John Carney’s bizarre crusade against the CRA

By Felix Salmon
June 25, 2009

For some unknown reason John Carney has decided that the Community Reinvestment Act was partly responsible for bad lending practices “spreading like wildfire across the country”. His first big blog entry on the subject, yesterday, declared that “the evidence is unequivocal” — without actually presenting any such evidence at all. His second attempt finds something concrete: an OCC pamphlet from 1996 — a good decade before the fullest flowering of the subprime bubble. The pamphlet praises banks for working with local housing authorities to help low- and moderate-income individuals buy affordable housing.

The problem with the subprime bubble was not with people trying to buy affordable housing, it was with people trying to buy unaffordable housing. Default rates on people buying into affordable-housing developments have always been very low, partly because those houses are generally cheaper than neighboring market-rate developments. As a result, it’s generally cheaper for families to make their mortgage payments than to rent elsewhere.

Carney’s third entry on the subject is the most obnoxious. His headline is “Government Pamphlet Taught Banks How To Finance A $70,000 Home With A $500 Downpayment”. Again, the pamphlet dates from before the housing bubble — 2000, in this case. Carney hones in on a table showing how banks can work with local authorities to help borrowers own their own home and end up saving money in the process. Here are the full numbers from the case study, which he disingenuously elides:

  • The borrower needs $1,200 in cash: $500 downpayment, and $700 for making minor repairs.
  • The bank loan is for $45,000 — a loan-to-value ratio of just 64%.
  • The bank loan is a sensible product: a 30-year fixed-rate mortgage at 7.5%. Nothing explodes.
  • The bank loan is carefully underwritten with full knowledge of the borrower’s income and financial affairs.
  • The borrower is taking advantage of many local assistance programs, including 0% mortgages and a waiver of permit fees.
  • The borrower’s current monthly rent payment is $750. The new monthly housing expenses — not only mortgage payments but also taxes and insurance — are $550, which will rise to $613 in five years’ time.
  • The borrower has participated in extensive prepurchase education and counseling.

There is nothing dangerous about this loan — it’s safer, and has a lower LTV, than most prime mortgages. If this is the kind of product which lenders pushed during the subprime boom, there would have been no problem at all. Instead, predatory lenders started pushing unsuitable mortgages which had no chance of being repaid as opposed to prepaid or refinanced. Yes, some of those products involved low or no downpayments. But that wasn’t the main reason why they were so toxic.

The fact is that the CRA did not encourage banks to extend the kind of toxic loans which ended up being such an important component of the financial crisis. Indeed, most of those loans weren’t made by banks at all — they were made by unregulated subprime lenders who had no CRA responsibilities whatsoever. But don’t take my word for it: ask Fed governor Randall Kroszner, who comprehensively demolished these meme in a speech last December. Why Carney is looking to resuscitate it I have no idea.

48 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

My guess is that Carney is being fed this by some flack from a right-wing think-tank. He probably didn’t even dig up that pamphlet himself.

Anyway, this kind of oddness has the smell of a PR hit to me, like some part of the noise machine is looking to ramp up the CRA backlash again for some as-yet unclear reason.

The way that we’ll know that Carney is definitely being fed this is if some fresh anti-CRA idiocy pops up on the WSJ op-ed page this week or next, and then makes its way onto Fox News. But actually, that may have happened recently… I haven’t checked.

Posted by Jon Stokes | Report as abusive

Not sure I buy the argument that since they were from before the bubble that they can’t be part of the cause. The bubble needed a certain environment to exist in order to allow it to form. If these policies are what created that environment (general acceptance of no money down loans, tightening of the lower income housing supply, lifestyle inflation, etc.) then they do have their place in the root causes. I don’t know whether it is a root cause or not, but simply stating that it predates the real craziness doesn’t absolve the practices and can actually be a bit dangerous.

Posted by Ledbury | Report as abusive

Anything that increases the number of potential home-buyers while decreasing the mean credit worthiness of that same group would obviously contribute to home price inflation and an increased foreclosure rate down the road, among other evils. So it is far more likely that CRA did play some role in creating the housing bubble.

