It's The CRA, Stupid!
Meltdown: To their chagrin, the media elite moderating the latest GOP presidential debate got schooled in the real causes of the financial crisis by the line-up of candidates.
At Tuesday's forum, the Washington Post's Karen Tumulty asked Michele Bachmann if she thought Wall Street bankers have been sufficiently punished for "the damage they did to the economy." Only, the Minnesota congresswoman didn't take the bait, instead giving the misinformed Tumulty a much-needed education.
"If you look at the problem with the economic meltdown, you can trace it right back to the federal government," she said. "It was the federal government that pushed the subprime loans. It was the federal government that pushed the Community Reinvestment Act."
One of the worst rules on the books, the CRA fed the subprime bubble by requiring banks to underwrite a share of their loans in high-risk, unprofitable areas.
Newt Gingrich backed her up. Even media darling Ron Paul chimed in that the CRA led to "malinvestment" among banks. "But the federal government has also deregulated them," Tumulty protested.
Not in the way she thinks. Starting in the mid-1990s, in a major switch, regulators no longer enforced traditional lending rules. Prudent underwriting was deemed racist and banks were judged on how "flexible" they could be in qualifying "nontraditional"credit cases. The more they bent their old rules and the more lower-income minority borrowers they rubberstamped for loans, the better they did on their all-important CRA examinations.
In the run-up to the crisis, boosting minority home ownership became the goal of the U.S. government. And incredibly, lowering mortgage-underwriting standards to achieve that goal became government policy.
"We had lending standards lowered for the first time in American history," Bachmann duly noted. "The fault goes back to the federal government."
That seemed to quiet the debate moderators. But after the debate, the Washington Post swiftly posted a "fact check" piece on Bachmann that accused her of spreading canards. "The notion that the CRA — approved nearly 35 years ago in 1977 — had anything to do with a lending crisis that flowered in 2007 and 2008 has been roundly discredited," the Post sniffed, quoting CRA regulators who have a vested interest in protecting the act.
This red herring has been used before. What the Post "fact-checkers" don't tell readers is that the Clinton administration completely rewrote the CRA in 1995. Either they missed this critical fact or they knew about it, and deliberately misled readers.
A decade before the crisis, bank examiners for the first time enforced numerical lending goals in predominantly minority areas. And they mandated banks use "flexible underwriting standards" to meet them.
At the same time, HUD ordered Fannie Mae and Freddie Mac to "assist insured depository institutions (banks) to meet their obligations under the Community Reinvestment Act." The mortgage giants gobbled up the risky CRA loans originated by banks, creating a feeding frenzy.
A recent Fed study of CRA loans identified them as a type of subprime loan and noted that "CRA-related loans performed in a comparable manner to other subprime loans."
CRA actually egged on "too-big-to-fail" institutions by rewarding banks that met their CRA goals with merger approvals. More than 90% of the $4.5 trillion in post-1995 CRA loan "commitments" reported by the National Community Reinvestment Coalition were made by just four banks — Citibank, Bank of America, Wells Fargo and JPMorgan Chase — and banks they merged with.
"If banks failed to meet those (CRA) rules," Bachmann said, "then the federal government said we won't let you merge, we won't let you grow."
In an era of mergers, they either complied or died. And inner-city groups like Acorn made doubly sure they did, branding any bank giant that didn't make multibillion-dollar subprime pledges "racist."
This crisis traces directly back to the CRA. It's the common thread running through the banks, subprime lenders, Fannie and Freddie and even Wall Street securities firms who have taken the fall for the crisis.
Yet Democrat financial reforms, embodied in the Dodd-Frank Act, don't lay a glove on the chief culprit. In fact, the administration is scheming behind the scenes right now to expand the CRA's powers.