Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs

“It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”

Robert Gordon, American Prospect



I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE’s role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry — cognitive dissonance writ large — of those folks who have been pushing for greater and greater
deregulation, and are now attempting to disown the results of their

I feel
compelled to set the record straight about this pseudo-intellectual
detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks
required by Congress to lend the first mortgage and do a HELOC for the
down payment — at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)


• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund
managers load up on an investment product that was hard to value,
thinly traded, and poorly understood

• What was it in the Act that forced banks to
make “interest only” loans? Were “Neg Am loans” also part of the
legislative requirements also?

• Consider this February 2003 speech by
Countrywide CEO Angelo Mozlilo at the American Bankers National Real
Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.

If you were to ask me to reveal the prime causative factor for the Housing
boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and
then leaving them there for a year. The prime factor in the bust was
nonfeasance on the Fed’s part in supervising bank lending, allowing banks to give
money to people who couldn’t possibly pay it back.

The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs
off of the field and erroneously expecting market participants could
self-regulate, the powers that be in DC gave the players on Wall
Street enough rope to hang themselves with — which they promptly did.

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

Shame on them for their foolishness or cowardice.

Whenever I see a CRA proponent blathering, I have a “Star Trek
moment.” That’s when Captain Kirk proves to some random alien computer
that its basic programming is logically inconsistent. It’s the AI
(artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .

“You can fool some of the people some of the time and some of the people all of the time. That’s usually enough.”



Note in the Sources section, we have a few subtopics: “Sources” is what I use to show where data, quotes and charts are from. “Previously” discusses commentary on this subject we have written in the past. “Related” is a good jumping off point for further reading; lastly, Consistently Wrong
is where we point out the willfully misleading tripe written by people
who should know better, but publish nonsense anyway. In the case where it appears some are trying to mislead the public, the least we can do is call them out.



A Memo Found in the Street
Uncle Sam the enabler

Download A Memo Found.pdf


The Ongoing Impact of the Housing Sector
Barry Ritholtz
Investor Insight, Aug 27 2007, 11:50 AM

Real Estate and the Post-Crash Economy
Barry Ritholtz
Thoughts from the Frontline,December 29,  2006


Community Reinvestment Act had nothing to do with subprime crisis
Aaron Pressman
BusinessWeek,  September 29

It’s Still Not CRA
Ellen Seidman
New America Foundation, September 22, 2008 – 9:36pm

“The Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain”
Prepared Testimony of Michael S. Barr
Professor of Law, University of Michigan Law School
Before the Committee on Financial Services
U.S. House of Representatives, February 13, 2008

The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
WSJ, OCTOBER 1, 2008

Did Liberals Cause the Sub-Prime Crisis?
Robert Gordon
The American Prospect, April 7, 2008

After the Deal, the Focus Will Shift to Regulation
NYT September 28, 2008


Consistently Wrong:
Don’t Blame the Markets
NY Sun, April 18, 2008

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
INVESTOR’S BUSINESS DAILY, September 24, 2008 4:30 PM

Wingnuttery on CNBC
TBP, Wednesday, September 17, 2008
Michelle Caruso Caberra

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem.
NYT, January 13, 2008

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