A simple, yet likely powerful, explanation has now been offered for the subprime mortgage-lending and foreclosure problems that have fed the nation’s gravest economic crisis since the Depression.
Its simplicity makes one wonder why it took so long to surface: It was the fault of black people.
The federal government, another favorite whipping boy, also played a hand in this by trying to increase homeownership among minorities and other “undeserving poor.”
The scapegoat duo of “guv’ment” and blacks simply could not be resisted any longer. As Fox News’s Neil Cavuto concluded, “Loaning to minorities and risky borrowers is a disaster.”
Watch Cavuto in action as he pumps up the scapegoating:
According to many conservative commentators including Cavuto, Charles Krauthammer (Washington Post), Lou Dobbs (CNN), and editorial writers at the Wall Street Journal, it is the federal Community Reinvestment Act — basically a ban on redlining — that forced lenders to make bad loans to African Americans, other minorities, and other unworthy recipients in poor neighborhoods around the nation leading to the challenges that are now plaguing the nation’s economy.
As Andrew Macurak recently reported here on Rooflines, the argument is gaining traction. And it is utterly false.
Under the Community Reinvestment Act, passed in 1977, Congress concluded that “regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” This included all communities in a lender’s service area, and federal financial regulatory agencies were charged with the responsibility to “assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.”
The goal was to put an end to redlining and to increase access to credit for qualified borrowers in areas that had long been underserved. But, again, only “consistent with safe and sound” lending practices. And the law has worked.
According to studies by the Treasury, Federal Reserve, Joint Center for Housing Studies and others, the CRA has led to increasing homeownership in precisely those markets where the law was intended to do so and CRA-related lending has been found to be profitable. If any lender made a loan to a black applicant (or anyone else) who was not qualified, that lender simply did not understand the law. If such an institution was told it had to do so, it was dealing with a compliance officer who did not understand the law.
Timing alone demonstrates the erroneous nature of the CRA critique. The law was strongest in the 1990s, before the statute was watered down and before the surge in subprime lending. Not coincidentally, the CRA was weakened by the Phil Gramm-led Financial Modernization Act of 1999 and subsequent regulatory “reforms.” As a result, fewer mortgage lenders were covered by the law, and the rules that did apply were less stringent to many institutions.
So the CRA was strongest when families were able to buy and stay in their homes at record levels. The law was weakened just as the subprime lending craze took off, with the foreclosure and related economic crises that immediately followed.
More important, it is essential to understand that CRA-covered lenders did not make the loans that went bad. When the law was passed in 1977 approximately three-quarters of all mortgage loans were made by depository institutions covered by the CRA. Today approximately three-quarters of all loans are made by independent mortgage brokers and bankers who have never been covered by the law.
And as the National Community Reinvestment Coalition reported, CRA lenders have originated only one-quarter of subprime loans, with the overwhelming number of those loans — the loans that have led to the mortgage meltdown — being made by institutions that had no CRA responsibilities. In 2005 the Federal Reserve reported that just 5 percent of loans made by CRA institutions were high-cost loans, compared to 34 percent for non-CRA lenders.
With the federal government about to spend as much as $700 billion to purchase assets from financial institutions, CRA and related fair-lending laws should be even more rigorously enforced.
Here is an opportunity for the federal government to significantly advance the cause of fair lending, fair housing, and equitable community development generally. As Janet L. Yellen, President and CEO of the San Francisco Federal Reserve Bank stated last March:
There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.
Unfortunately, there is no magic bullet for what ails the nation’s economy. Apparently, this does not undermine the appeal of simple solutions, particularly when they buy into longstanding stereotypes.
Among the many responsibilities now confronting policymakers, as the public is about to make its multi-billion dollar investment, is to resist the racist, anti-government rants that have all too often fueled public policy and private practice throughout our nation’s history.