A great deal has been stated about Fannie Mae and Freddie Mac when it comes to the implosion of the housing bubble and, in particular, the use of the Community Reinvestment Act (CRA). A favorite target, in the attempt to delegitimize the effectiveness of CRA, has been the poor and people of color –- this has, in recent weeks, begun to rear its ugly head once again.
Mitt Romney and the GOP, by and large, have revealed many times that they are not huge fans of the program, but have Democrats and President Obama really been all that different? Even though they have not been highly critical of the Community Reinvestment Act, Democrats have been far from full-throated in their support of it.
The heart of the matter
On Oct. 23, 2008 (right at the beginning of the financial collapse), during the House Oversight Committee’s hearing on the Role of Federal Regulators, Henry Waxman finally did it.
He, after weeks of Republican attacks and a long, hard silence by Democrats, finally got around to really addressing the myths concerning the real, primary reasons for the mortgage and economic crises — marking a point when someone would stand up to the lies and the guilt-by-extension racial scapegoating by naming Fannie Mae, Freddie Mac and the Community Reinvestment Act.
One by one he had asked Alan Greenspan (former Chairman of the Federal Reserve), Christopher Cox (former SEC Chairman) and John Snow (former Bush administration Treasury Secretary) if they believed that Fannie Mae and Freddie Mac were the cause of the mortgage bust and one by one (with some hedging) they all said … no.
The attack that was launched, in the wake of the economic collapse and now as well, had less to do with getting to the bottom of the financial disaster and more to do with trying to ascribe blame to the American poor and the American citizens of color.
Attacking the Community Reinvestment Act
Many commentators, at the time, including Neil Cavuto, Charles Krauthammer, Lou Dobbs and editorial writers at the Wall Street Journal, blamed the federal Community Reinvestment Act — basically a ban on redlining — saying that it forced lenders to make bad loans to blacks, Hispanics (communities of color) and other unworthy recipients in poor neighborhoods around the nation leading to the challenges that are now plaguing the nation’s economy.
Under the Community Reinvestment Act, passed in 1977, Congress concluded that “regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.”
This included all communities in a lender’s service area, and federal financial regulatory agencies were charged with the responsibility to “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.”
The goal was to put an end to redlining and to increase access to credit for qualified borrowers in areas that had long been underserved. But, again, only “consistent with safe and sound” lending practices. And the law has worked.
According to studies by the Treasury, Federal Reserve, Joint Center for Housing Studies and others, the CRA has led to increasing homeownership in precisely those markets where the law was intended to do so and CRA-related lending has been found to be profitable.
Coincidentally, the law was strongest in the 1990s, before the statute was watered down and before the surge in subprime lending.
Not coincidentally, the CRA was weakened by the Phil Gramm-led Financial Modernization Act of 1999 and subsequent regulatory “reforms” — the Clinton administration shoulders some of the blame for this as well. As a result, fewer mortgage lenders were covered by the law, and the rules that did apply were less stringent to many institutions.
The CRA was strongest when families were able to buy and stay in their homes at record levels. The law was weakened just as the subprime lending craze took off, with the foreclosure and related economic crises that immediately followed.
More important, the CRA-covered lenders did not make the loans that went bad. When the law was passed in 1977, approximately three-quarters of all mortgage loans were made by depository institutions covered by the CRA. Today approximately three-quarters of all loans are made by independent mortgage brokers and bankers who have never been covered by the law.
And as the National Community Reinvestment Coalition reported, CRA lenders have originated only one-quarter of subprime loans, with the overwhelming number of those loans — the loans that have led to the mortgage meltdown — being made by institutions that had no CRA responsibilities.
Facts and figures about private gain and public pain
In 2005, the Federal Reserve reported that just 5 percent of loans made by CRA institutions were high-cost loans, compared to 34 percent for non-CRA lenders. Admittedly, I am a sociologist and not an economist, but I am familiar enough with simple math to know that 34 percent is significantly larger than 5 percent.
This position is further supported by a report published in July of 2008 by UC Irvine’sPaul Merage School of Business Center for Real Estate, in which they used 1998-2006 housing and mortgage data from a variety of sources — including First American Loan Performance, the S&P/Case-Shiller Home Price Indices and the Federal Housing Finance Board — to analyze 20 U.S. metropolitan areas as part of their study.
The study argues that the considerable 2003 pullback of government-sponsored financial service corporations Fannie Mae and Freddie Mac from the mortgage credit market and their subsequent replacement by aggressive, private mortgage securities issuers in late 2003 had a significant impact on home prices and was more responsible than subprime lending for the drastic price run-up that peaked in early 2006.
The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.
But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume.
Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital. The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products.
- Wall Street Investors, not Fannie Mae and Freddie Mac, were the major purchasers of and investors in subprime loans
- The vast majority of subprime loans went to white, middle and upper income borrowers
- From 2004-2007 non-Hispanic whites had more subprime loans than all minorities combined
- The Wall Street Journal reported that 60-65 percent of those who received subprime loans qualified for conventional mortgages
- Whites made up 71 percent of the borrower population in 2006 and received 56 percent of the subprime loans originated that year
- Blacks, meanwhile, made up 10 percent of the loan pool, yet received 19 percent of the subprime loans. Hispanics constituted 14 percent of the borrower community and received 20 percent of the subprime loans
- In 2006, the height of the subprime lending frenzy, roughly 56 percent went to non-Hispanic whites. Affluent borrowers, those with annual income at least 120 percent of their given area’s median income, meanwhile, took out more than 39 percent of the loans.
Conclusion
It appears that the low-income/people-of-color bashing forces are immune to these facts, which is sad but unsurprising. When you couple this slanderous line of attack with the data that consistently shows that even when blacks and Hispanics have equal or better credit than their white counterparts, they are still, disproportionately, more likely to be steered toward a subprime loan, it is downright unjust and shameful.
Although the real culprits may be symbolically cursed by the masses, they have been left largely unscathed. While millions of Americans of every hue are drowning in a sea of economic devastation, it is reprehensible to add to the peoples of color and to the American poor and working class the extra tax of demonization and scapegoating.