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8/14/2019 CRA Stupid Shit

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We've now entered a new stage of the financial crisis: the ritual assigning of blame. It began in

earnest with Monday's congressional roasting of Lehman Brothers CEO Richard Fuld, and

continued on Tuesday with Capitol Hill solons delving into the failure of AIG. On theRepublican side of Congress, in the right-wing financial media (which is to say the financial

media), and in certain parts of the op-ed-o-sphere, there's a consensus emerging that the whole

mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, andthe Community Reinvestment Act, a law passed during the Carter administration. The CRA,

which was amended in the 1990s and this decade, requires bankswhich had a long,

distinguished history of not making loans to minoritiesto make more efforts to do so.

The thesis is laid out almost daily on The Wall Street Journal editorial page and in the National

Review.Washington Post columnist Charles Krauthammer provides an excellent example,

writingthat "much of this crisis was brought upon us by the good intentions of good people." Hecontinues: "For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977,

there has been bipartisan agreement to use government power to expand homeownership to

people who had been shut out for economic reasons or, sometimes, because of racial and ethnic

discrimination. What could be a more worthy cause? But it led to tremendous pressure on FannieMae and Freddie Macwhich in turn pressured banks and other lendersto extend mortgages

to people who were borrowing over their heads. That's called subprime lending. It lies at the rootof our current calamity." The subtext: if only Congress didn't force banks to lend money to poor

minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel's Neil

Cavuto put it: "I don't remember a clarion call that said: Fannie and Freddie are a disaster.

Loaning to minorities and risky folks is a disaster."

Let me get this straight. Investment banks and insurance companies run by centimillionaires

blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the editorial page of The Wall StreetJournal, and ignore the rest of the papereconomic know-nothings whose opinions are informedmostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which

didn't make subprime loans but did buy subprime loans made by others, were part of the

problem. Poor congressional oversight was part of the problem. Banks that sought to meet CRArequirements by indiscriminately doling out loans to minorities may have been part of the

problem. But none of these issues is the cause of the problem. Not by a long shot. From the

beginning, subprime has been a symptom, not a cause. And the notion that the Community

Reinvestment Act is somehow responsible for poor lending decisions is absurd.

Here's why.

The Community Reinvestment Actapplies to depository banks. But many of the institutions that

spurred the massive growth of the subprime market weren't regulated banks. They were outfits

such as Argent and American Home Mortgage, which were generally not regulated by theFederal Reserve or other entities that monitored compliance with CRA. These institutions

worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA

likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA

didn't force mortgage companies to offer loans for no-money down, or to throw underwriting
http://www.federalreserve.gov/dcca/cra/http://www.federalreserve.gov/dcca/cra/http://en.wikipedia.org/wiki/American_Home_Mortgagehttp://www.newsweek.com/related.aspx?subject=Lehman+Brothers+Inc.http://bigpicture.typepad.com/comments/2008/10/misunderstandin.htmlhttp://bigpicture.typepad.com/comments/2008/10/misunderstandin.htmlhttp://www.federalreserve.gov/dcca/cra/http://en.wikipedia.org/wiki/American_Home_Mortgagehttp://www.newsweek.com/related.aspx?subject=Lehman+Brothers+Inc.http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html


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standards out the window, or to encourage mortgage brokers to aggressively seek out new

markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on subprime

debt.

Second, many of the biggest flameouts in real estate have had nothing to do with subprime

lending. WCI Communities, builder of highly amenitized condos in Florida (no subprimepurchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of

now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or

minoritiesunless you count rich Venezuelans and Colombians as minorities. The multi-yearplague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of

the least subprime housing markets in the nation.

Third, lending money to poor people and minorities isn't inherently risky. There's plenty ofevidence that in fact it's not that risky at all. That's what we've learned from several decades of

micro lending programs, at home and abroad, with their very high repayment rates. And as The

New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes

and sell them to the working poor in subprime areas of New York's outer boroughs, has arepayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer

than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld

of Lehman Brothers, or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more

risky, since they have a lot more borrowing capacity. And, here, again, it's difficult to imaginehow Jimmy Carter could be responsible for the supremely poor decision-making seen in the

financial system. I await the Krauthammer column in which he points out the specific provision

of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverageratio of 33:1, that instructed Bear Stearns hedge-fund managers to blow up hundreds of millions

of their clients money, and that required its septuagenarian CEOto play bridgewhile his

company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required LehmanBrothers to borrow hundreds of billions of dollars in short-term debt in the capital markets and

then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find

it. Did AIG plunge into the credit-default swaps business with abandon because ACORNmembers picketed its offices? Please. How about the hundreds of billions of dollars of leveraged

loansloans banks committed to private equity firms that wanted to conduct leveraged buyouts

of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is

that Bill Clinton's fault?

Look. There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and

the subprime lenders were an integral part. But the dumb lending virus originated in Greenwich,Ct., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and

Washington. Investment banks created a demand for subprime loans because they saw it as a

new asset class that they could dominate. They made subprime loans for the same reason theymade other loans: They could get paid for making the loans, for turning them into securities, and

for trading themfrequently using borrowed capital.
http://www.irvinehousingblog.com/http://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.newsweek.com/related.aspx?subject=Richard+Fuldhttp://nymag.com/daily/intel/2007/11/the_journal_knows_what_jimmy_c.htmlhttp://nymag.com/daily/intel/2007/11/the_journal_knows_what_jimmy_c.htmlhttp://nymag.com/daily/intel/2007/11/the_journal_knows_what_jimmy_c.htmlhttp://www.irvinehousingblog.com/http://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.nytimes.com/2008/09/27/nyregion/27about.html?_r=1&scp=2&sq=%22brooklyn%22%20and%20%22foreclosures%22&st=cse&oref=sloginhttp://www.newsweek.com/related.aspx?subject=Richard+Fuldhttp://nymag.com/daily/intel/2007/11/the_journal_knows_what_jimmy_c.html


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At Monday's hearing, Republican Rep. John Mica of Florida gamely tried to pin Lehman's

demise on Fannie and Freddie. After comparing Lehman's small political contributions to Fannie

and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played inLehman's demise. Fuld's response: "de minimis."

Lending money to poor people doesn't make you poor. Lending money poorly to rich peopledoes.
http://thehill.com/leading-the-news/barbs-traded--at-hearing-on-lehmans-fall-2008-10-06_2.htmlhttp://thehill.com/leading-the-news/barbs-traded--at-hearing-on-lehmans-fall-2008-10-06_2.html

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