John Carney’s bizarre crusade against the CRA
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.