CRA, ACORN, Democrats, Obama and the Housing Market Crisis
Posted by: Ken Marrero | 09/27/2008 12:49 PM
-By Ken Marrero
Following up on my post featuring an excellent video background for America's current financial woes, I thought to dig deeper into The Community Reinvestment Act of 1977 (CRA). A lot of scrutiny is going to be directed toward it, and rightly so. Well intentioned at the outset, CRA was hijacked by the political Left and driven to this place and time by the unscrupulous with no regard for the consequences.
Signed by Jimmy Carter, CRA purposed to increase credit availablity in Lower and Middle Income areas (LMI). Such areas were often largely inhabited by the poor or minorities. Thus, if banks were lending less in LMI areas, it could mean they were discriminating. There was even a term coined, "redlining", for the alleged bank practice of outlining areas on maps in which they would not do business, with a red pen. When the Housing and Mortgage Disclosure Act (HMDA) of 1976 did show low levels of lending in LMI areas, discrimination was assumed and CRA passed the following year.
Realistic alternative meanings for HMDA data were proposed and evaluated, but it was too late. Howard Husock reports
A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.
That assessment was over 20 years too late to stop CRA. By then it had already infected the banking industry and a catalyst had been found to accelerate the process.
In 1977 banking was heavily regulated. CRA required banks to report compliance. This information was used by regulators to approve mergers, to OK opening new branches and closing old ones. Doing business required good CRA compliance. During the 70s and 80s "Regulators asked banks to demonstrate that they were trying to reach their entire "assessment area" by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups." These softer compliance reporting requirements drastically changed in 1995 under Bill Clinton's administration. CRA was amended, adding 2 features which began and drove the Housing Bubble.
First, compliance would now be measured only by one criteria: actual loans made. Husock writes
The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A's for effort. Only results--specific loans, specific levels of service--would count.
It was no longer acceptable to prove you were looking for the smaller number of good loan candidates in a larger pool of bad candidates. CRA compliance would only be granted if you actually found someone to loan to. True to Leftist ideology, banks were no longer good community citizens if they provided equal access to loans. They were only good if they provided equal outcomes to borrowers. Responsible lending be damned!
As bad as the first change was, the second would prove even worse, especially seen from 2008's perspective. Once again, Howard Husock says it best.
Crucially, the new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints. The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition--a foundation-funded umbrella group for community activist groups that profit from the CRA--issued a clarion call to its members in a leaflet entitled "The New CRA Regulations: How Community Groups Can Get Involved." "Timely comments," the NCRC observed with a certain understatement, "can have a strong influence on a bank's CRA rating."
This led to all manner of abuse. Deregulation massively changed the environment which existed in 1977 when CRA was first passed. Those changes were not taken into account by the 1995 changes to CRA, they were merely exploited by activists with agendas having nothing to do with lending. Deregulation meant more bank mergers, which in turn were dependent upon good CRA scores. But scores could be depressed, meaning expensive delays in business development, simply by formal complaints directed against a bank. It mattered not if the complaints were legitimate. The process was the costly component, not the outcome. Leftist groups like ACORN and others used this to their financial advantage. In vintage Jesse Jackson style shakedowns, they received real windfall profits as banks paid them not to follow up on threats of costly, frivolous complaints.
Even more disturbing, lending decisions were removed from bankers and handed over to activists as the activists were given a powerful seat at the table. ACORN in part, not banks alone, now controlled who got CRA mandated loans. Banks got the risk, while ACORN and others just got rich! In light of this, it is realistic to say it was not just Government Democrats who brought America's current financial woes down on us, Democratic activists also played key roles!
It makes more sense that activists with no incentive to pay attention to risk would make bad loans than would bankers who understand the lending process. Why should ACORN care if the loans they hand out, but for which banks are responsible, are defaulted on? As we have learned in the last few months, ACORN should have cared. The numbers are staggering and the impact cannot be overestimated! Husock reports in 2000,
By intervening--even just threatening to intervene--in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."
Even worse, ACORN gets to double- and even triple-dip. Again from Husock, "In addition to providing the nonprofits with mortgage money to disburse, CRA allows those organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved." Activist organizations such as ACORN get shakedown payments, community influence and stature from being a reliable source for loan money and get what amount to "broker's commissions" for doing so.
