The Washington Independent » financial

What’s Next for the CRA?

Martha C. White — Mon, 18 Jan 2010 11:00:18 +0000

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.

Bush Legacy Watch

Matthew DeLong — Thu, 01 Jan 2009 14:53:57 +0000

The New York Times takes stock of the economy’s dreadful year:

In a mere 12 months, the Dow Jones industrial average plunged 4,488.43 points, or 33.8 percent, its most punishing loss since 1931. Blue chips like Bank of America, Citigroup and Alcoa lost more than 65 percent of their value. The broader Standard & Poor’s 500-stock index sank 39.5 percent, almost exactly matching its decline in 1937.

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out in a year of violent market swings. [Emphasis added.]

If President George W. Bush was allowed to take credit for good economic performance, then I guess its only fair to lay blame for the crash squarely at his feet.

Heckuva job, Georgie! You have less than three weeks to turn this thing around before it officially goes in the history books.

Hard Times Hit the Blackjack Table

Mary Kane — Tue, 30 Dec 2008 13:20:03 +0000

We were talking Monday about the unexpected effects of the foreclosure crisis, like skateboarders in California taking advantage of empty swimming pools behind vacant homes to practice their craft. Here’s another: Gambling is falling in popularity as more people choose instead to pay their bills, Bloomberg reports. That means tough times for Atlantic City, where the gambling industry had been booming for the nearly three decades.

From Bloomberg:

After 28 years of growth, Atlantic City’s gambling proceeds are down for the second time in a row. In the first 11 months of 2008, revenue from casino games fell 6.7 percent to $4.2 billion, regulators reported Dec. 10. Last year’s 5.7 percent decline was the first ever, as the number of visitors slipped to 33.3 million from 34.5 million.

You might think this is no big deal. Most of the people who gamble probably shouldn’t, so if the economy forces them to quit the habit, so much the better. The only problem is that New Jersey and many other states need that gambling revenue, and its loss will add to already difficult budget problems.

Again, from Bloomberg:

The slowdown comes as Governor Jon Corzine has warned that the state faces a revenue shortfall of $1.2 billion for the year ending June 30 and $5 billion in fiscal 2010. Through November, the state collected $338 million in Atlantic City tax revenue, down from $364 million and $384 million, respectively, in the first 11 months of 2007 and 2006. Casino employment fell to 39,137 in November from more than 42,000 as recently as August and a peak of 51,560 in July 1997. James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said the casino industry is vital for the economy of southern New Jersey and for the tax revenue it generates.“It’s possible Atlantic City is past its peak,” said Hughes, who predicted the situation may worsen next year. “It could never go back to its past glory. It’s a much tougher game now.”

That’s true everywhere these days, and now it’s hit the blackjack table as well.

Michigan and Ohio: Swing States No More?

Matthew DeLong — Fri, 12 Dec 2008 20:58:26 +0000

Another good point made by TWI’s Daphne Eviatar and Josh Marshall, who sums it up well. From TPM:

Senate Republicans are following this course for three key reasons — first is payback against a major industrial union; second is payback against states like Michigan and Ohio who have been moving away from the GOP; third is the desire to advantage Japanese auto manufacturers who disproportionately do business in their southern states.

I think the first and second points are key — that the GOP is taking a firm stand against the United Auto Workers, a core Democratic constituency, and in turn, against big-time GM states like Michigan and Ohio.

In recent history, Michigan and Ohio have been reliable swing states. But the actions of prominent Republicans may call into question whether they will retain their status as battleground states in future competitive elections.

As President Lyndon Johnson famously and presciently mused about the impact his signing of the Civil Rights Act of 1964 would have on his own Democratic Party, “There goes the South for a generation.”

I suspect some forward-thinking Republicans might harbor similar concerns about Michigan and Ohio.

Wall Street’s Old-Fashioned $50 Billion Swindle

Mary Kane — Fri, 12 Dec 2008 13:49:46 +0000

Forget credit default swaps, mortgage-backed securities and all those complicated financial instruments that are causing the economy so much trouble. Wall Street is reeling today instead from a straightforward, by-the-books, $50 billion Ponzi scheme apparently orchestrated by the once-respected investor Bernard Madoff, a former chairman of the Nasdaq Stock Exchange. There is no complex chain of securitization here, no pieces of risk sliced and diced into tranches. This is a throwback to rip-offs of old — a time-honored tactic using money from new investors to pay back the old ones, until the whole thing collapses.

Clusterstock has the indictment, if you want to read the details. Madoff’s firm, Bernard L. Madoff Investments, ran more than two dozen funds for decades, overseeing $17 billion and promising high returns and low fees. But a few days ago, Madoff blew the whistle on himself, telling senior executives at his firm and the FBI, according to the indictment, that it was all one big lie, a giant Ponzi scheme. He was broke.

But what pushes this beyond a juicy Wall Street rip-off story is the sheer size of the swindle — possibly the largest fraud in Wall Street history — and its implications for other hedge funds and investors.

From the New York Times:

“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the enforcement division at the Securities and Exchange Commission. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.”

Andrew M. Calamari, an associate director for enforcement in the S.E.C.’s regional office in New York, said the case involved “a stunning fraud that appears to be of epic proportions.”

Those proportions have some concerned about how this will play out, beyond Madoff’s personal saga, according to The Times:

There was some worry on Wall Street that Mr. Madoff’s fall would shake more foundations than his own.

Calculated Risk supposes Madoff had about 10 to 25 hedge funds as clients, that they lost everything, and that some hedge funds will be taking some serious write downs soon.

Looks like Wall Street will be sorting through the wreckage of all this today, to see how much damage has been done. As if there weren’t enough to worry about, already.

Obama Transition Team Releases Donors

Matthew DeLong — Mon, 01 Dec 2008 19:12:03 +0000

The Obama-Biden transition team today released its first monthly list disclosing the names of donors to the transition and the size of their contributions. The list can be found here.

As of November 15, the transition has raised $1,170,937.44 from 1,776 donors, for an average donation of $659.31. The contributions range in size from $5 to the $5,000 legal maximum.

According to the transition, it accepts donations only from individuals, and rejects any from corporations, labor unions, political action committees, registered federal lobbyists and registered foreign agents.

A quick review of the largest donations indicates many appear to come from lawyers and those working in the financial industry. This is not entirely surprising. According to OpenSecrets.org, lawyers and the financial industry were the second and fourth largest sources of contributions to the presidential campaign’s of both Obama and Sen. John McCain (‘retired’ was the largest.)

There are a few interesting donors. Eric Schmidt, CEO of Google, and William Daley, former commerce secretary, both are advisers to the transition and contributed the maximum.

However, the one that really jumped out was a $5,000 donation from George Lucas, of the San Rafael, Calif.-based Lucasfilm Ltd. — the director and producer of the “Star Wars” franchise.