced lenders to make bad loans to low-income borrowers.

Thoma quickly dismisses this. Instead, he raises an important question. If someone has good credit, and pays their rent month after month, year after year, shouldn’t there be some way to help them buy a house?

From Thoma:

We are about to start passing rules and regulations to try to prevent another financial crisis from happening, and I don’t want to see people excluded from home ownership unnecessarily. I know it’s unfashionable to stick up for the poor right now, to advocate for increased home ownership, and in particular to say that it was not a mistake to try to increase home ownership rates at lower income levels, but (1) poor households didn’t cause the financial crisis, though in many cases they were victims of it, and (2) it’s the right thing to do in any case.

He’s on the mark, here – it is the right thing to do.

And, as Thoma points out, there are right ways to do it. The correct lesson from the housing crisis isn’t to keep poor people from buying homes — it’s to help them afford to maintain home ownership once they do buy. Oftentimes, pricey home repairs, like a new roof, can send people who live close to the edge over that edge, and they default. Also, low-income borrowers are the least likely to have enough money for a substantial downpayment, which either excludes them from buying entirely, or puts them into a home for which they have little stake – another risk factor for default.

Thoma has some great proposals for this, which I haven’t heard talked about before:

If your household income is in the qualifying range, the government will grant you an equity stake in the house of, say, $5,000 (or pick an amount you like better). If you stay in the house for seven years or more, then the $5,000 is yours if you ever sell the house (perhaps as a tax credit)….

A big problem would be repairs – roofs, plumbing, that sort of thing. Big expenditures like that could cause problems and lead to default. Some sort of insurance against this could be made available and required as part of the house payment (along with co-pays to create better incentives but still keep the cost reasonable).

Thoma says his ideas aren’t refined, but they are a beginning.

Whatever solutions policymakers can come up with, the goal is the same – something ought to be done. In this atmosphere of rescuing banks and shoring up the credit markets, it could be easy to overlook supporting home ownership for low-income borrowers.

In the long run, doing so would be yet another mistake.

I guess lenders who sold deceptive loans on unfair terms, packed on prepayment penalties to hold back borrowers who tried to refinance into better loans and offered brokers kickbacks for bringing in loans at higher rates than borrowers qualified for are totally innocent. Oh, and all those lenders that targeted poor and minority neighborhoods with high-cost loans – can’t blame them either.

Meantime, Economistmom weighs in to say that she’s glad Democratic vice presidential nominee Joe Biden slapped down the idea that soccer moms alone have special insights into the economic troubles of average Americans. Biden responded to Palin’s comments along these lines by emotionally recalling his experience as a single dad, after his wife died.

Given the fact that the country is on a financial precipice, facing the worst economic crisis since the Great Depression, maybe we should just assume candidates have a pretty clear idea that times aren’t good. Let’s just cut all those kitchen-table references from here on  – please.

Palin, for example, began the debate by saying you can get a sense of how people feel about  the economy’s troubles by going to a soccer game and talking to parents on the sidelines. As someone who has been going to games all fall and has two tomorrow, I think I speak for many a parent when I say: No, please don’t ask. We’re trying to watch the kids play.

I don’t care whether a candidate shops at Home Depot or frequents Main Street in Wasilla. Our economy is in big trouble – can someone explain exactly how we got here, and how we’re going to get out of it?

Could the candidates talk about why banks are fearful of lending to one another and what tools government can and should use to ease a credit crunch?

Could we end the faux folksiness on both sides and get down to business, sorting out the lessons learned from the housing bubble and how we’ll prevent similar problems going forward? How do we regulate the financial services industry without making credit too restrictive? Is the bailout bill the best strategy or should we should be looking at some alternatives?

And what about what’s ahead, the sacrifices we’ll need to make, the difficulties we’ll face in a stagnant economy?

Judging by the debate, candidates want to score points by relating to Joe Six-Pack. If they really mean it, they could talk in substantive ways about the financial crisis and what they’re going to do about it. Anything less reverts to platitudes and condescension, something the folks on Main Street in small- town America can figure out for themselves.

Our story Tuesday outlined that argument, in which conservatives blame the Community Reinvestment Act for the flood of subprime lending that led to the housing meltdown.

Morris, however, says it’s clear that competition drove bad lending. Consider a 2005 Standard & Poor’s report that reviewed a sample of collateralized debt obligation deals, or CDOs. The CDOs are investment-grade securities backed by a pool of bonds, loans and other assets.

The CDOs used mortgage-backed securities as collateral, and judging by the sample, “there appears to be a high preference for subprime over prime” securities, S&P reported. Subprime represented 62 percent to 75 percent of the residential mortgage-backed securities in 31 of 39 transactions, the report said.

And why did investors choose subprime over prime?

Simple. High yields, S&P explained.

Which is just what we said – profits, not poverty activists, were at the root of subprime’s growth.

Even in 2005, S&P seemed to raise a few warning flags about all this, although clearly no one paid much attention. From the report:

In addition to the risk of housing price declines and higher interest rates that could affect the

performance of the RMBS (Residential Mortgage-backed Security) market, structured finance CDO managers are concerned with the payment shock associated with some of the affordability products. This concern is especially acute because these products are being offered to subprime borrowers with lower FICO scores and higher LTVs.

But the subprime mortgage-backed securities market rolled on. By 2006, subprime and Alt-A loans comprised 41 percent of all new mortgages issued. We all know the story from there.

The lesson from this, when it comes to claims that low-income borrowers are to blame for the ailing financial system: follow the money, not the rhetoric.

Conservatives are blaming the Community Reinvestment Act, an anti-redlining law, by saying it forced banks to make bad loans in poor and minority neighborhoods.

Media Matters details some of the conservative commentary on this, but let’s just take all the politics out of it. Here’s Janet Yellen, president of the Federal Reserve Bank of San Francisco, on why it’s wrong to blame the CRA — and why it’s important to continue promoting homeownership among underserved borrowers:

There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.

The worst thing to come of all of this would be to cut off worthy borrowers from credit, especially now.

In the meantime, why not focus on the borrowers who were truly irresponsible — you know, all those folks on Wall Street, the ones coming hat in hand to Congress to ask for your money.