Saturday, November 1, 2008

The Community Reinvestment Act is NOT the cause of the economic crisis

There is a video making the rounds that accuses the Democrats and Obama of causing the subprime lending crisis through the Community Reinvestment Act. I haven't watched the entire video (I simply don't have the patience to sit through ten minutes of nonsense), but I did hear someone make the same argument on NPR the other night.

Please, this is total and complete BULLSHIT.

The Community Reinvestment Act (CRA) is an act to encourage banks to make loans in low income and minority areas, areas that these banks had redlined, refused to make loans in, not because of credit considerations but because they were bad neighborhoods. "The only enforcement mechanism in the CRA was when the banks decided to merge or acquire another institution. Folks could go in and say, this bank has not been making loans in these areas. In my experience, most of the time CRA compliance didn't matter one bit. There is nothing in CRA that encourages making loans to people with low credit ratings. There is noting that encourages banks to make loans toloans to people with no income.

Here's what caused the mortgage meltdown. Lenders no longer service the loans they make. They slice and dice the mortgages and sell them to investors. The lender gets an immediate return and so doesn't care whether the borrower sinks or swims (this makes renegotiating bad loans really difficult). The sliced and diced mortgages become opaque so that they are impossible to value. Credit agencies stopped caring about whether their ratings were accurate because if they rated an offering of a sliced and diced mortgage poorly, they wouldn't be hired again. Lenders didn't care about the borrowers credit because they could make money with no risk--the risk went with the sold mortgage. It's pretty clear from what I have read that brokers (sellers of sliced and diced mortgages) didn't want to hear about risk. House prices would continue to rise so even if the mortgage went bad, the house price would have risen enough that they would make a bigger profit.

My background? A number of years as a corporate lawyer where I represented banks; a year volunteering for a fair housing agency where I monitored banks compliance with CRA and filed complaints when the banks wanted to merge.

And the video blames the Dems for stopping Republican sponsored legislation during the Bush administration (when the Republicans were in control of congress, the last year cited was 2005; the Dems didn't get control until 2006).

This American Life did a great radio program on the mortgage meltdown. If you want real answers, go

Don't let misinformation keep you or your friends from voting for Obama.