Get your money for nothin' and your houses for free!

Early on in this year's credit crunch, I started hearing about the Community Reinvestment Act and its effect on America's housing market. I started doing some research into this matter and man is my head spinning. I can't believe we let it go this long and we are now at the brink of the total collapse of the credit markets and NO ONE is asking to repeal the CRA. Let me start at the beginning and see if I can make this understandable. Much of the following information comes from a great paper by Vern McKinley who wrote about the CRA for the CATO Institute. McKinley has worked for The Fed, FDIC, Resolution Trust Corporation, and the Treasury Deparment. He seems like a qualified authority on the subject. I also found a lot of information on Wikipedia's entry titled Community Reinvestment Act.

Back in 1977, Sen. Proxmire (D-Wisc.) thought we needed to do away with the practice of "redlining" in granting loans. "Redlining" is the practice of denying loans or other services due strictly to someone living in a certain area of a city. On the surface, the idea of doing away with "redlining" is a good one. But the cautions we had from the beginning have come to fruition. The idea was to ensure that if a bank took deposits from a certain area of the city that they were giving back in the form of loans to people in that same community. McKinley states that, "Opponents of the bill feared that one day banks would be required to make unsound loans to meet their local credit quotas." Yes, ladies and gentlemen, there were in fact people aware of the dangers of this legislation waaaayyyy back in 1977! I suspect they could not have foreseen the levels to which the government was involved however. Let's move on.

So, ultimately the CRA (along with a battery of other legislation aimed at ending discrimination in home loans) was passed with a variety of government agencies tasked with enforcement. At this point, the banks were simply asked to provide paperwork to the various agencies detailing their level of community involvement. And conversely, the public was allowed to make comment on banks as well. This is similar to the way things are done in broadcasting. TV and radio stations are required to file certain paperwork and hold public hearings to show their community service to the FCC. The agencies would give the various financial institutions a rating based on the information they had as a result of the various filings. Enforcement would come from the agencies in the form of denying approval for mergers, acquisitions, etc. This went on for many years with little or no real enforcement, however.

So Sen. Proxmire wasn't satisfied. In 1989, at a public hearing, Sen. Proxmire said the inner-city neighborhoods were "starving for credit." As a result of these hearings, the agencies overseeing the CRA filed a joint policy statement strengthening enforcement of the CRA. After the requisite round of new legislation, the regulating agencies were now required to write an evaluation of the banks' CRA compliance. It wasn't enough to simply give them a rating, now we have to have a written evaluation. With all this attention on the CRA, the Fed decided it was time to flex their muscle. They denied their first bank acquisition! (Awwww, who's a good little regulatory agency, you're almost all grown up now!) Once the genie's been let out of the bottle, it's going to be hard to get that sucker back in. Now the federal government knows they can dictate the behavior of banks. (Just in case they were unclear on that issue)

In 1992, the Boston Fed undertook a study to find out what was causing the disparity in lending rates, with respect to race. It turns out that there is NO overt discrimination in lending. That, in fact a whopping 97% of minorities with the same credit as whites got the same loans. Despite this, there was still a great disparity in the number of loans. So OBVIOUSLY, the discrimination here is far more subtle than we realized. (It would have nothing to do with the disparity in incomes, would it? Hmmm, maybe we should address that issue.) So under the Clinton administration, they decided that there would be all new standards for complying with the CRA and enforcement would be much stricter. Enter Janet Reno and the Justice Department. Now, banks weren't just worried about satisfying the various regulatory agencies. Now they had to worry about being PROSECUTED!! Apparently, Janet Reno thinks that not giving loans to people who don't qualify is ILLEGAL! Her exact quote is this, "we will tackle lending discrimination wherever and in whatever form it appears. No loan is exempt, no bank is immune. For those who thumb their nose at us, I promise vigorous enforcement.” That my friends is a threat!

She backed up her threats by suing the banks in federal court and forcing them to comply with huge financial packages aimed at revitalising their local neighborhoods. The Clinton administration then started making proposals that were more quota based. So that no matter what conditions existed in the local community, they had to have a certain number of CRA loans to pass the Clinton Administration's strict standards. This was a sort of financial affirmative action. But don't take my words for it. Listen to HUD Secretary Andrew Cuomo talk about this affirmative action in a video discovered by Naked Emperor News. (At the end of the comments by Cuomo, there's a clip from Hannity's show giving a much more succinct history of the CRA.) What I find interesting in this video is Cuomo actually saying that the discrimination is so subtle, it's institutionalized.

So now you have the Clinton administration demonizing the banking industry and threatening them if they don't make all these bad loans. Not to mention the various community organizations (can you say ACORN?) that have started to sue the banks under the CRA (remember the part about the public being able to comment on the banks?). What are the banks supposed to do? So they start making all these bad loans but still have to find a way to make money. That's where Freddie Mac and Fannie Mae come in.

Freddie and Fannie are designed to buy mortgages, insure them, and pay the banks the value of the mortgage. They would then bundle these mortgages into morgage-backed securities and investors would invest in them. Freddie and Fannie would keep a fee for insuring them and everyone was happy. The problem was that they soon realized they were being saddled with too much bad debt. They couldn't keep up with the flow of these CRA loans because of the restrictions on them. So the restrictions were lifted and in 2000 Fannie Mae expected that 50% of their business was going to be CRA loans! 50%!! (I think we've found the source of the problem!) Now, mind you, not all of these loans end up in default. Just a larger percentage.

With home loans going out the door at a record pace, housing becomes in shorter supply, which artificially drives up the price. As these CRA loans started to default, the prices of the houses started to come down, and that reduced the incentive for people to try and work out a repayment schedule. The house they bought wasn't worth what they paid so how could they refinance? And the rest is history.

The best part is now that the banks have done what they were threatened to do, the phrase of the day is "predatory lending." Congress is trying to blame the banks for making all these bad loans. Well, during the Bush years (2000-present), Republicans in Congress have tried to reform the rules and put the power of lending back into the hands of the banks. But when the Republicans tried to INCREASE regulations on Fannie and Freddie, they were lambasted by House Democrats. Take a listen from this video posted by Naked Emporer News.

I briefly mentioned ACORN earlier. Their contribution to this mess shouldn't be overlooked. ACORN was suing the banks and lobbying Congress to get more of these loans in the hands of people who really couldn't afford them. One of the catch phrases you might hear in the videos is "affordable housing." Not sure if anyone is aware of this, but housing is only affordable if you can pay for it. Just being able to get a loan and move in is not the end of the story. Well one of ACORN's lawyers has become very famous recently. He's been on all the network news shows and made several appearances on talk shows and has been traveling around the country talking about his plans for the economy. YUP, you got it! Barack Obama is one of the lawyers who helped ACORN sue the banks. And now he's in charge of fixing this mess. Would I be too cynical to say that I don't think repealing the CRA is high on his list of "to do's?"