It seems, on the face of it, a theory too absurd to even be taken seriously: A ragtag band of anti-poverty activists pushes the White House into forcing lenders to make bad loans to poor and minority borrowers, setting off a subprime loan crisis that puts the entire global economy at risk.
Yet in the frenzy of coverage as a financial markets collapse loomed in mid-September, the idea that the Community Reinvestment Act (CRA) was somehow responsible took off in the media-in the mainstream press as well as on the conservative fringe.
One of the most prominent proponents of the blame-the-CRA-movement was Washington Post columnist Charles Krauthammer (9/26/08), who described the CRA as the source of the subprime mortgage meltdown:
For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac-which 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.
Krauthammer's comments weren't the only catalyst. In a widely cited reference, Fox News business reporter Neil Cavuto (9/18/08), commented: "I'm just saying, I don't remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.'"
At National Review's Corner blog (9/19/08), Lisa Schiffren contended that poor people traditionally rent because they are bad loan risks, and "the day that reasoning by banks was junked as ‘racist' was the day this crisis became a possibility."
Conservative talk show host Rush Limbaugh, in explaining the country's financial mess, charged (9/29/08) that the community group ACORN used the CRA to force banks to make bad loans. ACORN, Limbaugh charged, employed "political correctness pressure" to spread misery "far and wide under the terms and definitions of things like affordable housing." Others in the pundit class quickly spread the idea on cable shows, with Republican strategist Alex Castellanos describing his version of the roots of the financial crisis on CNN (Late Edition, 9/21/08):
This started in the Carter and Clinton administrations when people decided, hey, you know what, we're going to have affordable housing even for people who can't afford it. And so they loosened the rules and created candy, home loans, dangling in front of people who couldn't afford them. It was poisoned candy because it was things people couldn't pay back. So it was actually the regulation of the banking industry.
Boston Globe columnist Jeff Jacoby (9/28/08) contended that "the pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless." Blaming the CRA made the front page at Investor's Business Daily (9/24/08), in a piece entitled "How a Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable." The steady drumbeat of the blame-the-CRA stories prompted Talking Points Memo (9/23/08) to compile a video of conservatives pointing fingers at the law as the cause for the crisis.
The remarkable thing about the spread of the CRA story was that it was simple to refute: The basic facts about the regulation didn't support the accusations. Gregory Squires, a sociology professor at George Washington University who studies redlining, said one of the gratifying effects of the move to blame the CRA was the eventual pushback by some publications. In outlining what the CRA really does, those stories and editorials educated people about what had been a misunderstood and slightly obscure 30-year-old law, he noted.
Editorials in the L.A. Times (10/25/08) and in the New York Times (10/15/08) dismissed the charges surrounding the CRA as inaccurate; as the NYT pointed out, CRA rules apply to banks, not to the private, unregulated mortgage lenders that made the vast majority of subprime loans during the boom. And the L.A. Times noted that the CRA was not the source of the mortgage products blamed for defaults:
The last things anyone wanted from the CRA were the exotic mortgages that have failed at alarming rates, including "liar loans" and "negative amortization" mortgages whose low payments pushed borrowers deeper into debt. So why did those types of loans and other questionable practices proliferate? Because they generated higher returns for lenders and investors.
The Washington Post also ran a news story refuting the claims (10/3/08). And Aaron Pressman of Business Week (9/29/08) offered a particularly sharp rebuttal, calling CRA critics "know-nothings," linking to Congressional testimony and other evidence exonerating the CRA, as well as providing a summary of posts in the blogosphere challenging the idea.
McClatchy Newspapers also followed up with a widely cited piece (10/12/08) that pinpointed the private sector as the source of the subprime boom:
Federal Reserve Board data show that: More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
But in many ways the pushback was too little, too late. Despite the rebuttals, it has become an article of faith among many that the CRA played some part in the housing crisis problem. And the attention paid to the CRA overshadowed what should have been a genuine controversy over discriminatory lending behavior in the mortgage market during the housing boom.
