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GroupW -> RE: Insanity of EARPMARKS in Mortgage Bailout Bill (9/26/2008 12:45:37 PM)
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quote:
ORIGINAL: AdrianaS
"ACORN Housing Corporation (AHC) was instrumental in its passage of the Community Reinvestment Act (CRA) which has plagued the mortgage markets since 1977. The U.S. Congress through the CRA compelled banks and lending institutions to make loans to “communities of color” disregarding sound economic and risk guidelines. CRA encouraged the relaxing of “outdated” risk-management protocols and underwriting obligations by lending institutions. In the name of ending discrimination, no longer were “communities of color” required to provide verification of income, employment, credit history, ability to pay homeowner bills, or down payment. In response, many banks and mortgage groups bundled trillions of dollars of “subprime” loans and sold them to investors here and abroad. It is these bundled Community Reinvestment Act mortgages, doomed to fail, that are today causing financial strain in U.S. and global financial markets." by James H. Walsh former Federal Prosecuter
Just FYI - the CRA comment isn't really all that accurate. Here's what I've posted elsewhere on the topic
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Blaming CRA for the current crisis is a bit simplistic. There are way too many causes to point a finger at any one. CRA disputably may played a part, but if so a very minor role.
First, the issue with CRA isn’t it’s establishment but rather its implementation by the banks it regulated. Here’s what I mean.
The basic goal of CRA is that you can’t take deposits in one community and invest them in another. That’s called “redlining” and it resulted in a severe capital shortage in many low income neighborhoods that were deemed to be undesirable risks. Interestingly, the only bank that supported CRA back in 1977 was ShoreBank. ShoreBank was an inner city bank on the south side of Chicago that actually did very well lending to small businesses in the inner city. ShoreBank was smart enough to know that CRA wasn’t necessarily bad legislation if you knew the basics of small business lending. In the neighborhoods ShoreBank was active, significant inner city redevelopment occurred with a corresponding rise in small business activity, employment, and income. ShoreBank saw CRA as a leveling of the playing field rather than government intrusion and supported the legislation knowing that the inner city was being unnecessarily starved for development capital.
Back in 1987, I went to work for a small bank in Indiana. That bank neatly dodged CRA by declaring it’s service area to be Porter County – an above average income county with minimal minority presence. That bank steadfastly refused to expand eastward since that would have brought Gary, Indiana into its service area. By contrast, the old Gary National Bank (aka “Gainer Bank”) did quite well in that area and eventually became the largest local bank in that county by a factor of 5 by purchasing several local Porter County Banks.
Again, it’s not CRA that’s the problem but finding ways to implement CRA profitably. It can be done, and has been done.
As recently as this past week, BB&T (east coast regional bank) was cited by analysts as an excellent institution for its avoidance of subprime loans. In reality, BB&T has historically done a significant amount of subprime lending. BB&T’s strategy however was different. They held all their loans on their own books and didn’t sell them. They used prudent underwriting and made sure people could document their incomes and could afford the loans. As a result, BB&T has largely avoided the entire mess while simultaneously getting an excellent CRA score. Clearly CRA considerations are not damaging BB&T’s performance.
BB&T is not alone. Wells Fargo has historically been one of the better subprime originators, again using reasonable underwriting criteria. Wells was also one of the larger issuers of sub-prime asset-backed securities. Wells’ losses have been modest and contained. Furthermore, Wells’ securitizations have performed in line with their ratings (unlike most others which have been downgraded, in some cases all the way from AAA to CCC in a very short amount of time.) Like BB&T, Wells understood that you can’t, and indeed don’t have to, abandon prudent underwriting in pursuit of legislatively mandated social goals.
Second, one of the other goals of CRA was to exert some form of discipline when it came to getting value from the government guarantee on their deposits. Banks benefit from a very low cost of borrowing due to the FDIC guarantee on deposits. The general feeling was, and still is, that the government and society in fairness needs to gain a benefit from that privilege. In mandating that banks serve the lower income portions of society by creating low cost loan and savings products, CRA did not encourage bad underwriting. It was explicitly endorsing what we all know – that banks serve a dual purpose. They are first and foremost businesses intended to make profits and create jobs.
Secondarily, though, they are allocatiors of investment capital and able to fundamentally influence via that power who has an economic shot at prosperity and who does not. In this role, banks have an ethical consideration unlike any other business. We are the arbiters of economic justice like no other. Some regulation to enforce the judicious use of this power is both reasonable and advisable.
Third, as the Wikipedia article rightly points out, nearly half of all subprime originations were done by entities not regulated by CRA.
This mess would have happened with or without legislative mandates.
Fourth, since the inception of CRA, there has been a steady influx of capital into the inner cities. It’s entirely possible that CRA is a significant factor in the ongoing gentrification of a number of blighted urban neighborhoods. It has not been a perfect piece of legislation, but it has had some excellent results.
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