When the financial problems surfaced my first reaction was to place a big portion of the blame 
on Jimmy Carter and the liberal Congress who passed the first CRA law. I then read an article that explained why I was wrong and silly me, I believed it. Since then I have read too many other reports that indicate that my initial gut response was, in fact, right. CRA is to blame for a big part of the housing and mortgage problem.
What is CRA? During Jimmy Carter’s presidency, Congress created the Community Reinvestment Act to ensure that banks met the credit needs of lower income areas. I was in banking then and remember when a close friend of mine was initially put in charge of implementing the CRA requirements for my bank. I even helped her with the demographics and maps outlining where the low income areas were and showing the number and types of loans we had in those areas.
Within a year we needed to have an entire department full of people, including a lawyer, to not just make these loans but to show the government that we were in compliance with the new laws. This is because we soon realized that this law had teeth. If a bank was found to be out of compliance then the government could stop it from opening branches, merging with other banks, or even give then a Cease and Desist order! I worked for a large bank which had the manpower and expertise to not only meet the new laws but to then prove we did meet them. But for smaller banks, both making the loans and the accompanying CRA paperwork was (and still is) a huge burden.
I am assuming this but it would make sense that over the next 10-15 years the banks found and made loans to the “best” consumers and businessess in low income areas. Yet they still had to show growth and continuous new lending but there was no one left who qualified.
In 1995, when Clinton was president, there was a revision to the CRA and one of the changes was to allow the securitization of new CRA loans with subprime mortgages. I have heard but have not yet been able to prove that these changes also allowed banks to use unemployment checks as income for applying for a loan. Regardless of the exact method, the result was to offer mortgages to people who would not qualify for a loan if they lived in my neighborhood or your neighborhood. Yet they were now moving down the street and raising the prices of our houses, all thanks to CRA. And gee, guess what one of the roles of a community organizer is?
Basically, CRA is affirmative action imposed on banks. But, affirmative action to lower the requirements to get into college is one thing, lowering the requirements to make a loan is an entirely different prospect. If a person flunks out of college, no harm is done but if a person can no longer pay their mortgage, well, we now see what happens. Then again, what else should we expect when liberal congressmen, most of whom have never worked in the real world their entire lives, tell businessmen how to do business?
I hate being right. But my gut instinct to blame CRA is correct. And yet, even as I write this, banks are still being examined to see if they are compliant to CRA regulations. This makes no sense. We must reign in the CRA requirements or else we will find ourselves back in the same mess, regardless of any new proposals by Congress to resolve this issue. As the saying goes, it would simply be throwing good money after bad.
on Jimmy Carter and the liberal Congress who passed the first CRA law. I then read an article that explained why I was wrong and silly me, I believed it. Since then I have read too many other reports that indicate that my initial gut response was, in fact, right. CRA is to blame for a big part of the housing and mortgage problem.What is CRA? During Jimmy Carter’s presidency, Congress created the Community Reinvestment Act to ensure that banks met the credit needs of lower income areas. I was in banking then and remember when a close friend of mine was initially put in charge of implementing the CRA requirements for my bank. I even helped her with the demographics and maps outlining where the low income areas were and showing the number and types of loans we had in those areas.
Within a year we needed to have an entire department full of people, including a lawyer, to not just make these loans but to show the government that we were in compliance with the new laws. This is because we soon realized that this law had teeth. If a bank was found to be out of compliance then the government could stop it from opening branches, merging with other banks, or even give then a Cease and Desist order! I worked for a large bank which had the manpower and expertise to not only meet the new laws but to then prove we did meet them. But for smaller banks, both making the loans and the accompanying CRA paperwork was (and still is) a huge burden.
I am assuming this but it would make sense that over the next 10-15 years the banks found and made loans to the “best” consumers and businessess in low income areas. Yet they still had to show growth and continuous new lending but there was no one left who qualified.
In 1995, when Clinton was president, there was a revision to the CRA and one of the changes was to allow the securitization of new CRA loans with subprime mortgages. I have heard but have not yet been able to prove that these changes also allowed banks to use unemployment checks as income for applying for a loan. Regardless of the exact method, the result was to offer mortgages to people who would not qualify for a loan if they lived in my neighborhood or your neighborhood. Yet they were now moving down the street and raising the prices of our houses, all thanks to CRA. And gee, guess what one of the roles of a community organizer is?Basically, CRA is affirmative action imposed on banks. But, affirmative action to lower the requirements to get into college is one thing, lowering the requirements to make a loan is an entirely different prospect. If a person flunks out of college, no harm is done but if a person can no longer pay their mortgage, well, we now see what happens. Then again, what else should we expect when liberal congressmen, most of whom have never worked in the real world their entire lives, tell businessmen how to do business?
I hate being right. But my gut instinct to blame CRA is correct. And yet, even as I write this, banks are still being examined to see if they are compliant to CRA regulations. This makes no sense. We must reign in the CRA requirements or else we will find ourselves back in the same mess, regardless of any new proposals by Congress to resolve this issue. As the saying goes, it would simply be throwing good money after bad.
Fascinating.
ReplyDeleteI'd heard the last part about the Clinton years' directives, but not that it had started in the Carter administration. For some reason, I'm not surprised. Diamond Jim