You lefties are desperate to deny what really happened with the housing bubble because it utterly invalidates your belief that government can engineer positive social outcomes.

Posted by Sterling | Report as abusive

Sterling! Oh joyous days! I thought I was going to have to bang my head against the wall of illogic as presented only by Carney et al. I know I sound too much like Nic Musolino, but that’s the internet on ya (what was that Tweet about anyway?).

How did the CRA standards decrease credit-worthiness? Felix pointed out that they would be reducing their housing expenses on a monthly basis? They would probably go out and buy color televisions, right? Still developing your economic theories from stock photos on the cover of the Economist?

Posted by 99 | Report as abusive

Sterling, if you don’t understand that the loans were made to be securitized you’re living in a righty bubble.

The whole housing bubble was launched on that basis because banks were offloading the risk and didn’t care about the borrower. It was all about fees.

Posted by Schooner | Report as abusive

Carney’s a tool. Like Wiesenthal. They find good pictures, but their analysis is 90% garbage.

Posted by RN | Report as abusive

I’m going to suggest a connection, but it’s not the one that is usually put forward. There is no logical/rational/reasonable connection between what appears to be, from my point of view, a subsidized housing plan to help the less well off, and a series of insane loans in the private market. First off, and it’s a big difference, one is a subsidized housing program. The other loans are not. One plan is subsidized, one is not. One plan is a govt attempt to help the less well off, the other is not. You can only judge the efficacy of the govt subsidized program on its own terms. Did it succeed or not at doing what it was supposed to do?

The connection stems from the fevered minds of the con artists pitching these subprime loans. Since GSEs are implicitly guaranteed, surely our loans are implicitly guaranteed. The govt has a habit of cleaning up private sector financial blowups, and they will do so here as well. As near as I can tell, this is the implicit assumption underlying this entire crisis. Even William Gross bought into. Just ask him how he missed the Flight To Safety, unless he believed that the govt would not allow a blowup. As him if he’s been investing on govt guarantees for years.

So, there is a connection. Con artists, preying on people’s fears of being left without a retirement plan, and possibly missing out on the one chance to secure a home, were duped, in most cases, into buying something that no sane loan officer would sanction. Namely, lending to people with less resources at the top of the market. What’s more, theses con artists could claim that, just like GSEs, they were doing the Lord’s, or, at least, the govt’s work. They were simply helping out the less fortunate. Surely the govt would come to the rescue if things went sideways. Wouldn’t it?

What’s shocking to me is how many people buy into this so-called connection. It’s a connection without any connecting dots. It’s more like a wish or a hope.

Not “were duped”, but ” duped people”- Don

Dude, I don’t think you should spend time analyzing the business insider. It’s more of a paparazzi rag-mag than a serious blog. Not quite up to the standards of serious economic journalism that you usually are interested in.

Posted by Ben | Report as abusive

Don’t worry, in Soviet Richmond, rag-mag comes to you! (sorry for playing vestigial insider baseball, but I couldn’t resist).

Posted by 99 | Report as abusive

it’s more “let’s re-write history so no blame can be laid on the stupidest president ever”. The CRA didn’t cause the massive amounts of bad loans, really dumb lenders did.

I don’t even know if more regulation is necessary, I think just getting regulators who are willing to do their job would be enough. The FDIC and the Federal Reserve both could have done much to prevent the current mess, but they had big ideological and political reasons not to. Since the FDIC insures deposits of banks, they could have easily prevented banks from putting those deposits at risk, by not letting them make all those sub-prime loans, or refusing to accept the “insurance” that credit swaps pretended to provide. The Fed didn’t have to lend all that money out to banks for whatever purpose they wanted, it’s not like they couldn’t have said “hey, don’t be making zero down, negative amortization, no docs loans with our money”.

But maybe new rules will make people feel better, so that everyone can say “it wasn’t my fault” and “this won’t happen again”. In the meantime, let’s blame it on Clinton.

