Why CRA loans weren’t toxic subprime loans

By Felix Salmon
June 30, 2009
Mike at Rortybomb wades into the CRA debate with a very good point: toxic subprime loans bear almost no relation to CRA loans.

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Mike at Rortybomb wades into the CRA debate with a very good point: toxic subprime loans bear almost no relation to CRA loans.

80% of the subprime mortgages expired in 30 months; they perpetually had to be refinanced. 75%+ of subprime mortages had a prepayment penalty. This is not at all what CRA loans looked like. CRA rooted for solid, longer-term mortgages.

I do hope the formal debate between John Carney and Barry Ritholtz happens; I’ve already lined up John Gapper and Mike Mandel as judges (they say they have no opinion on the matter), and I’m pretty sure I can host it in a Reuters TV studio. Come on, Barry, you know you want to!


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I’m happy to have the debate, but I’d like to see the macho big price-tag go away. I’d also like to see some actual bankers or former bankers in the mix. My banking friends all say CRA really did contribute to the meltdown. I’d like to see their insight brought to bear.

Posted by Kelli K | Report as abusive

If you have a Q-and-A portion with questions from the internet, I’ll submit a good one.

“My banking friends all say CRA really did contribute to the meltdown.”

Of course bankers would say that. They’re just trying to shift the blame.

Posted by Jon H | Report as abusive

There is no debate, Felix.

When you include the regulation that was part and parcel of CRA (over 100 of them), CRA loans are sound. Remove the regulations a la Bush, and no loans are sound.

Luckily for all of us, Justice Scalia broke ranks recently and told the states to resume regulating banks their own way:

http://www.mcclatchydc.com/251/story/709 85.html

This is why Spitzer was Spitzered.

Posted by Unsympathetic | Report as abusive

Sorry for asking what seems like a dumb question, but do we have data on what portion of the “subprime crisis” was caused by subprime loans?

It seems like everyone is focusing on whether CRA loans are subprime. (Arguably, Carney is focusing on something else — whether efforts to enforce CRA led to systematic deregulation that also influenced subprime.)

Do we have data on what percentage of defaulting loans are subprime and what percentage are CRA or CRA influenced?

Posted by J Mann | Report as abusive

Carney is a hack. Maybe he was a decent lawyer, but watching his on the job training in the new gig is painful.

pls Felix do not mention him again or I will drop you like a bad habit.

Posted by CarneyRat | Report as abusive

I am President and CEO of Pan American Bank in East Los Angeles. For over forty years we have focused on serving the working class Latinos in Los Angeles and Santa Ana.

Our bread and butter product has been the 30-year mortgage. At a recent Community Reinvestment Act examination all of our mortgage loans were deemed to be CRA loans. Of the approximately $27MM in such loans, the total delinquent loans can be counted on one hand…literally. Based on this performance, I would say question the existence of toxicity in our portfolio.

I have been a banker for two decades and I have been involved very closely in matters related to the CRA and community redevelopment. Based upon my many years of “banking” experience I can tell you that the CRA did not create the crisis. What created the issue was “intoxication” of the entire loan origination food chain. This loans were NOT originated because they were CRA loans.

It is too convenient for CRA bashers to label this as a CRA-driven crisis. But it just is not the case. The CRA “encourages” banks to provide loans, services and investments to low- and moderate-income individuals and communities. It by no means requires it at levels deemed to be unsafe and unsound.

Since 1970 banks have managed well under the CRA. And they continue to manage well without them. Prudent bankers realized early on that subprime loans were not needed or required under CRA. In fact, subprime loans have been inconsistent with the CRA if you consider the fair lending test that is part of every CRA examination.

Sure, many will conveniently blame the CRA for this mess. And those that do not know anything about banking and the CRA and are conveniently looking for an excuse will agree. But the bottom line is that CRA had nothing to do with the crisis.

Jesse Torres
President and CEO
Pan American Bank
3626 East First Street
Los Angeles, CA 90063
(323) 264-3310

Learn more about us here http://www.docstoc.com/profile/PanAmeric anBank

I think other web site proprietors should take this site as an model, very clean and great user friendly style and design, let alone the content. You are an expert in this topic!