The CRA and ACORN are NOT at the Heart of This Financial Crisis

The CRA and ACORN are NOT at the Heart of This Financial Crisis

The financial crisis we are in is a complicated matter.  There are a myriad of reasons it happened and you can lay blame at every level of the mortgage process from the borrower all the way to the investor and those in the government responsible for regulating the industry.  There are a growing number in the extremist wing of the Republican Party who are claiming that the Community Reinvestment Act (CRA) of 1977 or the subsequent strengthening of certain provisions in 1995 are to blame for the financial crisis are either in possession of limited knowledge of the big picture or have ulterior motives or both.  The same can be said of those who claim the community activist group ACORN is to blame.

CRA was created to eliminate the banking practice of "red-lining"- which eliminated entire neighborhoods from receiving bank loans based solely on the socio-economic status of the neighborhood, not the borrower.  In other words, the act attempted to reduce the amount of discrimination in lending.  It does not force banks to make bad loans.  It created a scoring system to rate banks on their lending practices to poor neighborhoods.  Generally, this book of business has been less profitable for banks, but not unprofitable.  Janet Yellen, President of the Federal Reserve Bank of San Francisco stated that most CRA loans have been responsibly made, and are not the higher-priced loans that have contributed to the current crisis.  Economist Luci Ellis of the Bank for International Settlements wrote that "there is no evidence that the CRA was responsible for encouraging the subprime lending boom and subsequent housing bust."-  Law firm Traiger & Hinckley conducted a study that found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower.  CRA banks were also half as likely to resell the loans to other parties.  Selling off such loans, sometimes even before closing, is a practice that many point to as contributing to the attitude among lenders that their loose lending practices would not come back to haunt them because another financial institution would buy the loan and suffer any consequences of default.  It is has been estimated that just 20% of the sub-prime loans issued were from CRA regulated banks and thrifts.  There are no numbers on how many of those have defaulted.  Only depository institutions are subject to CRA regulation. 

If we were not so close to a presidential election which seems poised to shift power away from those who have had it for a very long time you would not see nearly the amount of clamoring for media time and space from those claiming government interference in the free market, not lax regulation, is to blame for this mess.  Even a Baptist preacher in Katy, Texas condemned the CRA from the pulpit in a sermon complete with a multi-media presentation.

Never has the saying "A little knowledge can be a dangerous thing"- been so true.  Sub-prime loans and Credit Default Swaps came into being in this decade without any regulatory framework and provided those who issued them with handsome profits at seemingly low risk.  Sub-prime loans (which, by the way has nothing to do with the prime rate of interest but with the perceived risk of the borrower) were the product of choice for the small independent mortgage company even when the borrower might have qualified for a more conventional loan.  High rates with odd terms created mortgages with low payments"-for a limited time. 

Credit Default Swaps (CDS) are an insurance policy against loan default that the big investment houses were issuing as a way to avoid maintaining enough cash on hand to cover bad debt.  The CDS's, along with the category of financial security called derivatives which, now wealthiest man in America, Warren Buffet called "financial weapons of mass destruction"- can be very complicated and are not understood even by many in the profession.

Another Target of the Right

Look up what ACORN is and you'll see that it is an advocacy group for the poor whose goals are altruistic.  Look at who is condemning ACORN and you'll see right wing politicos who are intent on derailing the Obama express simply by accusing him of guilt by association as they've tried to do with 60's radical turned college professor Bill Ayers.  Surely, ACORN has been involved with some questionable voter registrations but it is not clear if it was at all systemic or some rogue members.  Concerning housing, they have put pressure on those responsible for extending mortgages to low income and minority groups but have no power to force anyone to do anything.  While FNMA did step up its involvement in purchasing subprime loans and loosening lending requirements about nine years ago thus making it easier for lenders to unload their exposure in this market, it is by no means the lions share of the problem.

There is good and bad regulation.  In this case, lax or no regulation at many levels is clearly one of the main contributing factors in this financial crisis.  It is not the only one.  Even the very conservative CNBC cable channel overwhelmingly attributes much of this mess to lack of oversight.  Experts agree, neither CRA nor ACORN are the main culprits.  Anyone trying to make them the main culprits are politicizing this financial crisis in an effort to hang on to the power they've enjoyed for too long.  Get over it.  The world will not end if Obama is elected.  It will likely get much better for many people.  But then, perception is everything and these same people will likely see everything that happens in an "Obama-nation"- in a negative light no matter what it is.