Sunday, October 04, 2009

Poisonous, Dangerous Cocktail: Expanding the CRA

As we try to shake off the financial crisis, here's a bright idea. Take a law that has led to the writing of an enormous amount of bad mortgages and expand it. Then take enforcement away from bank examiners and give it to housing activists. Sound like a poisonous cocktail? Well, it is what the Obama administration and Democrats are currently stirring up on Capitol Hill.

The White House and Congress want to expand a 30-year-old law--the Community Reinvestment Act (CRA)--that helped to fuel the mortgage meltdown (see chart above of the growth of CRA lending leading up to the financial crisis). What the CRA does, in effect, is compel banks to seek the permission of community activists to get regulatory approval for bank expansions and mergers. Often this means striking a deal with activist groups such as ACORN or unions like the Service Employees International Union and agreeing to allocate credit to poor and minority areas that are underserved.

In short, the CRA encourages banks to make trillions in loans they would not ordinarily make. What's more, these agreements often require that banks offer no-money-down mortgages and remove caps on how much debt a borrower can take on. All of this is done in the name of "financial democracy."

The CRA is not about community development; it is, essentially, affirmative action in lending. Trillions in loans are now to be made not on the basis of whether they can be paid back but to meet CRA goals. This is precisely what we need to get away from. Drinking this potent cocktail would be dangerous to our financial health.

~Peter Schweizer's excellent commentary in Forbes


At 10/04/2009 10:12 PM, Anonymous Anonymous said...

To get a balanced picture, you should also look at some of the Federal Reserve Board studies on lending discrimination that support this statute.

As to other claims re CRA, they have been pretty much debunked:

At 10/05/2009 10:36 AM, Anonymous Anonymous said...

Anon 10:12 PM. You have the typical blind eye/tin ear (choose your metaphor) of a typical liberal social engineer. Affirmative action, through CRA and other government requirements, is the primary cause of the Great Recession we are currently in. For decades, the basic requirements for buying a house were 20% down and a mortgage of no more than 2 1/2 times annual income; if we get back to that, real growth will again appear after the adjustments now necessary because of the government's social engineering policies of the last 2-3 decades. If we don't get back to 20% down and 2 1/2 times annual income, we will continue in the malaise we are in. Oh, and the worst parts of AA, it is the primary cause of the continuing racial divide in this country and it most hurts the people it is supposedly trying to help.

At 10/05/2009 2:12 PM, Anonymous Anonymous said...

Thanks Anon 10:36 for taking Anon 10:12 PM. to task. Anon 10:12 is oblivious to reality and just repeats the Left's vast arrempt to coverup the CRA/Acorn & Democrats as the root cause of the financial meltdown. They will never face justice they deserve.

At 10/05/2009 3:28 PM, Anonymous Anonymous said...

I notice that none of the critical comments of the first annonymous provided any statistical support for their positions, whereas the first anonymous did.

They must have the courage of convinctions without the common sense to support their positions with facts.

At 10/05/2009 5:11 PM, Blogger Stan said...

The Boston Fed study has been conclusively debunked. See

Federal Reserve Bank of Boston on mortgage lending

A 1992 study by economists at the Federal Reserve Bank of Boston purported to show a widespread discrimination against minorities in the Boston mortgage market. This study quickly became the basis for government mandates to relax lending rules, allowing people who did not meet traditional lending requirements to obtain mortgages. This ultimately contributed to the current U.S. financial crisis.

When independent researchers attempted to replicate the study, the underlying data were inaccessible. Key information was eventually obtained using the Freedom of Information Act, which revealed coding errors in the original data that invalidated the results. But the replication process took six years, by which time the new lending rules had long been enacted.

At 10/05/2009 7:14 PM, Anonymous Anonymous said...


I checked your link to a Canadian foundation that purports to promote competition, but could not find the article.

I am linking you to a more detailed empirical analysis of the CRA appearing in the Academy of Banking Studies in 2006. It summarizes all the empirical studies of CRA to that date. Match and raise you one.;col1

At 10/05/2009 8:04 PM, Anonymous Anonymous said...


The Boston Fed Reserve critque is not supported by additional studies:

Tootell (1996) rules out the possibility that statistical discrimination caused the Boston Fed's results. Lacour-Little (1999) claims that studies relating to these issues, such as Board of Governors of the Federal Reserve System (1993), and Canner and Passmore (1995, 1997), have been inconclusive. Reviews of the most recent literature and audit studies, such as Yinger (1998) and Urban Institute (1999), conclude, however, that whatever motivates market participants, market forces have not yet been sufficient to eradicate mortgage lending discrimination. Moreover, these academic findings are often supported in the statistical evidence presented in court cases that document that despite substantial progress, various forms of discriminatory practices still persist in mortgage and housing markets.
Munnell et al. ( 1996) is an important study of discrimination in mortgage lending with adequate control variables. It would be valuable to know whether results that hold in Boston also hold in other metropolitan areas or nationwide. Avery, Beeson, and Snidermann (1996) address whether there are similarities in racial differences in lending across the country. They fully use the "new" HMDA data and find racial differences in denial rates across all markets and for all loan types, even after controlling for lender, neighborhood, and applicants' economic characteristics. They note that these differences are not due to property location or neighborhood. Thus, causing them to wonder whether differences in how lenders act toward minorities could be an important explanation.

Overall, Munnell et al. (1996) is an excellent study and has advanced the state of the art considerably, though it is not the last word on this topic. There may be several important methodological issues which have not been addressed by this or any other research on mortgage discrimination, but the Munnell et al. (1996) study establishes a strong presumption that lenders discriminate against blacks and Hispanics in providing mortgage loans.

This is from the article appearing in the Academy of Banking Studies.


At 10/05/2009 9:05 PM, Anonymous Anonymous said...

Another study that supports anonymous of 10/4 at 10:12 is paper # 259 from the bank for international settlements. Note the BIS is a swiss organization of central banks.
As has been pointed out most of the subprime loans were made by entities not covered by CRA. A number of articles have pointed out that the biggest cause was using the house as an ATM machine, promoted by the adds like the one I recall from Countrywide that ran over and over on Cable.
I think that perhaps Texas had it right in 1876 until it was repealed in the late 1990's that you could only borrow to buy or improve your home not as an ATM.
The idea was that in exchange if you went bankrupt your house was exempt. It is interesting that apparently most of the foreclosures seem to be re-fi's not first purchases.


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