Gee, what took them so long?
This particular line of reasoning, spread by the usual suspects over at The National Review, Townhall.com, and the like, is that the Jimmy Carter-initiated, Bill Clinton-pushed Community Reinvestment Act caused the mortgage crisis by forcing political correctness on the banking industry. The big, bad government forced banks to lend money to poor blacks in the projects, and, well, you know how those people are. Of course they defaulted on these loans and spent the money on Air Jordans and crack instead. Voila, the entire economy is crumbling as a result.
Besides being racist, blaming the Community Reinvestment Act is just flat-out wrong. For those who don’t know, the CRA mandates that federally-insured banks and thrifts make loans in the communities from which they receive deposits. So a bank taking money from a low-income community has a duty to reinvest in that community.
However, the law does not apply to independent mortgage companies like Countrywide. As the American Prospect pointed out when this line of bullshit first appeared back in the spring,
it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
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."
The “blame CRA” line of reasoning first appeared back in the spring, and I'm not surprised to see it being floated again. But the facts show this argument to be flawed, racist, and designed solely to propagate the tried-and-true conservative myth that government regulations are always bad. But lack of regulation and lack of oversight allowed greed to run amok through our financial system. It is this, not the regulated Community Reinvestment Act, that caused our economic meltdown. It’s a textbook case of what happens when you put Ayn Rand-style philosophy into practice.
As the Prospect wrote last April:
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.
Profits over people: not a winning economic model.
