Did Liberals Cause the Sub-Prime Crisis?

[Phx_Dem]

The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

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But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. 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."

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http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis

This is from April but it's worth reading because it refutes the idea that the CRA of '77 caused the sub-prime mess, which is an assertion that is circulating on RW sites right now.

[slackmaster]

1. Blaming the CRA is a distraction

Nothing to see here.

[FreakinDJ]

2. Would have happened 30 yrs ago if that was true

typical KKK propaganda

[underpants]

3. It's not about the loans it is about packaging the loans and reselling them multiple times

the problem is that Wall Street (not a corporation like say Boeing or GE) was chasing WALL STREET. They had to keep up with their own expectations.

[Renew Deal]

4. They somehow blame Barney Frank for the crisis.

Which I find laughable.

[Vinnie From Indy]

5. The CRA had NOTHING to do with this alleged crisis

The lie that has to be accepted in order for this ridiculous argument to be made is that the CRA MANDATED that lending institutions give loans to unqualified buyers. IT DOES NOT DO THAT! Any lending institution that was governed by the CRA STILL had the onus to give responsible loans to those that applied and were qualified. The GOP propaganda pimps are laughably trying to make it seem as though hordes of poor folks rushed into banks and forced the lenders to give them gargantuan sums of money regardless of their capability of paying it back based on the CRA. That scenario is ridiculous on it's face.

[Bonhomme Richard]

6. Republicans have always been very good at using racism,

while not actually using racist terms, playing to their base and their worst instincts. They have been doing it since Reagan.

[Wilber_Stool]

7. Here's what Eliot Spitzer said about that time in 2003

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

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