2009 October 12 Monday
Community Reinvestment Act Mortgage Disaster

Edward Pinto, chief credit officer at Fannie Mae in the 1980s, says the Community Reinvestment Act's requirements for home lending to the poor and lower performing ethnic groups made a big contribution to our on-going financial disaster.

Though the feds, again, haven’t collected figures for CRA loans’ performance as a whole, we do have statistics from a few lenders that are troubling indeed. In Cleveland, Third Federal Savings and Loan has a 35 percent delinquency rate on its CRA-mandated “Home Today” loans, versus a 2 percent delinquency rate on its non–Home Today portfolio. 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. And Bank of America said in 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.

Whatever the precise magnitude of the CRA’s role, there is no question that as the government pursued affordable-housing goals—with the CRA providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5 percent or less down more than tripled, from 8 percent in 1990 to 29 percent in 2007. Adding to the default risk: of these loans with 5 percent or less down, the average down payment declined from 5 percent to 3 percent of the loan’s value.

The US government is keeping itself intentionally ignorant about the extent to which CRA and related policies contributed to the massive mortgage losses and home foreclosures.

Taxpayers deserve to know why not one regulator had the common sense to track the performance of CRA loans. They also deserve to know why the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and other regulators appear to have no idea how trillions of dollars in CRA loans are performing now. But above all, they deserve to know that the damage done by the CRA won’t happen again. Incredibly, the House Financial Services Committee is considering legislation that would broaden the scope of the CRA.

Never mind the disaster. The US government is trying to reflate housing market with reckless issuance of loan guarantees by the Federal Housing Administration for buyers with little money to put down.

The government is giving as many people as it possibly can the chance to buy a house or, if they are in financial difficulty, refinance it. The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even F.H.A. backers express amazement.

Having learned nothing from the disaster Barney Frank is keen on wasting taxpayer money to slow the decline in housing prices. So he wants more suckers to sacrifice themselves in order to bail out banks and other imprudent people.

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

We can go into decline. The nation does not have to keep growing. If the government tries hard enough it can make sure that the decline of the United States becomes a great tragedy told for generations to come in the history books.

Share |      By Randall Parker at 2009 October 12 07:54 PM  Economics Housing


Comments
dchamil said at October 13, 2009 5:13 AM:

Q: When is Barney Frank like a kitchen door?
A: When he swings both ways.

AMac said at October 14, 2009 1:57 PM:

Blogger Steve Sailer has the best information on the malign effects that the CRA and related Federal initiatives have had on stoking the mortgage meltdown. Sailer aptly calls the current unpleasantness "The Diversity Recession." "Predatory Securitization" is another term he coined. These monikers are so useful and so politically incorrect that the the mainstream media avoids their use. And most explanations of the underlying concepts.

Sailer's "Real Estate" tagged posts are here.


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