A simple, yet likely powerful, explanation has now been offered for the subprime mortgage lending and foreclosure problems that have fed the nation’s gravest economic crisis since the Depression.
The beauty and simplicity of this explanation makes one wonder why it took so long for us to see it. According to this view, it was the fault of Black people!
The federal government, another favorite whipping boy, also played a hand in this by trying to increase homeownership among people of color and other “undeserving poor.” The combination of big government and Blacks simply could not be resisted any longer. As Fox News’ Neil Cavuto concluded, “Loaning to minorities and risky borrowers is a disaster.”
According to many conservative commentators including Cavuto, Charles Krauthammer (Washington Post), Lou Dobbs (CNN) and editorial writers at the Wall Street Journal, it is the federal Community Reinvestment Act—basically a ban on red-lining—that forced lenders to make bad loans to African Americans, other people of color and other unworthy recipients in poor neighborhoods around the nation leading to the challenges that are now plaguing the nation’s economy. The argument is gaining traction. And it is utterly false.
Under the Community Reinvestment Act (CRA), 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 goals were to put an end to red-lining and to increase access to credit for qualified borrowers in areas that had long been underserved. But, again, only “consistent with safe and sound” leading practices. And the law has worked.
Prior to the CRA, government policy, particularly federal policy, complemented private industry practices to deny credit in communities of color, undercut homeownership by people of color and perpetuate racial segregation. As is now well-known, for at least the first 30 years of its existence, the Federal Housing Administration insured mortgage loans almost exclusively in white, suburban communities. Urban renewal and the concentration of public housing in central city neighborhoods reinforced traditional patterns of segregation. And the federally financed highway system enabled white suburbanites to commute to their downtown jobs without coming into contact with communities of color. Exclusionary zoning ordinances in virtually every suburb to this day keep housing prices artificially high, discouraging low-income families, disproportionately people of color, from moving into the more prosperous and predominately white neighborhoods outside of central cities.
But government has hardly acted alone. Overt red-lining, along with more subtle practices by mortgage lenders (e.g., refusing to finance, or providing loans only on more onerous terms, for older and lower-priced homes), steering by real estate agents, fraudulent appraisals and other practices reinforced racial segregation throughout U.S. metropolitan areas.
The CRA was enacted as part of an effort to undo the effects of such public policies and private practices, and it is succeeding.
According to studies by the Treasury, the Federal Reserve, Harvard Joint Center for Housing Studies and others, the CRA has led to increasing homeownership in precisely those economically distressed markets where the law intended to do so; it has nurtured integration by increasing homeownership among people of color in predominately white neighborhoods that have traditionally been closed to them; and CRA-related lending has been found to be profitable. If any lender made a loan to a Black applicant (or anyone else) who was not qualified, that lender simply did not understand the law. If such lending institution was told it had to do so, it was by a compliance officer who did not understand the law.
Timing alone demonstrates the erroneous nature of the CRA critique.
The law was strongest in the 1990’s, 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.” As a result, fewer mortgage lenders were covered by the law, and the rules that did apply to many institutions were less stringent. So 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 importantly, it is essential to understand that 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 that are not covered by the law.
And as the National Community Reinvestment Coalition reported, CRA lenders have originated less than 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. In 2005, the Federal Reserve reported that just five percent of loans made by CRA institutions were high-cost loans, compared to 34 percent fro non-CRA lenders.
With the federal government about to spend as much as $700 billion to “invest” in troubled financial institutions, CRA and related fair-lending laws should be even more rigorously enforced. Here is an opportunity for the federal government to significantly advance the cause of fair lending, fair housing and equitable community development generally. As Janet L. Yellen, President and CEO of the San Francisco Federal Reserve Bank, stated last March:
“There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.”
Unfortunately, there is no magic bullet for what ails the nation’s economy. Apparently this does not undermine the appeal of simple solutions, particularly when they buy into long-standing stereotypes. Among the many responsibilities now confronting policymakers, as the public is about to make its multi-billion dollar investment, is to resist the racist, anti-government rants that have all too often fueled public policy and private practice throughout our nation’s history.