The Community Reinvestment Act, Evaluated
There have been many claims and counterclaims concerning the Community Reinvestment Act (and government assistance to low income borrowers in general) since October 2008. This article will run down some common defenses of the CRA, give some history of the act and related government activities, then show the real performance of loans stemming from it and its impact on bank profitability. In order to address this, the first thing to settle is the relationship between the CRA and Fannie Mae/Freddie Mac. According to Edward J. Pinto, Fannie Mae's chief credit officer from 1987 to 1989, "approximately 50% of CRA originations since the mid-1990s were acquired by Fannie Mae and Freddie (the GSEs) to help them meet HUD-mandated affordable housing (AH) goals. CRA created the supply and the GSEs created the demand" [Pinto 2009b]. Fannie/Freddie statistics are relevant to any discussion of the Community Reinvestment Act, and Pinto uses Freddie/Fannie statistics to create a proxy for CRA loan performance (below)
Defenses of the Community Reinvestment Act
We need to be clear about one thing at the beginning; blaming a government program aimed at minorities is not the same as "blaming minorities". Unless you wish to make a blanket claim that no program aimed at helping minorities can possibly have negative consequences, you have to leave that door open. Any government activity, like any other human activity, can go wrong.
One defense of the CRA is that the loans made under it were prime loans and not subprime loans. However, Pinto writes that "approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores-characteristics that indicated high credit risk" [Pinto 2009a]. Pinto goes on to state that "an estimated 10% of CRA lending ended up being classified as subprime ... the reason that these were not high-rate loans was that the big banks and the GSEs were subsidizing the rates, as recent events have painfully demonstrated" [Pinto 2009b]. More on CRA and large institution subsidies below. Furthermore,
a FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008....An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto [Wallison 2009].
One cause of this misreporting was that "Fannie and Freddie consider subprime a certain classification: If it's a lender that traditionally does subprime, or has a division that does subprime, they'd count it as that" and if not, not. Pinto states that the result of this was "through the end of 2003, self-denominated subprime, impaired credit, as a percentage of loans, didn't change" [Cavanaugh 2010]. The danger in this is that "default risk on an original loan increases geometrically the closer you get to no money down. A default propensity of 1 on a property bought with 80 percent financing increases to 2 at 90 percent financing, 4 at 95 percent, and 8 at 100 percent" [Cavanaugh 2010].
Another defense of the CRA is that studies have absolved it of being seriously damaging, giving as an example the "evaluation of CRA loans by North Carolina's Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall. What they don't mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act" [Husock 2008]. When evaluating a study that claims CRA related loans are safe, the first question is "when were the loans studied?":
"The bulk of these loans," notes a Federal Reserve economist, "have been made during a period in which we have not experienced an economic downturn." The Neighborhood Assistance Corporation of America's own success stories make you wonder how much CRA-related carnage will result when the economy cools. [Husock 2000]
Rising home prices during the bubble resulted in lower default rates, as borrowers would rather sell for a profit than lose a property they couldn't afford in foreclosure. The test of a loan should also include how it performs in a downturn, and not just during a bubble. In addition, North Carolina's Center for Community Capital is not one of the largest banks (the same applies to the 3,900 homes built under the Nehemiah housing program [Dwyer 2008]), and the differences between smaller entities and the largest banks will be addressed below.
Another trick in defending Fannie/Freddie/CRA is to limit what types of involvement count. An example of this comes from a study by staff members of the Federal Reserve Bank of New York
...Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie....While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion....Fannie and Freddie purchased billions of dollars of subprime-backed securities for their own investment portfolios and got hit just like every other investor. [Pressman 2008]
Note the article admits Fannie and Freddie bought the securities, which is the claim made below. Fannie and Freddie were not 'involved' by 'backing' loans or 'originating' loans (or "getting loans by using mind control rays on bank executives", for that matter), but you cannot go from there and extend the claim to say they were not involved at all, and you cannot try to disguise their involvement by painting them as innocent victims of evil capitalists.
Are government affordable housing initiatives absolved from blame because primary fault lies with the middle class suburbs? No, according to the anarcho-capitalist radicals at the Boston Federal Reserve, which published a study in 2008 concluding that "in the current housing crisis foreclosures are highly concentrated in [urban] minority neighborhoods." Furthermore, "the study found that borrowers in these areas were seven times more likely to be foreclosed on than the general population. Analysis by the Pew Research Center and another by The New York Times found that mortgage holders in these areas had foreclosure rates four times higher than the national average" [Schweizer 2009].