This is made even more relevant when one considers that the demon in the Housing market crisis is "greedy lenders" who engaged in "predatory lending practices" giving "huge loans to borrowers who couldn't afford them". I, personally, have wondered about the the numerous claims from borrowers that lenders didn't fully explain their loan terms. I've often wondered why banks would engage in such suicidal practices. But if "lenders", with literally NO liability or expertise yet armed with an agenda, controlled vast sums of loan funds, it becomes easier to understand. While many types of mortgages are currently in default, including loans to speculators who borrowed just to "flip" houses and not to live in them, it would be interesting to know how many bad loans came from banks and how many from ACORN's "mortgage lenders". "Greedy lenders making bad loans", indeed!
The issue jumps from politics to politician when one considers the "Community Organizer" role Barack Obama is so proud of. It is no secret Obama worked for ACORN in Chicago where part of his work was suing financial institutions to force CRA compliance. It is no secret he continues to support the goals and strategies of ACORN. This would put Obama neck deep in creating the problem he is now asking America to send him to Washington to fix.
I'm reminded of the old saying about putting the fox in charge of the henhouse. Obama's association with ACORN and specifically with lawsuits involving CRA compliance in Chicago taint him sufficiently in my mind to disqualify him as a candidate to lead this nation. If his idea of proper tactics and procedures is embodied in this sort of activity, if this is organization he sees as beneficial for a community, he should not be trusted with an even larger community to organize.
There will be more investigation into this matter in the days ahead. Stay tuned. And stay engaged. It may mean the difference between electing a man and a party that believes this sort of outrage is good for the American people and a man who believes in service to country over to service to self.
Center right? Please do not make Us laugh!
First of all HMDA is of 1975 not 1976. Redlining is a term that goes back to the Depression Era, it did not originate in the 1970s as you insinuate by omission. The Husock article while very well written is a cart load of conservative garbage resting on a bed of bullshit. No banker which We have spoken has said anything other than while the CRA reporting standards are a bit of bureaucratic nonsense compliance is relatively simple: Make good loans that perform well and do not lead to default to community development projects and individuals. The vast majority of CRA loans are business mortgages in urban and blighted communities within a bank's MRSA.
Actually, only 20% of all loans made by the banks covered by the CRA of 1977 were subprime. The vast majority of subprime loans were made by mortgage lenders and banks not regulated by CRA standards. As of 2004 the Bush FDIC, Office of Thrift Supervision and the Office of the Comptroller of the Currency decided to raise their standard of asset holding for banks regulated by CRA compliance from 250 MM to 1 MMM USD. According to the report of this Bush administration change at the height of corporate profits from the bundling of Mortgage Backed Securities and at the behest of the American Bankers Association of the 1,138 banks subject to the most scrutiny the Bush appointed FDIC head reduced the number to 227.
No groups, no matter what wings they have influence the CRA process it is a loan accounting inspection. If banks offer good loans to disadvantaged borrowers who QUALIFY under the same standards as everyone else then the worst rating that can be given by the FFIEC is "satisfactory."
We take this time which is likely wasted on you merely to educate and explain that if you deal in verifiable facts you do not have to worry that you appear to be less than credible. You clearly do not know the facts and since the facts do not support your political views you prefer to take an ignorant, racist and malevolent tack in hoping to score a point for your side.
It is people like you who deserve the wake up call of an economic depression, however, We, Ourselves, prefer that America recover despite the arrogance and stupidity of millions of people just like you.
Qu'ul cuda praedex nihil!
Pain, you are in for a world of it when you look at the facts!
The issue is not just that the CRA basically required the use of these loans, but that they opened the door on this new category of loan. In the old days, you could not get this credit. The CRA, Fair Housing Act et al. basically forced banks to expand credit access. WHEN ANALYSTS TALK ABOUT THE NEED FOR DELEVERAGING, THEY MEAN THAT POOR BLACK PEOPLE SHOULD NOT HAVE ACCESS TO CREDIT.
This crime was magnified by Fannie and Freddie holding to their charter to buy loans. And while none of those loans were subprime, it dramatically added liquidity to the MBS markets. Couple that with liberal legislators who were determined to maintain access to credit from their poor black constituents who DID NOT DESERVE IT, and Republican legislators who utterly failed us in their caving to Wall Street, the subprime markets were opened (why do you think the usury laws were repealed?! To allow for loans to be made to poor black people with bad credit who necessitated risk premiums above the usury ceiling! see Depository Institutions Deregulation and Monetary Control Act)
Now add FAS 157 (enforced mark-to-market accounting), and you have the recipe for a financial disaster.
BUT THE WORST PART is that I actually think this is all part of the goddamn liberals' plan: force the banks to make loans to poor black constituents with bad credit. Get the people in the homes. Then, when the tidal wave of defaults hits, elect Obama, force cramdown, etc. That is, LIBERALS WILL TRY TO USE THE POLITICAL POWER OF THE NEXT ADMINISTRATION TO SCREW BANKS IN FAVOR OF GIVING AWAY HOUSES TO THEIR POOR BLACK CONSTITUENTS WHO CANNOT AFFORD THEM.
