It's Not the "Greedy Poor People"

NEW YORK - A 31-year-old law
designed to put an end to "redlining" and other restrictive practices
that effectively shut poor and minority families out of home-ownership
and neighbourhood development is being attacked by conservative
commentators as a major cause of today's sub-prime mortgage mess.

The charge is being incessantly repeated by some of the so-called mainstream media as well as by right-wing bloggers.

For many years, local and regional banks were happy to take deposits
from people who lived in deprived neighbourhoods. A large proportion of
these depositors were members of racial minority groups.

But the banks did not extend credit to these depositors. Small
businesses did not receive finance. Mortgage loans were not made.
Supermarkets and other shops were not built, forcing residents to
travel miles for their household needs. Local jobs dwindled. Crime
rose. Riots broke out in some cities in the U.S. Whole neighbourhoods
fell apart.

Then, in 1977, when Jimmy Carter was president of the U.S.,
Congress passed the Community Reinvestment Act (CRA). The Act required
federally regulated and insured financial institutions to show that
they were lending and investing in their communities.

Initially, some local and regional banks opposed the measure.
To these, it represented unnecessary government interference in the
private sector and mired them in what they saw as a sea of additional
paperwork.

But over the years, these banks have largely become adjusted
to the requirements of the CRA. Today, most regard it as normal "cost
of doing business".

The key words here are "federally regulated and insured
financial institutions" -- which means commercial banks and thrift
organisations.

Not included were investment banks, mortgage brokers, and the
now-bankrupt non-bank lenders such as New Century Financial Corp. and
Ameriquest that underwrote most of the subprime loans that we now know
were so toxic.

The reason is that these private non-bank lenders were
regulated by 50 different state banking supervisors instead of the
federal government -- which effectively meant they were not regulated
at all.

And those who champion the CRA point out that the default rate
on CRA mortgages is far below the national average and many times lower
than the sub-prime mortgages written by unsupervised lenders.

Ellen Seidman, director of the U.S. Office of Thrift
Supervision under President George H.W. Bush (the current president's
father) and now an official at the New America Foundation, told IPS,
"In the 30 years since its enactment, CRA has generated major changes
in the manner in which banks and thrifts view and serve low- and
moderate-income communities and consumers."

Federal housing data shows it was the unregulated private
sector -- not the government or government-backed companies -- that was
responsible for the explosion of subprime lending at the core of the
crisis. According to the Federal Reserve Board, more than 84 percent of
the subprime mortgages in 2006 were issued by private unregulated
lending institutions and private firms made nearly 83 percent of the
subprime loans to low- and moderate-income borrowers that year.

Nor does the timing correspond. Subprime lending offered
high-cost loans to the weakest borrowers during the housing boom that
lasted from 2001 to 2007. Subprime lending was at its height from 2004
to 2006.

Conservative critics of the CRA also claim that the Bill
Clinton administration pushed industry giants Fannie Mae and Freddy Mac
to purchase risky sub-prime mortgage loans made to people with known
poor credit histories.

These entities have operated since 1968 as government
sponsored enterprises (GSEs). This means that, although the two
companies are privately owned and operated by shareholders, they were
assumed to be protected financially by the support of the federal
government -- and now, both have been taken over by the government.

Fannie Mae was created in 1938 as part of President Franklin Delano
Roosevelt's New Deal. The collapse of the national housing market in
the wake of the Great Depression discouraged private lenders from
investing in home loans. Fannie Mae was established in order to provide
local banks with federal money to finance home mortgages in an attempt
to raise levels of home ownership and the availability of affordable
housing.

But Fannie and Freddie aren't lenders, to minorities or anyone else.
They purchase loans from private lenders who actually underwrite the
loans. In an effort to promote affordable home ownership for minorities
and rural whites, the Department of Housing and Urban Development (HUD)
set targets for Fannie and Freddie in 1992 to purchase low-income loans
for sale into the secondary market that eventually reached 52 percent
of loans given to low-to moderate-income families.

But these loans, and those to low- and moderate-income
families, represent a small proportion of overall lending. Between 2004
and 2006, when subprime lending was exploding, Fannie and Freddie went
from holding 48 percent of the subprime loans to holding about 24
percent. Among the reasons is that Fannie and Freddie were supervised
by far more robust standards than most of the unregulated players in
the private sector. Most of these unregulated players have now gone
bankrupt or are in serious legal trouble.

During the same three-year period, these same unregulated
private investment banks dominated the mortgage loans that were
packaged and sold into the secondary mortgage market. According to
McClatchy News Service, in 2005 and 2006, the private sector
securitised almost two-thirds of all U.S. mortgages, supplanting Fannie
and Freddie.

Ellen Seidman, who successfully presided over the thrift
crisis in the 1980s and 1990s -- the failure of 2412 savings and loan
associations -- testified to Congress that "Billions, perhaps
trillions, of dollars of credit and investment has come into these
communities spurred, incented, or directed by the Act and collateral
laws such as the Home Mortgage Disclosure Act (HMDA), various
anti-discrimination statutes, and obligations placed on Fannie Mae and
Freddie Mac. And while there was a time when those subject to CRA
complained bitterly about it, in general that time has passed."

But despite a substantial body of evidence to the contrary,
conservative critics of the CRA continue to blame it for the nation's
economic woes.

Conservative columnist Charles Krauthammer wrote recently that while
the goal of the CRA was admirable, "it led to tremendous pressure on
Fannie Mae and Freddie Mac -- who in turn pressured banks and other
lenders -- to extend mortgages to people who were borrowing over their
heads. That's called subprime lending. It lies at the root of our
current calamity."

And on FOX News, commentator Neil Cavuto remarked, "I don't
remember a clarion call that said Fannie and Freddie are a disaster.
Loaning to minorities and risky folks is a disaster."