Other defenses of the CRA (and related initiatives) have the left reversing course from their earlier praise. Take the argument that the CRA was not large enough to do significant damage. Aside from the fact that "from 1992 to 2008, announced CRA commitments totaled $6 trillion." [Pinto 2009a], it ignores earlier praise, like from the Bookings Institute in 2004, which bragged that "over the last decade, Treasury studies have shown that CRA helped to spur $1 trillion in home mortgage, small business, and community development lending to low- and moderate-income communities" [Carney 2009]. Either the CRA (with help from related government activities) was large enough to have an impact, or it was not. It cannot be large enough to do significant good, but too small to possibly do any harm. If the impact of the CRA is so small, why do banks establish separate CRA departments, why has a CRA consultant industry come into existence, and why do financial services firms offer prepackaged portfolios of CRA loans to allow institutions to quickly solve issues with their CRA ratings? [Husock 2000]
It is also argued that since the CRA was passed in 1977, it cannot be the cause of any later damage. However, the CRA was not passed and then forgotten:
During the seventies and eighties, CRA enforcement was perfunctory. 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. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. 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. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods? [Husock 2000]
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." [Husock 2000]
As an aside, the law that prohibited banks from owning other financial institutions (part of the Glass-Steagall Act) was repealed in 1999. Defenders of government affordable housing initiatives point to this as a cause of the housing crash. If a Clinton era "deregulation" did not happen too far in the past to be a contributor to the crash, then neither did Clinton era changes to affordable housing initiatives. The charge against Glass-Steagall repeal is easily refuted: not only had multiple Glass-Steagall exemptions been granted before the repeal and this separation of commercial and investment banks not been required in Europe (which is not exactly a hotbed of libertarianism), repeal allowed diversification, which can strengthen an institution during a crisis. Significantly, "the Rutgers economist Eugene Nelson White, for example, has found that national banks with security affiliates-the sort of institutions Glass-Steagall was designed to prevent-were much less likely to fail than banks without affiliates" [Mangu-Ward 2009].
Regarding later changes to government housing policy, the anti-government extremists at the Federal Reserve Bank of San Francisco defend the act with the same point I made above:
Three changes in the late 1980s and the 1990s may help explain a delay in the CRA's effectiveness. First, in 1989, the CRA was amended to require public access to CRA examination evaluations and performance ratings. This likely helped motivate banks to comply with the CRA in order to avoid adverse publicity. Second, and perhaps more importantly, in 1995, the CRA evaluation process increased the emphasis on actual lending and decreased the emphasis on banks' documentation of their efforts to assess community needs [FRBSF 2004].
If later changes were claimed to be the reason the act did not do as much good at first, those later changes would also explain why it did not do as much harm until later. You can see the impact of these changes in CRA lending commitments: "from 1977 to 1991, $9 billion in local CRA lending commitments had been announced...growing to $6 trillion [since 1993]" [Pinto 2009c]. To further address the "it was passed way back in 1977" defense, other expansions of the government's affordable housing initiatives include:
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In 1989, President George H.W. Bush signed into law the Financial Institutions Reform Recovery and Enforcement Act that included provisions to increase public oversight of the way the CRA was enforced. Regulators were required to issue public, written performance evaluations of banks, including a system that rated bank compliance as Outstanding, Satisfactory, Needs To Improve or Substantial Non-Compliance. This public scrutiny began to push banks to make more loans to low-income borrowers, a process that often involved putting in place relaxed lending standards. [Carney 2009]
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Beginning in 1992, Fannie and Freddie received increasing pressure by Congress and the Department of Housing and Urban Development ("HUD") to increase their "affordable lending" operations. For 1996, HUD instructed Fannie and Freddie that 42% of their mortgage financing had to go to borrowers with income below the median in their area, a target that increased to 50% in 2000 and 52% in 2005. HUD also increased Fannie and Freddie's obligations with respect to "special affordable" loans, those borrowers with income less than 60% of their area's median income. In 1996, Fannie and Freddie were expected to make 12% of their loans as "special affordable," a figure that rose to 20% in 2000, 22% in 2005, and a goal of 28% by 2008. To meet these ambitious targets, Fannie and Freddie encouraged lenders to dip further into the risk pool of borrowers and to take on loans with increasingly risky terms, such as ARMs, interest-only, and high-LTV loans. [Zywicki 2009]
