CRA, ACORN, Democrats, Obama and the Housing Market Crisis
Posted by: Blue Collar Muse in 2008 election season, Bailouts, Business, Congress, Economics, Entitlements, Individual Responsibility, Liberal, McCain Palin 2008, Obama Biden 2008, Taxes, The Economy, Unintended ConsequencesFollowing 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.
There will be more investigation into this matter in the days ahead. Stay tuned. And stay engaged. It may mean the difference between electing a man and a party that believes this sort of outrage is good for the American people and a man who believes in service to country over to service to self.
Blue Collar Muse
Popularity: 19% [?]
Tags: , ACORN, ACORN Housing, Banking Deregulation, Barack Obama, Bill Clinton, Burning Down the House Video, Community Reinvestment Act, Community Reivestment Act of 1977, CRA, CRA Compliance, Credit Scores, Democratic Activists, FDIC, Federal Reserve, Freddie Mac, HMDA, Housing and Mortgage Disclosure Act of 1976, Howard Husock, Jimmy Carter, John McCain, NCRC, Outcome Based Lending, Shakedown, The National Community Reinvestment Coalition
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October 2nd, 2008 at 7:58 pm
How about some figures to support your theory? What % of the bad paper in this current meltdown can be attributed directly to either CRA or ACORN.
Remember, this is a multi-trillion dollar problem, so in order to prove that CRA was the catalyst, you are going to need some pretty big figures.
If you can’t supply these figures, than your theory is…well…just a theory.
October 3rd, 2008 at 7:40 am
@ Chris -
You’re asking two separate questions.
The first is whether or not CRA is the basis for the growth of sub-prime loans and whether ACORN and other lenders (including banks) made a lot of sub-prime loans to create and expand the Housing Bubble which recently burst. That is a pretty well established connection and the evidence is presented in the post. You can accept that evidence or not. You can do more research or not. But that much seems clear.
The second question is whether the loans that are defaulting are the ones made by ACORN and other non-bank “lenders”. I did not state that as fact, merely as conjecture that would clear up my confusion as to why some sub-prime borrowers would insist their lender never disclosed the terms of their loan. That sounds decidedly non-bankish. I have no figures yet to back that premise up. Thus, it remains an interesting and unanswered question.
However, you’re making an unjustified leap if you are asserting that because I cannot prove the majority of defaulted on loans came from ACORN then the CRA and ACORN were not the driving force behind the Housing Bubble. CRA still mandated sub-prime loans even if ACORN never made a single one. ACORN could influence the making of these loans via complaints alone and never made a single loan.
But when you add in the fact that ACORN made billions of dollars off this deal and was on the hook for none of it, you see the potential for both driving the Bubble and doing it with really bad loans. Their motive was decidedly different that a bank’s would have been and that makes all the difference.
October 4th, 2008 at 11:37 am
I dug around a little bit and am not convinced that CRA is in anyway responsible for teh current crisis. First point to note is that the current crisis is rooted in the explosion of financial instruments (derivatives) starting around 2004. CRA was in effect for 25+ years before 2004 and a lot of activity linking cra to acorn etc happened in the mid 90s, well before the financial engineering started to explode in 2004.
US Banking System’s CDS exposure (notional) was less than a Trillion dollars until 2003, but in 2004 it went up to 1.5 Trillion, to 5.2 T in 2005, to 9 T in 2006, 14T in 2007 and 16 T in 2008. Now that is the root of the current crisis — this explosion in derivatives. And what did the banks do to get themselves into this crisis? As NYTimes today pointed out, it was the change in net capital rules that were enacted by SEC in 2004 (http://www.nytimes.com/2008/10/03/business/03sec.html?em) that enabled this crisis. The numbers I point out above (which are publicly available and published by the Fed; I got mine from a site I subscribe to: http://www.contraryinvestor.com/subscriber/moarchive/mo071508.htm) and show how derivatives exposure went crazy since this rule was enacted.
Next up are a couple of articles straight from the horse’s mouth, the Fed. Here is a speech from Mr. Bernanke himself, talking about the origin and need for the CRA and a chronicle of how it was changed to reflect changes in society/banking system. It is long but read it in full: http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm.
Conservatives are trying to blame CRA for losses at banks. I already showed the numbers (derivatives exposure) that caused this crisis, but here is a Fed study in 2000 that concluded that CRA loans were generally marginally profitable. Their conclusions are based on a survey of about 28% of banks (the rest didn’t respond to the survey) which collectively loaned close to 50% of the CRA loans. Nothing in this study suggests that CRA was responsible for the huge banking losses alleged by conservatives. Study is at http://www.clevelandfed.org/research/commentary/2000/1100.htm.