In the heat of the CRA debate, Mike Masterson, a columnist for the Arkansas Democrat-Gazette (9/23/08), tied the Community Reinvestment Act to the landmark 1988 "Color of Money" series written by the Atlanta Journal-Constitution's Bill Dedman (5/1-4/88). Masterson wrote that Dedman's series "exposed the practice of redlining by banks that routinely declined risky home loans in low-income neighborhoods." The exposé, Masterson argued, "pitched the snowball that grew into the avalanche and buried our leading mortgage institutions" because it prompted wider expansion and enforcement of the CRA.
Here's Dedman's response, posted to the Red State Conservative blog (9/26/08), which had excerpted the Masterson piece:
In his opinion article accusing me of starting the mortgage credit crisis, Mike Masterson makes a fundamental misunderstanding. My 1988 series of articles in the Atlanta Journal-Constitution dealt with the failure of banks and savings and loans to make mortgage loans in middle-income black neighborhoods. Middle-income black neighborhoods. But all Mr. Masterson remembered from these articles was "black," so he made an assumption. He writes, "Bill Dedman in 1989 [sic] produced a series called ‘The Color of Money' that exposed the practice of redlining by banks that routinely declined risky home loans in low-income neighborhoods." See what he did? Hearing "black," Mr. Masterson decided that meant "low-income." He thought "black" meant "risky."
Masterson apologized for the error (10/2/08), but the exchange illustrates what worries some people about the CRA coverage. Ellen Seidman of the New America Foundation, who has written extensively about the CRA, said she thinks that "some damage definitely has been done" by the frequent references, especially on talk radio, to the characterization of minority borrowers as risky borrowers, and to the linkage of the CRA with the housing mess. "I do think there has been sufficient pushback so that few would be willing to say (as some did 6-8 months ago) that CRA is the cause of the problem, but the residual notion that it might have been a contributor is out there," Seidman said in an email.
Where this will come up is in efforts to amend and/or extend CRA to take into account the very new financial landscape, a topic that will likely arise as part of financial services regulation restructuring. The argument will be, "Well, maybe CRA didn't cause the problem, but it was part of a series of misguided public interventions in the market that contributed, and we shouldn't exacerbate the problem by expanding/extending CRA."
Jesse Van Tol of the National Community Reinvestment Coalition (NCRC) said the lasting impression left from the debate was that low-income and minority borrowers bear most of the blame for the housing crisis. "While some borrowers speculated or ‘bought too much home,' the major contributing factor to the foreclosures crisis was reckless and irresponsible lending," he said.
The claim that minority borrowers were to blame adds insult to injury, since predatory lending and the foreclosure crisis have already and will continue to wipe out billions of dollars of wealth in communities of color. The ink is not yet dry on this one, but I suspect that the idea that borrowers are to blame has gotten more resonance than it rightly deserves.
That resonance exists in some measure because blaming the CRA put borrowers on the defensive. The pushback involved explaining that the CRA didn't force banks to lend to risky borrowers-instead of focusing on the culpability of lenders in targeting minority borrowers for high-cost loans to begin with.
Plenty of evidence exists to document that problem. In July, the NCRC released a study (NCRC.org, 7/31/08) showing that minority borrowers, regardless of income, were the most at risk of receiving high-cost mortgage loans. And the tendency for minority borrowers to pay more than their white counterparts for their loans increased with the minority borrowers' incomes.
The previous month, an analysis of foreclosures in the Washington, D.C., area found Prince George's County-the nation's wealthiest black suburb (Washington Post, 7/26/07)-had one of the highest foreclosure rates in the nation (Washington Post, 6/19/08). A year earlier, the Post, using an analysis of Federal Reserve data, concluded that Prince George's County residents were more likely to have subprime loans than predominantly white areas-a disparity that couldn't be explained by the county's credit scores, which ranked above state averages (Washington Post, 3/17/07).
In many ways, media let CRA's opponents set both the terms and tenor of the debate. As a result, the real scandal-the discrimination against minority borrowers at all income levels-failed to get the coverage it deserved.