BTW, this will only freeze credit further, driving up risk premium from banks in the future.
I'm guessing a few things:
1. You do not know how FICO works, nor risk premiums, spreads, etc.
2. You do not understand that deleveraging necessarily implies the dramatic pullback of credit to the most marginal borrowers. This by definition includes poor black people.
3. You think it's legitimate to socially-engineer society and force banks to make loans to people who are BAD CREDIT RISKS, ie poor black people in inner cities with bad credit.
4. You have no idea what the effects of doing so are.
Let's all prevent MORONS like this guy from getting into office!
To achieve “good” CRA ratings, banks would set loan targets, develop new products and procedures for low income groups. This creating competition in the low end of the market and resulted in other lenders and mortgage brokers lowering their underwriting standards. Or as one affordable housing advocate put it:
“Local neighborhood organizations, working with supportive members of the media, the academic community and some elected officials and representatives of financial institutions themselves (sometimes brought kicking and screaming to the bargaining table) have used a variety of tools to change the way lenders do business in the nation’s cities. And the Community Reinvestment Modernization Act would likely not have been produced if it were not for the advocacy efforts of the National Community Reinvestment Coalition, ACORN, the National Training and Information Center and community organizations around the country. “
No Progress Without Protest, Gregory D. Squires, NHI Shelterforce Online. Issue #128, March/April 2003
Likewise, in 1996 President Clinton’s Housing and Urban Development (HUD) agency directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. In addition, HUD required Freddie and Fannie to provide 12% of their portfolio to “special affordable” loans. Those are loans to borrowers with less than 60% of their area’s median income. Naturally, these targets increased over the years with the 2008 target being 28%. Fannie Mae subprime purchases exploded from $600M in 1995 to over $17Billion in 1999 and up to $158 Billion in 2006. The only way to achieve the low income loan targets while dramatically increasing lending was to erode underwriting standards. Fannie Mae aggressively bought Alt-A loans, where these loans may require little of no documentation of a borrower’s finances.
People on both sides of this argument are throwing around so-called "facts" without having a clue what they're talking about or else they're intentionally misleading. The Community Reinvestment Act has absolutely nothing to do with the mortgage crisis. Ethnicity and race aren't a part the CRA so it's ridiculous, not to mention racist, to try to blame it on forcing the government to lend to poor blacks. It has to do with poor, regardless of color. White people in trailer parks were being discriminated against just as much as blacks in the inner cities.
"Pain" tried to blame the Bush administration for raising the threshold so banks with less than $1 mil in assets don't fall under CRA. That's simply not true. They don't fall under the test for large banks, but they still fall under CRA under guidelines for small or mid sized financial institutions. Large banks are examined for lending, service and investment activities. Small and mid sized banks are examined primarily for lending activity.
The vast majority of the defaulted loans came from mortgage companies that didn't even fall under CRA. Banks and financial institutions weren't forced to make these loans. They relished the opportunity to do it! Lenders didn't care if borrowers could afford the loans. They just refinanced them and collected more fees if borrowers started to fall behind.
If you want to blame legislation, blame the Predatory Lending statutes that prevented banks from making the sub prime loans. When the loan became unprofitable is when the housing market started to crumble. It has absolutely nothing to do with government forcing anyone to lend to the poor.
CRA is exactly targeted at providing loans to low to middle income regions. Look up the CRA webstie or look up the bill itself. It is not racially targetted, it is income/credit worthiness targetted. To assume that the banks that they could profit off of sub-prime lending is ridiculous. Consider that these loans are going to housing areas of low to middle income, mostly low-income. These housing areas are not what most people would consider investment properties. If they were good investment properties people or businesses with good credit ratings would be buying it up. In order for the banks to make a profit from sub-prime lending they would need to recover enough money upfront through fees and interest to cover their expenses (writing the loan, closing, foreclosure process, repairs, depreciation, and so on). The value of these homes rarely increases. To assume that the total cost of lending and time to recover costs if the loan defaults is not thoroughly considered is hard for me to believe.
Also, another point about small to medium banks not being affected, the small to medium banks were affected in that they could on their or could be asked to make these loans and then sell them to the large banks to help them meet their numbers. This in turn helps the smaller banks reputation within the community that they operate.
Groups can affect the CRA rating of a bank based on number of complaints against the bank. Large groups, like ACORN, would have the money, people, and legal resources a.k.a Obama, to attack banks.
Also consider to which party's candidates Freddie and Fannie were donating to the most.