October 7th, 2008 at 4:00 am
There are many links to check in the housing mess in many federal agencies. Apparently owning a home was to cure a variety of ills from education to health to nutrition. The gov’t had $20,000,000 just to advise people about “predatory lenders” while it was pressuring banks to make risky loans. How smart is that, and did the people who needed the counseling ever get it before the mortgage? Also, many well meaning groups connected with churches receive housing money to help the poor left in the neighborhood after many had moved to new housing in the suburbs, helping to destroy their communities and networks. Then support agencies needed more money to help the low income people that were now scattered around the metropolitan areas.
October 8th, 2008 at 10:13 am
Just a quick response to Rational’s comment. Certainly the derivative securities explosion has fueled the current situation, but I think its wrong to describe that as the “root” of the problem. The root causes of any problem are the things put in place at the start, not the things that flow deriviatively from it (no pun intended). And lets face it, there would not be any problem if all the bad loans made as a result of CRA were performing loans. The people who are not paying their loans are the real “root” of the problem. That is not to say those are bad people. I’m sure the vast majority of them would prefer to be paying off their loans if they could. Thats just the way it is. So at the end of the day the root cause of the problem started well before the net capital rules changes in 2004.
October 8th, 2008 at 12:56 pm
@Bob -
Nicely put … thank you!
October 11th, 2008 at 5:49 am
Are you ignorant, Mr. Husock, dishonest– or both? CRA covers traditional banks. More than 80 percent of bad mortgage loans originated with lenders NOT covered by CRA. See Aaron Pressman’s Business Week article, 9.29. It’s easy to find, as are other articles explaining how CRA works, if one bothers to look. You don’t, do you?
There was also a Wall Street Journal article, maybe 18 months ago, that laid out the percentage of subprime and other ‘creative’ mortgage vehicles foisted off on unwary people whose credit ratings actually qualified them for standard loans. They, like poorer people in the city, were targets. Fraud began at the grassroots level of brokers… and multiplied itself all the way up this nasty foodchain.
But don’t lefacts stop you from floating a discredited, dishonest ideology.
October 13th, 2008 at 2:32 pm
I came here to read up on the facts about ACORN and CRA and the effect they have had on the housing bubble and financial crisis. It seems to me that much of you article is laden with personal hypothesis. While these concepts hold some logic, I think you are way off on the scale of things.
If ACORN has a $760mil agreement with the Bank of New York, what is the total lending pool of said bank? What is the percentage of loans done under ACORN and similar organizations?
You also hypothesize that all of the complaints were registered in order to gain financial power for these actions groups. Is it not also possible that there were legitimate complaints? Could community action groups help reduce these complaints by using directed PR in the communities themselves? By helping people outside of the banking and lending world understand their loan, could they not only reduce the complaints, but possibly the risk?
You assume that every deed done by these groups was done in a dark and sinister manner. I find it very hard to believe that is the case.
Logically, to me, it seems very possible that a hungry derivatives market, coupled with a housing boom, riskier and riskier lending as time went on. All secured by the fact that real estate is going up, so the risk was being priced out of the securities (and the loans). When housing prices dropped, the risk came back in to play, banks verged on insolvent and were forced to sell these securities at big discounts, taking major losses, driving down prices of similar securities, causing increased scrutiny over the value of these securities, etc.
Your hypothesis sounds feasible until the reader put the numbers in perspective.
October 14th, 2008 at 5:56 pm
AMEN! I am a retired mortgage banker, having worked over 20 years as a loan officer, underwriter and branch manager for a national mortgage company. When all of the sub-prime mess came to light, your points on CRA/HMDA were my first thoughts. You are absolutely right on all counts.
December 8th, 2008 at 9:07 pm
Carrie, you are overlooking a key aspect of this situation. The goal of the CRA was to increase housing for low-to-middle income (LMI) people. It was written in 1977, but amended and strengthened by the Clinton administration. Around the same time, to achieve the same goal, the Clinton administration and other CRA advocates pressured Fannie Mae and Freddie Mac to lower the criteria they used to purchase loans. (For reference see http://query.nytimes.com/gst/fullpage.html?res=950DEFD7173DF933A25750C0A962958260 and
http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&pagewanted=all .) This sent a signal to all lenders, not just CRA lenders, that they could relax their lending standards, and be confident that Fannie and Freddie would buy their loans.
Thus the CRA and CRA-associated actions affected all lenders, not just CRA lenders.
Then, with the standards lowered, it was like the wild west.
So asking whether CRA or non-CRA lenders were the main culprits is the wrong question. The proper question is why were the standards (originally established through decades of experience) relaxed? The answer is they were lowered in conjunction with the CRA, through pressure by CRA supporters, to achieve the same goals the CRA was attempting to achieve. As noble as the goal might have been, the efforts to achieve it ignored a fundamental rule of economic systems: When you try to give someone something for nothing, someone else will end up with nothing for something. Or, as Scotty would have said if he were an Economist, “You canna change the Laws of Economics, Jim!”
January 21st, 2009 at 1:37 pm
The Government should not have created Fannie and Freddie, should not have passed CRA, and should not be bailing anybody out. Capitalism is like Henry Fonda in the 1957
Hitchcock movie “The Wrong Man” being wrongly blamed for something it was not responsible for.