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which opened the door for interstate banking and encouraged a new wave of banking M&A, made the ratings under the CRA a test for determining whether acquisitions would be allowed. That same year, the Fed refused to allow a Hartford, Connecticut bank to acquire a New Hampshire bank on fair housing and CRA grounds. [Carney 2009]
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In 1995, regulators began to enforce the CRA in a very different way than they had in the past. Instead of focusing on the process of bank lending, the new regulations were focused on objective performance evaluations. At the same time, regulators began disclosing more information about particular banks. As one commenter put it at the time, "We have learned from 30 years of CRA policy that what is measured gets done." [Carney 2009]
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In November 2000, then-HUD Secretary Andrew Cuomo announced that Fannie Mae and Freddie Mac were committed to purchasing $2 trillion of "affordable housing" mortgages. This greatly increased the willingness of banks to make the kind of mortgages being promoted by the regulators. As the push factor of the CRA was increasing, the pull factor of Fannie-driven securitization was also increasing. [Carney 2009]
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In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their "investment" and "service"-two long-standing categories of assessment under the CRA. [Carney 2009] More on that below; this is not the 'deregulation' it may appear to be at first.
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...federal regulators implemented several important changes in September 2005...The new rules also expanded the definition and geographic scope of CRA-eligible community development by creating two new categories of CRA-eligible activities and/or geographies. The first new category includes activities that either revitalize or stabilize state and federally designated disaster areas during the official disaster period. The second includes activities that either revitalize or stabilize middle-income distressed or underserved areas that are located in rural areas. For the CRA, rural areas are those census tracts located outside the boundaries of the nation's metropolitan statistical areas, or MSAs. By adding these distressed or underserved rural areas to the rural census tracts already designated as low- or moderate-income, federal regulators expect to increase the number of rural areas in which activities are eligible for community development consideration under the CRA.[Grover 2007]
Another factor in escalating government involvement in housing prior to the crash was Fannie's and Freddie's reactions to their own scandals: "It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises" [Zywicki 2009]. Freddie Mac protected itself from accountability with political donations that resulted in a $3.8 million fine to the Federal Election Commission, having been accused of "illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $1.7 million for federal candidates" which "benefited members of the House Financial Services Committee, a panel whose decisions can affect Freddie Mac" [Poor 2008]. Finally, if Proposition 13 (passed in 1978) can be claimed (falsely, in my opinion) by the left as the cause of all of California's budget woes, they cannot then turn around and claim 1977 is too far in the past for the CRA to have harmful impact today, particularly if they also believe it has helpful impact today.
Overall Performance Statistics
There have been some wide ranging (as opposed to single-institution) studies of CRA loan performance and profitability. One of the earliest I found referenced a study of the period 1991-1996 which revealed that "the financial soundness of CRA covered institutions decreases the better they conform to the CRA. Gunther compares certain institutions' CRA ratings to their CAMELS rating-a formula used by bank regulators to assign safety and soundness ratings that takes into account capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risks. He found that the better a lender was rated by CRA standards, the worse was its CAMELS rating" [Minton 2008]. Later statistics from around the year 2000 include:
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As early as 1999, the Federal Reserve Board found that only 29 percent of loans in bank lending programs established especially for CRA compliance purposes could be classified as profitable. [Husock 2008]
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Delinquency rates for CRA loans are twice that for non-CRA loans in the market for home purchase and refinance (1.57 percent v. 0.79 percent). [Silvia 2000]
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In the home purchase and refinance market, unprofitable lending is three times greater with CRA loans as compared to other loans. Only 6 percent of non-CRA lending in this category was non-profitable, compared to 18 percent for CRA lending. [Silvia 2000]
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Delinquency rates for CRA loans in the home purchase and refinance market are twice that for non-CRA loans. [Silvia 2000]
