At the Core

As the economy spirals downward, it seems that blame is ideological. On the Right, the problem is loan policies implemented in the 1990s contrived by Democrats that forced banks to create mortgages for people who had no ability to repay them. On the Left, the problem is greed on Wall Street and a lack of oversight precipitated by a Republican aversion to regulation. In this case the ideological views are both correct.

But it's difficult to argue that the beginnings of the problem, its true core, can be traced back to something called the CRA, best summarized in a prescient article published in The City Journal (hat tip: Richard Fernandez) in the winter of 2000:

The Clinton administration has turned the Community Reinvestment Act [CRA], a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

The CRA's premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA's logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.

The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were "redlining" inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill's rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.

With the benefit of hindsight, ever member of Congress, every banking regulator and every Wall street Master of the Universe should have been force fed this city journal article until they gagged. Continuing The City Journal piece:

The result of all this activity, argues the CEO of one midsize bank, is that “banks are promising to make loans they would have made anyway, with some extra aggressiveness on risky mortgages thrown in.” Many bankers—and even some CRA advocates—share his view. As one Fed economist puts it, the assertion that CRA was needed to force banks to see profitable lending opportunities is “like saying you need the rooster to tell the sun to come up. It was going to happen anyway.” And indeed, a survey of the lending policies of Chicago-area mortgage companies by a CRA-connected community group, the Woodstock Institute, found “a tendency to lend in a wide variety of neighborhoods”—even though the CRA doesn’t apply to such lenders. …

This policy—”America’s best mortgage program for working people,” NACA [a Boston-based community organizing group] calls it—is an experiment with extraordinarily high risks. There is no surer way to destabilize a neighborhood than for its new generation of home buyers to lack the means to pay their mortgages—which is likely to be the case for a significant percentage of those granted a no-down-payment mortgage based on their low-income classification rather than their good credit history.

The actions of unscrupulous mortgage lenders, incompetent politicians, and greedy, corrupt Wall Street money managers all flowed out of the CRA—a program designed with the best of intentions that turned into a catastrophe that has robbed millions of hard-working Americans of 30 - 40 percent of their retirement savings and an equivalent percentage of their net worth. All because ideology overcame common sense.

Sadly, it’ll happen again, and maybe sooner, rather than later. Sigh.