Posted by KenG | Report as abusive

Felix,

You’d make a terrible mortgage lender, which would probably have made you rich during the boom.

That deal has a ridiculous LTV. You go wrong by calculating only the bank loan, and not the total financing. A slight drop in home values puts this buyer underwater, which hugely increases odds of default. LTV is meaningless for predicting defaults unless you are considering all the debt that goes into the financing.

What’s more, this was an early model. It was entirely predictable that in actual practice the standards would be even looser.

One more thing: contrary to the assertion by the first commenter, there’s no one feeding me stuff. I wish there were. It would have saved me hours of digging. If you know someone in the business of feeding journalists information of this type, send them my way please.

Except, John, the accept wisdom in 1996 was that home prices never drop over the long term (life of loan, for instance) and since these loans did not allow for speculators (first homes only), the net decrease in housing cost would mean that small variances would not lead to drastic decision making (remember all those arguments in 2006 about how people didn’t think houses were investments and that even if the market dipped they would be inclined to stick it out?). Since the rates were largely fixed, I have a hard time believing you would see ahistorical default rates unless there was a massive macro-economic shift (perhaps middle income and above home owners moving into massive speculation based on NINJA loans).

Posted by 99 | Report as abusive

99,

I totally agree that was the rationale at the time. I’m not saying the CRA regulators believed they were forcing banks to make bad loans. Quite the opposite. They were true believers in these loans. And many mortgage bankers were true believers as well.

My point is not the the CRA caused the mortgage boom. That would be too much. Instead, I proved a more modest claim: that the regulators and the CRA had a hand in promoting lax mortgage lending practices that we later learned were very dangerous.

John,

While it may be true that a small dip in the value of the home would put the borrower underwater, it is unlikely that that would have affected them. Underwater only matters when you are scrambling around in order to move, can’t make your payments, or have to ditch the house for some reason.

With a payment structure like the one set out above, it is likely that these borrowers would have been able to continue making their payments, oblivious to the fact that their house had “lost value”. The goal was to get them into a home, not to let them have access to the “Home ATM”.

Total monthly payments of $613 a month (after 5 years) is a decrease from their current rent. It is affordable, and in line with their income. Sure, on the margins, there would be some defaults caused by decreasing home value as people’s conditions required them to move, but on aggregate, they would probably have shown less defaults than someone who maxed out their home equity, and were faced with the same problem.

As for the standards loosening. I still don’t see this as a CRA issue, but rather an incentive issue for the bank and non-bank lenders. With everyone chasing yields and commissions, the incentives were there for the private lenders to churn through as many of these loans as possible, with little or no in-depth underwriting. Standards may, on the margin, have declined somewhat due to CRA loans, but you are going to have to try harder to pin the real wacky stuff on them.

Posted by jpwhite_mtl | Report as abusive

So after I read Carney’s comment, I looked at the case study cited in Felix’s post. So I’m wondering, how many defaults on $70K homes would it take to cause the carnage we’ve experienced? My guess is a lot more than actually happened. I doubt if 1 million $70K homes defaulted and went to $0 value, but let’s say they did, that would be $70B in losses, or a negligible fraction of the trillions of dollars in losses sustained.

No, the CRA-induced loans in poor areas did not cause this problem. Just delusional thinking, like Carney’s, that justified many more, and much bigger and riskier loans.

Posted by KenG | Report as abusive

I’m still having a hard time here. I can see someone complaining that, in order to compete with a govt subsidized business, they will have to offer some incentives to potential customers. I suppose that you can call the incentives loose standards. But how do we go from that point to subprime loans?

Also, I was under the impression that GSEs were meant for people who couldn’t qualify for loans in the private market. Hence, the oddity of trying to undersell the govt in this subsidized market, as is apparently being advocated. That might be what happened, but that’s surely a bit on the iffy side of sensible investment.

So, let me get this straight: The CRA worked fine for 30 years. Then all of the sudden it caused the sub-prime crisis? Ridiculous. Nice piece, Felix.