More recent data, limited to specific institutions, tells a similar tale. All but one of the examples below involves smaller institutions, which perform differently than large ones under the CRA, but they do counter the likes of the North Carolina Center for Community Capital example (note the prime/subprime designation games, first mentioned above, played by Third Federal):
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Third Federal Savings and Loan's (Cleveland) has a 35% delinquency rate on its "Home Today" loans versus a rate of 2% on its non-Home Today portfolio. Home Today is Third Federal's CRA lending program, which targeted low- and moderate-income home buyers who prior to March 27, 2009 (the date it suspended the program's innovative and flexible underwriting requirements due to poor performance) would not otherwise qualify for its loan products, generally because of low credit scores and high LTVs. ...it did not classify its Home Today loans as subprime lending, however, it noted that the credit profiles of Home Today borrowers "might be described as sub-prime" [Pinto 2009b]
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Chicago's Shorebank-the nation's first community development bank, with largely CRA-related loans on its books-has a 19 percent delinquency and nonaccrual rate for its portfolio of first-mortgage loans for single-family residences. [Pinto 2009a]
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Bank of America said in 3Q 2008 that while its CRA loans constituted 7 percent of its owned residential-mortgage portfolio, they represented 29 percent of that portfolio's net losses. [Pinto 2009a] The annualized loss rate from the CRA book was 1.26 percent and represented 29 percent of the residential mortgage net losses. [Husock 2008]
Some might complain that the final bullet point leaves out 71% of Bank of America's losses. Reverse the situation and pretend a government mandate resulted in 7% of Bank of America's residential portfolio, which was 29% of its hypothetical profits. Would the same people ignore that or make that a huge point in favor of the mandate?
Edward Pinto calculates a proxy statistic for nationwide CRA performance, based on the fact that 50% of CRA originations since the mid 1990s were acquired by Fannie and Freddie in order to meet HUD mandated affordable housing goals. Fannie/Freddie had a total of $1.5 trillion in high risk loans (85% of those being affordable housing loans), and those loans had a delinquency rate of 15.5% in June 2009. "This is about 6.5 times the 2.4% delinquency rate on the GSEs' traditionally underwritten loans" [Pinto 2009b].
Large vs. Smaller Institutions
The Community Reinvestment Act impacted larger and smaller institutions differently. According to George Benston of Emory University, larger banks' loans to low to moderate income borrowers are operated as a strategic loss to get a satisfactory CRA rating for regulatory approval for mergers and acquisitions. This means larger banks charge extremely low rates that smaller banks cannot match [Minton 2008]. An executive with a major national financial-services firm states that "the problem with CRA,is that banks will simply throw money at things because they want that CRA rating." [Husock 2000] This opened the door for "community groups" to extort funding for themselves as well:
...banks, engaged in a frenzy of mergers and acquisitions, soon learned that outstanding CRA ratings were the coin of the realm for obtaining regulators' permission for such deals. Further, nonprofit advocacy groups-including the now famous Acorn and the Neighborhood Assistance Corporation of America (NACA)-demanded, successfully, that banks seeking regulatory approvals commit large pools of mortgage money to them, effectively outsourcing the underwriting function to groups that viewed such loans as a matter of social justice rather than due diligence. "Our job is to push the envelope," Bruce Marks, founder and head of NACA, told me when I visited his Boston office in 2000. He made clear that he would use his delegated lending authority to make loans to households with limited savings, significant debt, and poor credit histories. [Husock 2008]
...the examination process to determine the level at which a bank is meeting its CRA obligations can sometimes take several months. This has become a major point of leverage-and source of funding-for "community" activist groups. Lending institutions, rather than face the increased expense of a slowed deposit facility application due to a CRA challenge, have committed over $7 billion to such groups and $23 billion to community development lending projects since 1977. Some companies seek to mitigate the threat by funding activist groups' projects, instead of reforming their overall approach to community reinvestment, according to Jonathan Macey of Yale Law School. Groups like the Association of Community Organizations for Reform Now (ACORN), aware that even small delays in approval can result in substantial losses of money for financial institutions, have been exploiting such a strategy for years. For example, Chase Manhattan and J.P. Morgan donated hundred of thousands of dollars to ACORN around the time that they applied for permission to merge. [Minton 2008]
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." [Husock 2000]
