The Big Hullaballoo Part 4: What's the Best Way to Grope the Poor?

One of the other stories about What the Hell Happened? says it's all the fault of bleeding heart heartbleeders trying to make the normally prudent banks who like to bleed their blood only in sound investments instead bleed their big, banky hearts all over the poor.

What the hell are you talking about?

Why, the Community Reinvestment Act, of course! Because I'm lazy today, let's ask Wikipedia about this. The Community Reinvestment Act

is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services.

According to one of the emerging Right Wing Narratives of What the Hell Just Happened, it's this law's fault that all the bank's made bad loans: Because they were forced to by lovey-fluffy-commie girlies in Congress who were dumb enough to think poor people could pay back their loans. Some jackass at the National Review explains:

One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so. ACORN, for which Obama worked, is one of many left-wing organizations that spent decades pressuring banks and bank regulators to do more to make mortgages available to people without much in the way of income, assets, or credit. These campaigns often were couched in racially inflammatory terms. The result was the Community Reinvestment Act. The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama’s fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands — which are political demands — have been met. There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime.

So, you see? It's Barack Obama's fault, and it's also ACORN'S fault. But, the National Review concedes,

The bankers cannot blame CRA entirely; they made a lot of bad bets on rising home prices. But CRA did influence lending standards across the banking industry, even in those institutions that are not strictly liable to its jurisdiction. The subprime debacle is in no trivial part the result of lending decisions in which political extortion trumped businesses’ normal bottom-line concerns.

Now, leaving aside the fact that people who are editors for the National Review are retards/assholes, all of this does make some sense. So we should ask some questions like, To what extent did the Community Reinvestment Act force banks to make loans to people who couldn't pay them back?

Because this is complicated, and because understanding whether it's true would require some research, let's turn this one over to someone smarter than me. Writing for The American Prospect, Robert Gordon says:

First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending." CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

See, look what I did! I paired a leftwing editorial with a rightwing editorial and decided that because the leftwing editorial said stuff that I like, I agree with it! You know what that makes me? Everyone in America!

The only problem with the above paragraph is that the American Prospect article included specific datapoints. In particular:

• Independent mortgage companies, who aren't subject to the CRA made twice the number of high priced loans the banks and thrifts did.

• Half the subprime loans came from banks and thrifts not covered by the CRA.

• 25 to 30 percent of the rest (for a total of 75-80%) came from "bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves."

• After the slow-down of CRA activity (2001) and after the weakening of the law (2004), subprime lending continued and intensified.

In contrast, the National Review gives us the following datapoints to work with:

• ACORN is racist.

• Barack Obama loves the Community Reinvestment Act.

• The CRA contributed in some way to the crisis, even though it wasn't the only thing.

So what are we left to conclude? My judgment, subject to change:

The CRA didn't cause the problem.

In fact it is sort of a kind of good idea, except that the idea of forcing banks to lend money to poor people as a way of increasing home ownership in poor neighborhoods is really really troubling. It can't not encourage some degree of predatory lending -- or, if you're on the other side of the fence, encourage irresonsible poor people to screw over the honest bankers who were forced to lend them money. I like the Habitat for Humanity model better.