Apparently undeterred by last week's marijuana misadventure, DaveScot just decided to add another topic to the growing list of things he has absolutely no understanding of but writes about anyway. In today's installment, he joins the growing list of right-wingers who have decided to blame the current subprime mortgage crisis on the Democrats who passed the Community Reinvestment Act of 1975. Predictably enough, it doesn't take much effort or research to figure out that this claim has very, very little resemblance to the truth.
The basis behind the claim that the CRA caused the subprime crisis is relatively simple. The Community Reinvestment Act requires banks to make loans in the low- and moderate-income areas that they serve. Everyone knows that low- and moderate-income families are going to be bad risks, so this means that the banks are being forced to make subprime loans. Therefore, the CRA is the cause of the current problem.
The thing is, very little of this is true.
Let's start with the Community Reinvestment Act and the reasons that it was passed. For decades prior to the law's passage, banks engaged in a process known as redlining, where they declined to write loans in certain geographic areas - typically low-income areas with large minority populations. They did not decline to write bad loans in these areas; they refused to write any loans at all. For example, in 1975 the largest bank in the Bronx wrote a grand total of 32 loans in the entire borough (Rooney 1995, p.50). No loans means no new businesses, no new housing, no opportunity.
The CRA simply requires that any federally-insured bank that accepts deposits from people living in a certain area also write loans in that area. That's all. It does not require a fixed number or percentage of loans to be made, and it does not require that the banks relax their lending criteria in CRA areas. In fact, the law specifies that federal agencies evaluating the covered banks:
assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution;
Simply put, the claim that the CRA forces banks to make subprime loans is absolute nonsense. The law contains a clause that protects banks from having to take on unsafe levels of risk. It was also passed in 1977, more than a quarter-century before the current crisis began to unfold. But what about the rest of the claim. Isn't there some truth to the claim that anyone lending money in a poor area is going to have to be willing to lend to subprime borrowers?
Apparently not. According to the President of the Federal Reserve Bank of San Francisco, over 80% of CRA loans made in 2006 by banks covered by the act are prime loans. Simply put, being poor does not mean that you are irresponsible, or that you have bad credit. It just means that you don't have a high income or a lot of money. There is no shortage of responsible poor people out there, who have good enough credit and enough savings to qualify for a traditional, prime home loan.
It's not the banks covered by CRA that are making most of the bad loans. They account for about a quarter of all subprime loans. Bank subsidiaries that are not necessarily subject to CRA account for about another quarter. The rest - representing slightly more than half of all subprime loans - were made by the mortgage companies.
To sum up, the Community Reinvestment Act was signed more than 25 years before the current subprime crisis erupted. Banks, which are the only financial institutions covered by the CRA, have made a little less than a quarter of the riskier loans. These riskier loans only account for 20% of the total number of CRA-eligible loans that they have been made. The majority of the subprime loans were made by mortgage companies that do not have to comply with the CRA, and 40% of the mortgage loans initiated in the mortgage company sector in 2006 were subprime. The claim that the CRA caused the subprime crisis is nothing short of asinine.
To sum up the summary, DaveScot is wrong. Again.
Rooney, J. 1995. Organizing the South Bronx. SUNY Press. ISBN 0791422100, 9780791422106.