[Neighborhood Assistance Corporation of America (NACA) chief executive Bruce Marks], a Scarsdale native, NYU MBA, and former Federal Reserve employee, unabashedly calls himself a "bank terrorist"-his public relations spokesman laughingly refers to him as "the shark, the predator," and the NACA newspaper is named the Avenger. They're not kidding: bankers so fear the tactically brilliant Marks for his ability to disrupt annual meetings and even target bank executives' homes that they often call him to make deals before they announce any plans that will put them in CRA's crosshairs. A $3 billion loan commitment by Nationsbank, for instance, well in advance of its announced merger with Bank of America, "was a preventive strike," says one NACA spokesman....Marks is unhesitatingly candid about his intent to use NACA to promote an activist, left-wing political agenda. NACA loan applicants must attend a workshop that celebrates-to the accompaniment of gospel music-the protests that have helped the group win its bank lending agreements. If applicants do buy a home through NACA, they must pledge to assist the organization in five "actions" annually-anything from making phone calls to full-scale "mobilizations" against target banks, "mau-mauing" them, as sixties' radicals used to call it. [Husock 2000]
In the 1990s, Mr. Marks leaked details of a banker's divorce to the press and organized a protest at the school of another banker's child. He says he would use such tactics again. "We have to terrorize these bankers," Mr. Marks says. [Hagerty 2009]
By the way, in 2000 "when the national average delinquency rate was 1.9 percent, Marks told [Howard Husock] that the rate for his organizations' loans was 8.2 percent" [Husock 2008]. When NACA was operating under "delegated underwriting authority" from the banks, and was determining whether an applicant was qualified, it received a $2,000 origination fee on each loan it closed in its own offices [Husock 2000]. NACA's charming behavior continues through 2009:
It recently added a photo of William Gross of Pacific Investment Management Co., the big bond house known as Pimco, along with pictures of his home and other information. Mr. Marks says his contacts in banking and government tell him Pimco doesn't support the administration's push to modify mortgages. "We're exposing them," Mr. Marks says. A spokesman for Pimco said neither it nor Mr. Gross would comment.
Mr. Marks says financial executives should be held personally responsible for actions that affect people's lives, and "if they interpret that as intimidation, so be it." He says that "we're not talking about violence. We don't do violence." [Hagerty 2009]
Predatory behavior on the part of "community activists" was not limited to Bruce Marks, our own President began his law career engaging in this sort of activity:
Obama's battle against banks has a long history. In 1994, freshly out of Harvard Law School, he joined two other attorneys in filing a lawsuit against Citibank, the giant mortgage lender. In Selma S. Buycks-Roberson v. Citibank, the plaintiffs claimed that although they had ostensibly been denied home loans "because of delinquent credit obligations and adverse credit," the real culprit was institutional racism. The suit alleged that Citibank had violated the Equal Credit Opportunity Act, the Fair Housing Act and, for good measure, the 13th Constitutional Amendment, which abolished slavery. The bank denied the charge, but after four years of legal wrangling and mounting legal bills, elected to settle. According to court documents, the three plaintiffs received a total of $60,000. Their lawyers received $950,000. [Schweizer 2009]
One reason "community groups" had this much power is that "Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates" [Pinto 2009c]. In addition to having to deal with the likes of ACORN and NACA, large institutions experienced new regulations aimed specifically at them:
In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their "investment" and "service"-two long-standing categories of assessment under the CRA....This had two unintended consequences that would later prove to be very costly. In the first place, it increased CRA scrutiny of larger banks, who were now the main focus of regulators. This put even more pressure on the banks to make CRA loans. Secondly, by allowing banks to de-emphasize "investment" and "service," the new regulations created an even greater incentive for banks to meet CRA obligations by making home loans. [Carney 2009]
Even before this, CRA related performance differed between large and small institutions:
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While 39 percent of the smallest banking institutions in the sample report that the profitability of their CRA-related home purchase and refinance lending is either somewhat lower or lower than the profitability of their non-CRA-related lending, 69 percent of the largest banking institutions report this experience. [Fed 2000]
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A greater proportion of large banking institutions (assets of $30 billion or more) report that their CRA-related home purchase and refinance lending is either marginally unprofitable or unprofitable than medium- (assets between $5 billion and $30 billion) or smaller sized (assets between $950 million and $5 billion) institutions. [Fed 2000]
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The mean and median 30-89 day delinquency rates for both the CRA-related and overall lending of large banking institutions are more than two times the mean and median 30-89 day delinquency rates for smaller institutions in the sample. Differences for other measures of performance are about the same. [Fed 2000]