Posted by Aaron | Report as abusive

“So I’m wondering, how many defaults on $70K homes would it take to cause the carnage we’ve experienced?”

It wasn’t $70K homes. Or, rather, it wasn’t homes that sold for $70K.

Look at this:
http://www.zillow.com/homedetails/2065-E -Lucien-St-Compton-CA-90222/21001659_zpi d/

Lovely, 2-bed, 1-bath, 634 sq ft home on 1/16th of an acre in beautiful Compton, CA. Sold in December 2007 for $350K! Sold in October 2008 for $288K! Now available for…$70K.

According to this:
http://zipskinny.com/index.php?zip=90222
That zipcode is 99% minority, has a median income of $30K, and the median age is about 24.

Posted by Bob Montgomery | Report as abusive

The CRA wasn’t seriously enforced until the 1990s. At that time, the focus of the CRA was changed from process to outcome. This made a major difference.

Then came the changes that were part of Gramm-Leach-Hollings. These things matter.

“So, let me get this straight: The CRA worked fine for 30 years. Then all of the sudden it caused the sub-prime crisis?”

I’m sure, then, that you will be arguing strenuously that California’s budget woes have nothing to do with Proposition 13 (requiring 2/3rds votes to pass budgets, tax increases, etc.); after all, it worked fine for 30 years. Then all of a sudden it caused a budget crisis?

Posted by Bob Montgomery | Report as abusive

This train wreck comment stream is what happens when the argument turns political, because some people are unable to accept that their utopian fantasies cannot be implemented.

For example, KenG doesn’t seem to understand when you inflate the prices at the bottom of the market, you inflate them all the way up. Turn a $70,000 house into a $140,000 house and a house that started at $140,000 will also increase dramatically in price.

And yes, Schooner, I was a stock broker in the mid-90s. Older, wiser stockbrokers counseled us young guys to stay away from FNMA securities and CMOs because they knew what would eventually happen.

However, while securitization of mortgages opened the spigot for the housing bubble, the pipes were laid in advance by CRA, FNMA, FHA and the whole lot of federal and state “wouldn’t it be nice if everybody owned their own home!” fantasists.

Nobody on the left wants to question the loan origination process that was foisted on banks by the Feds. But none of this would have happened without the government telling bankers how to determine what constitutes a good loan.

Posted by Sterling | Report as abusive

@Bob M, I used the $70K house because that was the example used in the case study ($45K at 70% LTV). If that house wasn’t typical of the CRA-induced loans, then why use it?

@Sterling, I certainly understand the issue of bracket creep, but if the CRA encouraged banks to make loans for homes in poor neighborhoods, it didn’t give them a mandate to make sub-prime loans in the speculative areas (FL, NV, AZ, CA), where most of the damage was done. I doubt that people who were able to sell their $70K home in Compton then decided to buy multiple homes in Arizona with zero down so they could flip them in a few months.

If you want to continue down the politicalization of this thread, I’d like to remind you that one of the highlights of the Bush administration, one of the things they bragged about, was the increase in home ownership. While public and private debt was soaring, they were claiming to have created this great ownership society.

Posted by KenG | Report as abusive

Hee. I forgot how much raise the right end of the bar Sterling. My ankle is tickling now. So let me get this straight: I give you a hit off a joint and you wake up and become heroin addict and it’s my fault? I would expect you would sell the ‘personal responsbility’ angle. As in: what were default rates, cut in 10 year ranges, before and after ‘substantial’ CRA encouragement/enforcement. Sure Fannie Mae was fanning flames — as much on Wall St and Main St. If they weren’t a public/private entity that was listed, instead perhaps functioning more like a national credit union, I suspect the spigots would have been more tightly drawn. But that has little to do with the input side (the CRA mortgage holders) than the output side (MBS).

Posted by 99 | Report as abusive

Steve Sailer has explained that the CRA didn’t force mortgage companies to loan money to marginal borrowers, but it did ensure that only the mortgage companies that did that were allowed to grow by mergers and acquisitions. So the end result, after a decade plus of vigorous enforcement, was that the mortgage companies with the worst underwriting standards (e.g., Countrywide) became the biggest in the country, and the prudent lenders who adhered to responsible standards stayed small.

