Editor,
Over the last year or so, there has been a lot of finger pointing as to what caused the housing
and ultimately the financial crisis. Many partisan pundits claim that banks were forced to make bad loans to people who could not afford to repay them, a veiled reference to the 1977 Community Reinvestment Act. This argument has no industry supported or empirical basis whatsoever and many of the pundits making this claim possess no real estate or finance expertise; approaching it as a purely partisan manner, in which they claim nefarious shakedowns by ACORN and the Clinton White House, even though no objective evidence has been presented to support that claim. The only place such claims are sourced are neo-conservative and right wing bulletins — National Review, Fox, Michelle Malkin, et al. The original act in 1977 required federally insured banks to make loans in the communities they operated in; to combat discrimination in lending based on race or geography, called redlining. Banks could still reject applications but the rejections had to be based on objective factors such as credit, income, etc. A statement in December 2008 by Federal Reserve Governor Randall Kroszner stated that the CRA in no way contributed in any substantial manner to the crisis and at maximum, less than 10 percent of lenders that fall under CRA regulations issued sub-prime loans. Another federal data study illustrated that 84 percent of sub-prime loans were issued by non-regulated mortgage lenders and 83 percent of debts were held by private, non-CRA regulated entities. Kroszner happens to be a disciple of Milton
Friedman’s Chicago School of Economics, which is a very conservative/libertarian economic position.
Sheila Blair, the FDIC chair and a Republican also claimed that this “banks were forced into bad decisions” meme is a distortion. The basic definition of a sub-prime loan in this case is a loan that is made without regard to the borrower’s actual income; allowing borrower to “state” their income without any supporting documents — W2, pay stub, etc. Other loans allowed for bad or shaky credit but the main component was the stated or NINJA (No Income, No Job, No Assets) loans.
A report by Lending Patterns, published in Real Estate Magazine on July 24, 2008 showed that in 2006, 71 percent of sub-prime loans were issued to non-Hispanic Whites; 40 percent were to middle- and upper-income borrowers. While there are many factors that drove this crisis, I would lay the blame more on deregulation by both Bill Clinton and George Bush; greed and a desire by banks and investment houses to take advantage of the new loan options available; and, economic circumstance. In 1999, Clinton signed Gramm-Leach, a bill that repealed the 1930s Glass-Steagull Act. The new bill allowed the mixing of investment banking with commercial banking, which set the stage for derivatives, swaps and sub-prime loans. Clinton also signed a bill deregulating commodities trading, which further added to current situation. When Bush took office, he pursued even further deregulation through weakening standards. His administration actually weakened CRA enforcement standards. His “compassionate conservatism” was encouraging the private sector to accomplish social goals. He failed to grasp that the private sector responds to profit, not social justice. While he signed the American Dream Downpayment Act to increase home ownership and had HUD encourage Fannie Mae and Freddie Mac to act to achieve this goal, he did not have the political will to create a strong enforcement mechanism to insure first time homeowners were not getting the shaft; opting to let markets resolve such issues. However, lenders such as the now defunct New Century knew that they would sell off the loans to Wall Street shortly after closing and felt that the risk would simply be passed on to someone else and therefore no bother. The argument that the CRA caused the crisis is mainly a GOP/right wing pundit talking point. While both Clinton and Bush used the CRA as a point for liberalizing capital, it was simply part of their toolbox for deregulation and allowing banks and financial institutions to run wild. Both embraced the free flow of capital, though Clinton had more inclinations towards some regulation and enforcement. Both had officials with ties to Wall Street (Robert Rubin, Larry Summers, Henry Paulson) in their administrations. The crisis was the result of poor regulation, enforcement, greed and a desire to allow financial institutions to pursue areas outside of their core missions. Add in speculation, the movement of capital from securities to real estate following the dot com bust and the 9/11 attacks and the invention of stated income, stated asset loans for would be real estate investors and budding real estate millionaires and we had a toxic soup which we are trying to purge ourselves of. So, the next time some blowhard tries to say the CRA caused the crisis, they are simply grasping at straws. That is all they have. But, maybe if they find enough straws, they can put the broom together.
Brandon Curtis
UNM Alumnus
