"Emancipate yourself from mental slavery, none but ourselves can free our mind.” - Bob Marley

Tuesday, September 30, 2008

Right Wingnut Myths: "The CRA Caused the Subprime Crisis"

A table regarding Community Reinvestment Act loans and Subprime loans:






CharacteristicCRASubprime
Interest RatelowHIGH
Default RatelowHIGH
TimeframeMostly before 2003Exploded after 2005
Issuersall by Regulated Banksat least 3/4 by enitites no fully regulated by CRA
Locationby law, Neighborhoods where bank deposits were takenMuch in vast new construction such as the Inland Empire and exurban Phoenix, where by definition no bank deposits were being taken because nobody lived there
So, except for all the important salient characteristics noted above, CRA and Subprime are exactly the same. Right.

The idea that Community Reinvestment Act (CRA) == Subprime has becaome a new conservative wet dream - but with less substance. (Thank goodness.)

The latest Right wing meme is that the Community Reinvestment Act "paved the way" or "provided the template for" or "is" Subprime Lending. I will not link to the idiots who propound this, other than to mention that I am seriously disappointed in Mike Huckabee, who seemed like the smartest of all the candidates, albeit too ready to mix religion with Constitution.

Here is the information I used in the table above. Money quotes:

CRA applies only to banks and thrifts that are federally insured...

The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits...

Studies by the Federal Reserve and Harvard's Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks' profitability.

In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened....

Second, 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...Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.....


[Which is not to say that 1/4 of subprime loans were CRA, btw.]

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.

One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."


[Emphasis added.]

So the next time you hear some right winger jabbering about how CRA started, or caused, or even contributed to the subprime crisis, you know you are listening to a profoundly uninformed person.

In fact, the mere nomenclature "Subprime Crisis" shows ignorance. The categories of mortgages known as "Alt-A" and "Option ARMs", generally not included in Subprime statisitics, are exploding and they will be as nearly as big, or bigger, than Subprime. And that still doesn't cover the loans on commercial real estate, where much of the same abandonment of sane underwriting occurred as in the residential mortgage market.

UPDATE:

(Ckick for larger image.)

I wasn't going to link to anything, but this cartoon at Day by Day http://www.daybydaycartoon.com/, by Chris Muir, seems to imply agreement with the CRA-caused-this meme, though I could be mistaken. If it does, then I have to disagree with the 1st half of of Sam's first frame comment.

And, for completely different reasons, I have to disagree with the characterization of the Paulson-Democrat bailout plan as a "crap sandwich". After all, there is bread in a crap sandwich.
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About Me

I'm a 57 year old geek. I voted Democratic for 20 years, because I disliked the Republicans more. But now, nobody really speaks for me. I'm for Guns, for more correct government regulation of the financial world, against illegal immigration and amnesty. (in 2008 I ended up voting Republican - too many questions about Obama, and voting against anybody who voted for TARP 1.) In 2010 I voted a stright republican ticket because the Democrats have completely lost their minds.