How is the Community Reinvestment Act to blame for this mess?

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In 1995, as a result of interest from President Bill Clinton’s administration, the regulations for the CRA were strengthened.

These revisions were credited with substantially increasing the number and aggregate amount of loans to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

Part of the increase in home loans was due to the emergence of lenders, like Countrywide, that do not reduce loan risk with savings deposits like traditional banks do, using the subprime authorization that was in the CRA. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $ 12 trillion U.S. mortgage market.

Now, since the CRA is entirely a creation of the Democratic party and its leftist elements, how can anyone pin the blame on the Republicans, who actually tried to reform it in 2003?
Yes, Joan. But unlike the countries that you have wet dreams about, the ones with their epaulet-laden “el presidentes for life,” being president of the United States accords no such dictatorial powers. And get this, EVEN IF his own party is in power, he still doesn’t have control unless his party has a 2/3 supermajority. And at no time since Gingrich delivered the house to the republicans did they ever have a supermajority.
Deb M: Interesting you say that dems in power now can’t get anything done because republicans are blocking it, but then ask why republicans couldn’t pass reforms in 2002-2003. Funny you should apply such a double standard without even wincing.

Fact is, the republicans TRIED to reform it. It was blocked by the two biggest recipients of Fannie Mae contributions, Barney Fwank and Chuck Schumer.

Just because you have a simple majority does not mean you can do whatever you want.
gabriel bell: There was no bill that brought the changes in 1995. The original act in 1977 gave broad regulatory powers to three agencies: Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency. They made the regulatory changes within the power they already had under CRA 1977. It did not require congress to approve.

  1. Reply
    Joan S
    April 30, 2011 at 11:45 pm

    Yeah. That must be it. Never mind that Bush has been in office for nearly 8 years. Not like he had any opportunity to have an impact?

  2. Reply
    gabriel bell
    May 1, 2011 at 12:13 am

    oh lemme take a stab at this one: congress was in the middle of the newt gingrich revolution? which would make the congress at that time republican which means republicans agreed with Clinton to pass the law

    so in this case both parties are responsible and FAIL.

    “man i am tired of being right”

    – ace ventura

    of course the bill we are talking about as the question asker states is from 1995 not 2002 , try to FAIL again some time.

  3. Reply
    Ol' Mon Reeba
    May 1, 2011 at 12:22 am

    It’s a way for the loser Republicans to blame their fiasco on a Democrat.

  4. Reply
    Deb M
    May 1, 2011 at 12:33 am

    Sorry, but if they were to reassess in 2002, the Congress was controlled by the republicans and by a republican president….Bush! Loaning 100 percent for homes should not have been the practice.

    Even now that the Dems have the majority, the republicans are filibustering legislation…even their own bills.

    Deregulation that was started with the Regan administration with McCain at his side has a lot to do with what we are facing today.

    A lot of people think this is just a ploy by Bush and the republicans. Trickle down economics of the Reagan administration simply does not work. Plus we saw the false inflation of the real estate market..

  5. Reply
    I love Obama 2
    May 1, 2011 at 12:48 am

    It is part of the problem but most blame should go on the CEO’s. Frank Raines and Johnson who are on Obama’s advisor team. Manipulated numbers to get bonus.

  6. Reply
    May 1, 2011 at 1:15 am

    The Act, in itself, was fairly solid. It is the predatory lending practices that followed that caused all the problems.

    I think Congress had a altruistic motive in implementing it, but they grossly underestimated the greed involved.

    Because the people who wanted these mortgages tended to be poor, they were given the absolute worse possible deals by lenders – guaranteed that they would fail in payments and have nothing to show when it was all over.

    With no one regulating the usury going on here, and nobody really caring what happened, it was a doomed program.

    Both Republicans and Democrats are to blame. All those in Congress are too far removed from the situation to see what was going on.

    If they had been given fair loans at realistic interest rates, many more would have been successful in paying their mortgages – but with ARM’s doubling housepayments every quarter, it was like mobsters were unleashed on already-poor people.

  7. Reply
    Fred Schwartz
    May 1, 2011 at 1:36 am

    Here’s the Truth:

    For the hayseeds in the powys this might work. Excellent presentation full of “facts” that they don’t need to check and that convincing McCain Palin pitch at the end.

    I know most of you here think I sit in my parent’s basement and peck away at the keyboard looking to pick fights with conservatives to get my jollies. Sorry, but that’s not me. I’m a researcher I sit in an office and I corral about 400 other researchers who are bound by a simple creed: “Verify, verify, verify.”

    Back in April 2008 the right wing tried to blame the subprime crisis on the CRA and thereby the Democrats, but two guys named Klein and Gordon writing in the American Prospect. They discovered that this began back in January on a thread at the Free Republic and gained traction with conservative bloggers and eventually a fellow at the Cato Institute decided that the facts were too hard to check for anyone to call him out so he ran with the idea that the CRA and the changes to it made by Clinton were the cause of the subprime mess.

    Then it was on to John Derbyshire at the NRO then to Bob Litan from the Brookings Institution. I guarantee none of them have read the latest incarnation of the CRA because if they had they would not have placed their reputations in the gun sights of Gordon, Klein and I.

    So here I am with the latest version of the CRA in front of me and a pile of links that state that the FDIC penalties were eliminated for 296 of the 297 banks regulated by the CRA in 2004 by none other than George W Bush. This was done so banks would have no trace or trail of how many subprime loans they made. So the blaming minorities and Democrats for this crisis is rendered moot. Vice president Dick Cheney in Davenport Iowa on August 24, 2004 was asked about FDIC Chairman Don Powell’s decision to let 99% of the banks which had to adhere to the CRA provisions no longer be regulated by that act. Here is the link from on the page seek the word “reinvestment,” and you go right to this question:

    “Thank you, Mr. Vice President, Mrs. Cheney. I just wanted to get back to — you mentioned economic developments in response to this gentleman’s question about engaging more minorities in the party, and to this woman’s question about her company closing, and I was privileged of being at the White House when the President announced an increase of 500,000 mortgages, a commitment to do 500,000 mortgages for new, minority home buyers. I also serve on the President’s Community Development Financial Institutions Advisory Board. And one of the things that occurred just last week is the announcement from Chairman Don Powell, from the FDIC, that they were going to change the system for how they hold the banks hands to the fire in making loans and mortgages and credit available for economic development for affordable housing, for what have you. What they have proposed to do in Iowa, for example, of the 297 banks that the FDIC regulates, 296 will no longer have the comprehensive CRA — community reinvestment act evalu . . .”

    It turns out this questioner was incorrect in his assessment of how many banks were regulated by CRA. What the Bush administration revisions to CRA did was release 1100 small banks with less than 1 MMM USD in assets from the regulations. In effect at the height of the subprime profit peak before anyone ever said the words housing bubble, the Bush Office of Thrift Supervision and the Bush FDIC virtually took the teeth out of the CRA. The point is not many minority subprime loans were made by banks with assets of over 1 MMM USD but many, many mainstream subprime and Alt-A loans were made by large banks including Countrywide Bank.

    More links: Black Caucus outraged at Bush changes to CRA Yellin SF Fed President Mike Barr before Congressional Committee Klein’s addendum to Gordon’s article

    Gordon and Klein end their piece with this salient paragraph:

    “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.”

    The difference between politics and journalism is politicians

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