Posted by Fred | Report as abusive

So Sterling,

You throw in a shot at the “left” and complain about the politicization of the thread ?

My argument has nothing to do with politics but a simple observation of what went on. Contrary to Mr. Carney’s assertion, Bank’s didn’t lower their standards because of CRA otherwise there would have been a problem long before 2005.

Bank’s relaxed their standards because they knew they weren’t keeping the crappy loans on their own books (or so they thought in the example of Citi) but were packaging them up and selling them off to be sliced and diced into CDOs that were then “rated” AAA by Moody’s et al and sold into the market.

Add in the use of further derivatives like credit default swaps and you get AIG involved with everyone taking a cut of the action along the way.

Without all of those factors, plus a few more including interest only loans, ARMS etc.(Fannie and Freddie didn’t help) you don’t get that bubble, you get a few defaults on crappy loans that are well within the local Bank’s means.

Let’s also not forget that those that got loans they shouldn’t have are out on the street while Wall St. gets bailed out and pays massive bonuses.

Posted by Schooner | Report as abusive

Dear Felix:

The overall topic of how government pressure for more mortgage lending to “underserved” minorities and lower income borrowers changed the culture of mortgage lenders from pennypinching skeptics to politically correct Pollyannas is much more complex than you realize.

Consider, for example, Angelo Mozilo of Countrywide, who wasn’t officially covered under the CRA, but was told in no uncertain terms by the Clinton Administration that if nonbank mortgage lenders didn’t lend more to minorities, legislation would be introduced to bring them under the CRA. So, Mozilo signed a treaty with HUD Secretary Henry Cisneros, whom he later put on Countrywide’s board, to lend more to minorities. As Mozilo charged harder into boiler room sales tactics annoying state attorney generals with anti-predatory lending laws, he kept buying regulatory cover for himself with the federal government by pledging more CRA-like lending: $600 billion in 2003, a full trillion dollars in early 2005.

Connie Bruck’s article on Mozilo in this week’s New Yorker documents how crucial minority lending was to Mozilo. It’s not on line, but I’ve got the good parts excerpted here:

http://vdare.com/sailer/090622_mozilo.ht m

A wide range of evidence suggests that a sizable majority of all the defaulted dollars lost so far have been on loans to minorities.

For example, in California, where a great majority of the national defaulted dollars are found, the correlation between the Q1-2009 default rate and minority share of subprime dollars borrowed in 2006 for the top 20 metropolitan areas is 0.89.

http://vdare.com/sailer/090517_foreclosu res.htm

The enormous size of “commitments” to minority and lower income lending under the Community Redevelopment act is not widely understood. The National Community Reinvestment Coalition (“the nation’s social justice trade association”) shows aggregate commitments by CRA-covered lenders of over $4 trillion dollars from 1996 through 2005. And that doesn’t include, for example, Bank of America’s subsequent $1.5 trillion CRA pledge in 2008.

And that’s not counting nonbanks, such as Countrywide, which were told they would be covered under the CRA unless they acted like it. (Countrywide made over one trillion dollars in CRA-style pledges.)

Pledges included in this total include the late, ungreat Washington Mutual’s $375 billion pledge in order to win FDIC approval for acquiring Dime Bank in 2001, the $800 billion JP Morgan Chase pledged in order to acquire Bank One in 2004, and various pledges by Citigroup totaling up to just under one trillion dollars.

For documentation, see:

http://vdare.com/sailer/090215_cra.htm

Obviously, the federal government couldn’t hold a gun to a banker’s head and order him to lend money to a likely deadbeat. He could always refuse to lend money to anybody.

The mechanism by which the government changed the culture of mortgage lending is more subtle, more selectionist, more Darwinian. The government put career impediments in front of pessimistic Scrooge-Potter-types and greased the skids for the optimistic Mozilo-Killinger types.