February 24th, 2009 at 7:07 am
CRA, Fannie Mae and Freddie Mac
The CRA by itself would never have produced the Financial Disaster of 2008, but when the risky CRA loans were guaranteed by Fannie Mae and Freddie Mac, the risky loans became “AAA” rated because they were backed by the federal government.
This linking of CRA, Fannie Mae and Freddie Mac occurred when the CRA was revised in 1995 under the Clinton Administration.
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2/23/09
Community Reinvestment Act
From Wikipedia, the free encyclopedia
In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied “AAA” rating.[29][22] The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.[30][edit] Legislative changes 1999.
———————————-
Please note the phrase “implied “AAA” rating”.
The reason the housing bubble lasted so long and the dangers not fully recognized was “rising home values”. I remember a phrase called “flipping”. Flipping meant buying a rundown home, throwing some paint on it and selling it for a very large profit. It was all possible because home values were rising and the Fannie and Freddie were guaranteeing the loans. Even if the people buying the home defaulted, another coat of paint was applied and sold again with a big profit.
Everyone was fat, dumb and happy, until the housing market was saturated with homes. When the defaulted homes could not be resold, the people turned to Fannie and Freddie to pay, but Fannie and Freddie did not have the money to pay.
Fannie and Freddie are now in default on there loan guarantees.
The root cause of the Financial Disaster of 2008 was the CRA, a piece of socialistic legislation passed by the democrats in 1977 in the Carter Administration and amended by democrats in 1995 in the Clinton Administration.
The idea for a solution being floated is to wipe out all the sub prime debt and start all over again. This means trillions of dollars lost by people who thought they were buying an investment that had a “AAA” rating. It also means violating the rule of “Moral Hazard”, because evil activity is being rewarded.
March 9th, 2009 at 5:15 pm
Heady stuff from all you “smart” people, but I believe the housing market collapsed the same way the stock market has………. our economy was booming and everything became overvalued by greed. Make it cost more than total assets (construction material and labor for real estate OR inventory and projected sales for business) and you artificially inflate what you can sell it for. As soon as huge blocks of jobs were sent off-shore there were no buyers. Yes, this is over-simplified, but the basic concept seems plausible to me. You can’t blame Democrats for corporate greed, folks. And, every American who bought the cruises and plasma tv and Hummer and yearly trip to DisneyWorld with their “equity loans” should own up to their part in the free-fall.
March 15th, 2009 at 1:30 am
“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”
This statement says it all. Only government tinkering in the free market system would undermine sound economic practices with artificial incentives. All of this housing mess would have been avoided if not for big brother’s lofty goals of social engineering. As much as they would like to create a Utopian society, they will always encounter unintended consequences. Because they can attempt to legislate certain behaviors, but they can’t legislate basic human instincts, like greed. (Which applies to EVERYBODY! -lenders, borrowers, wall street investors, community organizers and activists, politicians and their mothers…EVERYBODY!!)
March 15th, 2009 at 1:40 am
Oh, and greed is not limited to Wall Street investors. It also applies to lenders, borrowers, community organizers and activists, politicians and their mothers….EVERYBODY!!!!
March 31st, 2009 at 6:41 am
So Far Blue Collar Muse seems to have fingered the root cause that no politician seems honest enough to admit.
If I’m reading it correctly, it is the “Expanded Clinton 1995 CRA” not the original CRA that is really to blame.
If this Amended CRA was reversed even back to the original CRA, even now in 2009, then the fact that the triggering event was stopped could be the best way to restore confidence in the whole financial sector.
If this can be investigated further to prove it without a doubt, maybe a class
action lawsuit of some kind can be attempted. — I guess I’m hoping against
hope for a solution.
September 28th, 2009 at 8:35 am
Does anyone doubt that ACORN’s hands are clean in this fiasco? Also google NACA as they were deep into this fraud as well.
October 22nd, 2009 at 1:12 pm
ACORN is the red herring here. ACORN had management problems. If they were minding their own shop better, they’d still have public funding.
But, CRA is a lot bigger than ACORN. However, it is not nearly big enough to make a dent on the subprime crisis. There were no “CRA loans,” first off. There were loans that qualified for credit on CRA exams. By the way, those CRA exams were weak. Regulators weren’t doing jack.
CRA doesn’t tell bankers what loans to make. That’s in the original language of the bill. Regulators told the banks to have “CRA your way,” but that is because the law leaves up to banks to allocate credit as they prefer.
About underwriting – the truth is that CRA loans have outperformed their peers. Those loans were only made by banks & thrifts, remember?
It was the subprime lenders that weren’t covered by CRA.
CRA only only looked at the share of LMI loans on a small segment of the mortgage market – one in sixteen mortgage loans according to the University of Chicago.
Here’s some more explanation for you. This is just some basic facts, not a persuasive piece.
http://bit.ly/hDweT