"Liberal" economists are overjoyed by the bursting of the housing bubble, for it provides them with what they believe is another "market failure" story. "Most analysts see the sub-prime crisis as a market failure," Robert Gordon gleefully declared in the April 7 online edition of The American Prospect magazine, edited by Robert Kuttner.

Gordon does not define what an "analyst" is, and does not cite any survey to support his claim. One suspects that his opinion is based on an informal survey of his like-minded, left-wing friends.

Gordon is a defender of the federal government's 1977 Community Reinvestment Act (CRA) under which the Fed and other financial regulators have pressured/extorted banks into making more loans to less-than-creditworthy borrowers than they would normally be willing to risk. As such, Gordon believes in the following propositions:

1. runaway greed ("market failure") on the part of lenders is the cause of the subprime crisis;

2. these same greedy lenders routinely ignore billions of dollars in potential profits in lower-income communities because of their systemic racism, stupidity, or both - hence the need for the CRA; and

3. no government agency, especially not the Fed, had anything to do with either the creation or bursting of the housing market bubble and the subprime crisis.

(If you think I'm establishing a straw-man argument, read Gordon's article for yourself.)

The first two propositions flatly contradict each other, whereas the third is unequivocally false. Fed policy - which is not even mentioned by Gordon in an article that is ostensibly about the cause of the subprime crisis - is the cause of the boom-and-bust cycle that has caused the housing bubble and its bursting. Not "market failure" but Fed policy.

Gordon is incensed that a few "analysts," including myself and Professor Stan Liebowitz of the University of Dallas, have argued that the bursting of the housing bubble has caused the chickens to come home to roost, so to speak, after thirty years of government policy pressuring banks to make tens of billions of dollars in bad loans to people with low (or nonexistent) credit ratings. Neither Liebowitz nor I have argued that every last bad loan out there is a CRA loan, but Gordon implies that we do in a rather feeble attempt to construct a straw-man argument.

Gordon cites Fed bureaucrat Janet Yellen as the source of a "killer statistic" that absolves the government of all guilt: "Independent mortgage companies" which are not covered by the CRA made many more "high-priced loans" to borrowers with bad credit than did CRA-regulated banks, she says. Well, so what? Even if Yellen is correct, that does not mean that CRA-regulated loans have not caused tens of billions of dollars in defaults.

Moreover, Yellen and Gordon don't seem to understand what an "independent mortgage company" is. Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers - including "subprime" borrowers - with banks, including CRA-regulated banks. Some killer statistic.

By ignoring the role of the Fed in creating the whole housing-market mess, Gordon's pronouncement that it is entirely a result of "market failure" is laughable on its face. He also flatly denies that CRA lending has had anything to do with why so many uncreditworthy borrowers have defaulted now that the Fed-generated housing bubble has burst. This, too, is an untenable position.

When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous "community groups" that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations - merging, opening up a new branch, getting into a new line of business - it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded "community groups" like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other "community groups" by giving them millions of dollars as well as promising to make even more dubious loans.

In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company ("Freddie Mac") pioneered the "securitization" of bundles of these high-risk loans so that they could be sold on secondary markets. Such "securitization" exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges" (published online by the Fed),

Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals. (p. 3)

In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act loosened up the regulatory barriers to bank mergers. Consequently, said Bernanke, "As public scrutiny of bank merger and acquisition activity escalated, advocacy groups [like ACORN] increasingly used the public comment process to protest bank applications on CRA grounds." In other words, there was a burst of additional legalized extortion perpetrated by the Fed and its pet "activist organizations" beginning in the mid-1990s. As a result, says Bernanke, "banks began to devote more resources to their CRA programs." What an understatement.

Also in 1995, the US Treasury Department created the multibillion-dollar "Community Development Financial Institutions" fund to "provide banks with access [i.e., taxpayers' dollars] to new opportunities to finance community economic development" as "encouraged" by the CRA, said the Fed chairman.

The government also "streamlined" the regulatory requirements for CRA loans in 1995, allowing - and indeed pressuring - banks to make such loans without the benefit of many traditional credit-worthiness criteria, such as the size of the mortgage payment relative to income, savings history, and even income verification! Instead, the Fed told banks that participation in a credit-counseling program, many of which are federally funded, could be used as "proof" of a low-income applicant's ability to make his mortgage payments. In other words, federal bank regulators required banks to make bad loans based on nonexistent credit standards.

In his April 26 New York Post article on the CRA entitled "The Real Scandal," Professor Liebowitz explains how the government's Fannie Mae Foundation singled out one bank in particular as the role model for all other banks in America in terms of its commitment to CRA lending: Countrywide, the nation's largest mortgage lender, had committed to $600 billion in low-income or "subprime" loans as of 2003. Today, Countrywide is essentially bankrupted and has been merged with Bank of America.

The myth that the CRA would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt. "[The] CRA increased lending and homeownership in poor communities without undermining banks' profitability," Robert Gordon proudly proclaims. But now that the bubble has burst, all those unqualified borrowers - whom the government calls "subprime," as though their credit ratings are only a tiny, tiny smidgen below "prime" borrowers with the very best credit ratings - are defaulting on their mortgages in droves.

Bank profitability has been extremely "undermined," to put it mildly. The bursting of the Fed-generated housing bubble is the reason why the CRA scam was not exposed until now, despite having been in operation for some thirty years.

CRA, ACORN, Democrats, Obama and the Housing Market Crisis by Blue Collar Muse | September 27, 2008 at 2:46 PM
in
* ACORN
* CRA
* Housing Market Crisis

http://www.thenextright.com/blue-collar-muse/cra-acorn-democrats-obama-and-the-housing-market-crisis

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.