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Nearly 90 percent of large banking institutions report higher 30-89 day delinquency rates for CRA-related home purchase and refinance lending than for overall home purchase and refinance lending. By comparison, 41 percent of smaller banking institutions in the sample report this kind of relative experience. Similarly, half of the large institutions report that credit losses are higher for CRA-related home purchase and refinance lending, while only 22 percent of smaller institutions in the sample report a similar experience. [Fed 2000]
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Among all institutions, about 40 percent of CRA special lending programs are not profitable. For large institutions, 58 percent report that their CRA special lending programs are not profitable. [Silvia 2000]
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Delinquency rates are higher on a per program dollar basis than on a per program basis. The study interprets this result as "suggesting that larger programs have higher delinquency rates." [Silvia 2000]
The dollar amounts involved with large institutions are huge. Washington Mutual pledged $1 trillion in mortgages to those with credit histories that "fall outside typical credit, income or debt constraints". In recognition of this sort of behavior, it was awarded the 2003 CRA Community Impact Award for its Community Access program. Four years later it was taken over by the Office of Thrift Supervision. [Schweizer 2009]
Why is this important? Because 94% of the $6 trillion in CRA commitments made between 1992 and 2008 "were made by banks and thrifts that were or ended up being owned by just four banks: Wells Fargo, JP Morgan Chase, Citibank, and Bank of America" [Pinto 2009b]. These four banks, in addition to Fannie Mae and Freddie Mac, are responsible for "an estimated 70% or more of outstanding CRA loans" [Pinto 2009b]. We have seen the performance of CRA related loans at Bank of America. Fannie and Freddie are in such dire straights that the Treasury Department had to remove the "$400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent" [Wallison 2009].
Yes, some of the loans being held by the largest banks could have originally been issued by smaller banks which were acquired by the larger one. Yes, not all loans held by Fannie and Freddie came from the largest institutions, but if you put the "origin of" and "current responsibility for" statistics together, it is apparent that large institutions did most of the CRA heavy lifting. Think about it; while the CRA could have exposed both large and small institutions to the likes of NACA and ACORN, which do they go after, Bank of America or North Carolina's Center for Community Capital? Where is the money? Until the large institutions' loans are examined in detail, no meaningful defense of the Community Reinvestment Act can be made. No study of 500 loans made by "Tiny Community Savings and Loan" will suffice.
Unfortunately, the left's strategy is to use the CRA to target large institutions, then evaluate the harm done by the CRA (and related initiatives) by examining smaller institutions.
One last strike against the CRA (and government affordable housing regulations in general) is that their impacts are not limited to their intended targets:
The key question, however, is the effect of relaxed lending standards on lending standards in non-CRA markets. In principle, it would seem impossible--if down payment or other requirements were being relaxed for loans in minority-populated or other underserved areas--to limit the benefits only to those borrowers. Inevitably, the relaxed standards banks were enjoined to adopt under CRA would be spread to the wider market--including to prime mortgage markets and to speculative borrowers. Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers. This is exactly what occurred. Writing in December 2007 for the Milken Institute, four scholars observed: "Over the past decade, most, if not all, the products offered to subprime borrowers have also been offered to prime borrowers. In fact, during the period from January 1999 through July 2007, prime borrowers obtained thirty-one of the thirty-two types of mortgage products--fixed-rate, adjust-able rate and hybrid mortgages, including those with balloon payments--obtained by subprime borrowers." [Wallison 2008]
Similarly, "Dahl, Evanoff, and Spivey (2000) point out ... that mortgage companies may be influenced by potential regulations even though they are not currently subject to the CRA" [Ardalan 2006]. Having seen what happens to entities that do not fall into line voluntarily gives others an incentive to conform. This calls into question the defense that brings up "all those non-CRA loans". Were those other loans really uninfluenced by the CRA?
Conclusions
Did the passage of the Community Reinvestment Act in 1977 guarantee a housing crash in 2008 all by itself? Of course not. Did government smart growth policies [O'Toole 2009] and low interest rates [Matthews 2010], [Taylor 2010] (advocated and endorsed by leftists like Paul Krugman [Doherty 2009]) contribute to the crash? In my opinion, most definitely. Did the CRA, and government affordable housing policies in general contribute significantly? Yes. There is only a conflict if you look for the cause of the crash instead of the causes. Multiple government activities can all work together to lead to the same disaster.
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