For a case study of how Kerry Killinger of Washington Mutual won federal CRA approval for 29 acquisitions, making him a superstar executive … before WaMu went under last year, see:

http://vdare.com/sailer/090201_meltdown. htm

Finally, it’s likely that economic historians will assign less blame for the mortgage meltdown to the CRA than to George W. Bush’s October 15, 2002 White House Conference on Increasing Minority Homeownership. This event, and Bush’s speeches leading up to and away from it, have largely disappeared down the Memory Hole since recalling them doesn’t serve either party’s interests.

Bush called for 5.5 million more minority homeowners by 2010. To get there, he warned his regulators not to worry so much about zero down mortgages. (The percentage of first time homeowners in California putting zero down went from about 7% under Clinton to 41% in 2006.) And Bush denounced mortgage rules that required lots of paperwork — in other words, he was telling federal regulators that the Boss was okay with Liar Loans.

This was part of the Bush-Rove grand strategy of converting Hispanics to Republicans. The theory was that homeowners are naturally more conservative voters, so if we make it easier for Hispanics to get mortgages, the GOP will win the Hispanic vote for a generation.

For documentation, see:

http://vdare.com/sailer/080928_rove.htm

There are a number of different arguments here:
1) The govt told businesses to lend to the less well off or minorities.
2) The structure of GSEs led to the private sector going off the deep end, because they began emulating, in perverse fashion, these structures.
3) The govt didn’t actually force the lenders to make iffy loans, it just screwed them if they didn’t do so.
So, how do we get to subprime loans?
Hey, let’s lend money to people that can’t pay us back because… 1,2, or 3?
That would have to be among the worst economic or investment decisions ever made. It would have been much saner to tell the govt to go to Hell.
I’m still wondering what the function of the GSEs are given these comments? To whom are the loans going? Isn’t the point to provide assistance to people who can’t qualify for private sector loans? Otherwise, what’s the point of the program? Is it a subsidy or not? If so, why?
And if it is a subsidy, then how can it be criticized for being a subsidy? You might not agree with it, but it’s a subsidy.

This problem started many years ago, CRA is a small part of the problem. One of the responders commented that it all about the fees. That is and was a major problem. Most mortgages are written for the fees involved and then sold, the initial writer took the proceeds and wrote another mortgage for more fees and continued the process. Standards eased, and more mortgage lenders entered the market and continued the cycle. Did CRA help this cycle along. Anything that broadened the borrowers market did. Lenders got more creative and to survive, needed new gimmicks, Adjustable rate mortgages, Interest only, no income verification and so on.

The Chairman of the FDIC, Sheila Bair (A REPUBLICAN):

“I want to give you my verdict on CRA: NOT guilty,” said FDIC Chairman Sheila Bair, before the Consumer Federation of America, Bair said … she wanted to clear up the “myth” that the Community Reinvestment Act caused the financial crisis – and she set out to do so with vigor.

The Community Reinvestment Act – or CRA – is a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low-income and moderate-income neighborhoods.

“LET ME ASK YOU,” she proceeded. “WHERE IN THE CRA DOES IT SAY TO MAKE LOANS TO PEOPLE WHO CAN’T AFFORD TO REPAY? NOWHERE.” THE FACTS ARE SIMPLE, BAIR SAID. THE LENDING PRACTICES THAT ARE CAUSING PROBLEMS TODAY WERE DRIVEN BY A DESIRE FOR MORE MARKET SHARE AND REVENUE GROWTH, NOT BECAUSE THE GOVERNMENT ENCOURAGED CERTAIN LENDING PRACTICES.

Posted by Joe Friday | Report as abusive

Most subprime lenders weren’t regulated under the CRA. That’s really the long and short of it.

Posted by Derek | Report as abusive

“One other thing I’ve done, is I’ve called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There’s a lot of people in this — our communities around the country that deeply care about the issue of homeownership, and they’ve been responsive.”

– George W. Bush, U.S. President, March 26, 2004.

