Federal Involvement: Are Good Intentions Good Enough?

Excerpt from
Richard Bernstein’s DUPED AMERICA
Chapter 6

The history of the crisis started with the Community Reinvestment Act (CRA), signed into law by Democrat President Jimmy Carter in 1977. The law was designed to foster homeownership in low-income communities by pushing banks to aggressively lend to low and moderate income people. At first, it was easy to comply with the CRA. Banks merely had to demonstrate that they did not discriminate in making loans in poor and black neighborhoods. When Democrat Bill Clinton became President in 1992, he broadened the Community Reinvestment Act in ways Congress had never intended. In 1995, rather than submit legislation that the Republican-led Congress was certain to reject, Clinton bypassed Congress entirely, ordering the Treasury Department to rewrite the CRA rules.

As a result, banks were forced to fulfill loan “quotas” in low income neighborhoods.

That wasn’t the only problem. CRA also allowed community activist groups such as ACORN (Association of Community Organizations for Reform Now), for whom Barack Obama once worked in Chicago, and NACA (Neighborhood Assistance Corporation of America) to file complaints that could affect a bank’s CRA rating. Failure to comply with CRA or a bad rating meant a bank might not be allowed to expand lending, add new branches or merge with other companies. Banks with poor CRA ratings were also hit with stiff fines.

This rewrite of CRA gave activist groups like ACORN and NACA unprecedented power. Protests often held in bank lobbies or in front of the homes of bank officials, coupled with threats of litigation, allowed these groups to extort huge sums of money from financial institutions. In response, financial institutions began allocating more funds to low-income, high risk borrowers.

Loans started being funded on the basis of race and often little else. CRA became an excuse for lowering credit standards. Many Democrats have claimed that banks subject to the CRA represented few of the mortgages that led to our current problems. Not true. Nearly 4 in 10 subprime loans made between 2004 and 2007 were funded by CRA-covered banks such as Washington Mutual and Indy Mac. Many other subprime lenders not covered by the Act were, in effect, beholden to CRA mandates because they were owned by banks that were subject to it.

Since CRA only covered banks, the Clinton administration created a separate department at Housing and Urban Development to police “fair lending” policies at other institutions such as Countrywide and lending behemoths, Fannie Mae and Freddie Mac.

The result? Countrywide made more loans to minorities than any other lender, and not surprisingly, was one of the first lenders overwhelmed by loan defaults.

As groups like ACORN ran their intimidation campaigns against local banks, they eventually hit a roadblock. Banks told them they could afford to reduce their credit standards by only a little – since Fannie Mae and Freddie Mac refused to buy up these risky loans for resale on the secondary market. ACORN realized that unless Fannie and Freddie were willing to relax their credit standards as well, local banks wouldn’t make enough loans to individuals with bad credit histories or with very little money for a down payment. 11 Democrats such as Barney Frank (D-MA), Ted Kennedy (D-MA) and Maxine Waters (D-CA) allied with the Clinton administration to broaden the acceptability of these risky mortgage loans. When the Republicans attempted to restore fiscal sanity by paring back the CRA, they were stymied by Democrats — and by ACORN.

In 1995, an unrestrained Clinton administration announced a comprehensive strategy to push homeownership in America to new heights – regardless of the compromise in credit standards that this would require. Fannie and Freddie were given massive subprime lending quotas, which would increase to about half of their total business by the end of the decade.

Then came the single most catastrophic decision leading to the housing crisis: Clinton legalized the securitization of these mortgages, which allowed Fannie and Freddie to finance everything by buying loans from banks, then repackaging and securitizing them for resale on the open market.

Thus began the meltdown. In 1997, Bear Stearns handled the first securitization of CRA loans — $385 million worth — all guaranteed by Freddie Mac. Subsequently, a subprime market that had been a relatively modest part of the mortgage business with $35 billion in loans in 1994 soared to $1 trillion by 2008.

Regrettably, this massive bundling of subprime mortgages wound up poisoning the entire mortgage industry.

Fannie and Freddie used their “affordable housing mission” to avoid restrictions on their accumulation of mortgage portfolios. They argued that if they were constrained, they wouldn’t be able to adequately subsidize affordable housing. As a result, by 1997, Fannie was offering mortgages with a down payment of only 3 percent. By 2001, it was purchasing mortgages with “no down payment at all.”

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