See also:
President Bush Hosts Conference on Minority Homeownership
October 15, 2002 1:55 P.M. EDT
http://www.whitehouse.gov/news/releases/ 2002/10/20021015-7.html

The Community Reinvestment Act is a good program. There are many low-income, borrowers with mattress money and non-traditional credit who can make fine homeowners. These loans just have to be carefully underwritten, and the guidelines (debt-to-income, and reserves in particular) have to be realistic and prudent. In my opinion, the APPLICATION of the program by the lenders was flawed. I’m a mortgage underwriter with a major bank. I underwrote CRA loans in 2006 and 2007 when the guidelines were ridiculously liberal. In 2008 and 2009, I’ve been underwriting primarily FHA and Conventional loans. I went back today to re-review the guidelines for one of the CRA programs and am happy to report, the credit history, number of tradelines, employment history, income, debt-to-income ratio requirements, and level of documentation have all returned to sane, rational standards.

Using LTV as a default predictor, or even monthly rental amounts, assumes that people make logical financial decisions which they absolutely do not! I’ve seen borrowers who made $8.00 an hour working a factory line at a poultry plant in Arkansas pay off a home and buy an investment property, and I’ve seen borrowers who make $20,000.00 a month, who have to get a gift for their 3% down payment. I’ve also seen high income borrowers (over $400,000.00 a year) who have plenty of money in the bank, but lousy credit because they are “too busy” to pay their bills on time. I’ve also seen borrowers in California lose 30% of the value of their home in two short years, yet they continue to pay their mortgage, and some even buy investment properties now that houses are cheaper, because their sense of financial responsibility is greater than any worry they may have about capital gain or loss, or using equity as future savings.

Behavioral psychologists are beginning to open up a separate field of study that deals specifically with financial attitudes and behavior. Making a good loan decision involves taking ALL the layers of risk, into account. It’s not simple, and one or two variables, can’t tell the whole story. There’s a reason risk-based, automated underwriting systems are constantly modifying their models. That’s because good underwriting is art, as well as science.

Let’s not throw out the baby with the bath water. The Community Reinvestment Act is good for America.

In 2006 according to the Federal Home Mortgage Disclosure Act database, 77% of all subprime mortgage dollars for conventional home purchases in the state of California, the ground zero of the subsequent mortgage meltdown, went to minorities.

Why do we still need a law punishing lenders for not lending enough to minorities?

Let\’s not forget that just b/c non-mortgage lenders are not operating under CRA auspices, their commercial bank lenders certainly are. What this means for the Karl Marx crowd is that competition breeds competition. If the bank down the block complies with CRA this means you better make similar style loans to stay in the race. Read: New Century Mortgage, etc.

Sheila Bair might label herself a Republican, but she certainly shouldn\’t be labeled as having a brain. Of course that language is not printed on FDIC pamphlets; however, I\’ve sat through FDIC, FED and OCC examinations over the years and have been lambasted and threatened w/ enforcement action if CRA loans are not increased. I always ask \”even at the expense of underwriting?\” The gov\’t reply was a sidestep and a wrinkled eye: \”Just increase your CRA lending before the next exam.\”

Let\’s also not be hasty in remembering the CRA was the latest vote-buying scheme dreamed up by Jimmy Carter in the 70\’s. All of you partisan apologists should be ashamed. Call a spade a spade and then let\’s move on. Securitization, of course, played a role . . .after the fact of CRAs birth.

Derek, indeed.

But look how the thread fills with scum. Some people just can’t accept the fact that lenders were just as stupid as borrowers.

Posted by mkey | Report as abusive

The lack of acceptance of responsibility by the Repubs is breathtaking:

-Iraq has WMDs
-Iraq is behind 911
-The housing bubble is the minorities fault
-Hey lets cut taxes and start a war
-Debts don’t matter
-Torture is good for America

The thinking is almost funny if they weren’t serious.
Here is one thing I can guarantee, if the Repubs don’t stop thinking with their emotions and giving the Repub salute to everything and anyone that hates government and America, this country is done. Twenty percent of the population will destroy America, that is all it takes and there is still 20% of the non-thinking, saluting Repubs out there.

Rush and Paylin has to be the next Repub ticket.

Posted by John | Report as abusive

Because a large number of people in the United States like to blame Black and Brown people for all the problems in the world and certain elite conservatives both share this racism and cynically exploit it in order to continue our current economic program of Crony Capitalism. That’s why the CRA and FANNIE and FREDDIE memes just keep rising from the coffin no matter how many times you, Barry Ritholz, Paul Krugman, and others drive the stake of facts and data through its black heart.

Posted by Rick Kane | Report as abusive

For the libertarians commenting on this thread about how “it was the spirit of the CRA” or some such metaphysical effect that was the “ur” source of the bubble, you can convince me if you can cite an article with data that explains how a law passed in 1977, amended in 1996, stop being actively enforced in 2001 with arrival of Bush administration (remember that picture of the chainsaws and the regulations), caused a bubble that started exploding in 2002? Just like your answer to every economic problem is “cut taxes,” foreign policy problem “drop bombs,” your default position is that when anything goes wrong in the market economy “its the Government’s fault.” Its your church so you can believe what you want to believe, but it is just that, a church so stop trying to impose your religion on the rest of us.

Posted by Rick Kane | Report as abusive

Instead, I proved a more modest claim: that the regulators and the CRA had a hand in promoting lax mortgage lending practices that we later learned were very dangerous.

I think we can all agree that regulators dropped the ball by allowing lenders to make these loans, but what has that got to do with the CRA? Is Carney really saying that because the government encouraged bad loans (not true, but let’s say it is), then businesses were necessarily going to respond by making more bad loans? That’s a pretty dim view to take of capitalism.

Anyway, the bad loans weren’t really the problem. The problem was that lenders misrepresented the quality of the loans. If banks (and ratings agencies) had accurately described the risks of the loans, then banks could have made all the bad loans they could raise the money to make, and there would have been no bubble. No securitization under false pretenses, no credit bubble. Period.

And that doesn’t have a thing to do with CRA. You eliminate the CRA, and your bubble is going to be about the same size. If you enforce the CRA (which prohibits predatory lending), you probably mitigate the damage significantly.

Posted by politicalfootball | Report as abusive

The issue is not when those memos were written — it is certainly plausible that despite their being a bit before the boom they still played a role in the boom.

The biggest reason why the idea that the CRA was responsible for the subprime crisis is that CRA-governed banks were much less involved in the subprime loans that went bad. In fact, they were much less involved in all subprime loans.

The subprime loans were overwhelmingly from non-depository financial institutions (such as mortgage brokers), who are simply not governed by CRA (which only governs depository institutions. So it’s simply empirically inaccurate to say that the CRA was THE cause (or even, realistically, much of A cause). How could it be the cause if the loans weren’t coming from institutions governed by it.

If you doubt me, take a look at the research that has come out of Apgar and his associates at Harvard’s Joint Center of Housing Studies who were following the different forms of mortgages, mortgage originators, and secondary market players/buyers (a system they refer to as “mortgage market channels”). They have published several very thorough empirical reports of these going back more than half a decade — well before this issue caught the attention of the MSM and most blogs.

Posted by James DeFilippis | Report as abusive

Hey Sailer,

Stop trolling for hits. We already know what you are about, blamin the darkies.

Posted by Schooner | Report as abusive

Oh, so lowering interest rates and down payment requirements will not raise the default rate?

That might pass in a liberal arts school economics class where phallocentric truth is optional, but not if you live in the “real world” where interest rates and down payments reflect the ability to pay, not the moral imperative that people have housing.

Posted by gorak | Report as abusive

I am still astonished at how stupid the “cra is not responsible because mortgage brokers made most of the bad loans” people are!

Let me introduce you morons to a little basic economics. Mortgage brokers are not BLIND to what’s going on. They see the lousy type loans getting the go ahead, and then they jump on it. You actually think that morgage brokers are going to see no doc loans and the like being made and NOT jump on it? ARE YOU THAT STUPID?

Posted by yo | Report as abusive