Huh? Are you arguing that the italicized passage disproves what happened?
The actual practice associated with the CRA had nothing to do with safe/sound operation, and everything to do with a system of penalties and incentives intended to artificially juice minority homeownership. Mergers were denied and anti-redlining probes were launched if you didn't make a certain percentage of ultra high risk loans. This was a bipartisan thing, Bush pushed for this just as hard as Frank. Read Gretchen Morgenson's new book; what happened indicts Democrats and Republicans alike.
The textual literalist argument you offer is reminiscent of those who denied that the Soviet Union could be killing people by the million. After all, the Soviet Constitution spelled out all these great rights!
Mergers were denied and anti-redlining probes were launched if you didn't make a certain percentage of ultra high risk loans.
Since neither I nor most other readers have access to Morgenson's book, would you please provide links to documented examples of agencies forcing financial institutions to make "ultra high risk loans"?
(And by documented, I don't mean some guy on National Review asserting that it happened. Agencies are required by law to document such actions and, in most cases, that documentation is public record.)
Just to be clear, I've analyzed this issue in more depth than the typical person making assertions (on either side of the issue), though I am by no means an expert on the issue. As such, your assertions do not comport with my understanding of ether the CRA's imposed requirements on financial institutions, or the CRA as a cause of the financial crisis (to any degree).
Also, at the risk of sending this off onto a tangent, please also explain why it took 30 years for the CRA to cause the financial crisis.
Re: the last point, under Clinton and then Bush, the old Carter era CRA law got new life poured into it. Deval Patrick (now MA mayor) was one of the key guys on this when he was at Justice, using a number of laws (including the CRA and others) to beat up banks if they didn't lend to minorities at higher risk of default. Example:
Google around, you can find plenty of stuff that starts using new regs around the CRA in 1993-5:
www.ffiec.gov/cra/letters/letter_19950629.htm
An analogy: the actual FD&C Act empowering the FDA hasn't changed much, but new appointees differ dramatically on how to interpret the law and which new regulations are consistent with that interpretation. Starting with Clinton and continuing through Bush and Obama, HUD, Justice, and others started to use the CRA as a tool to force banks to extend more mortgages to minorities ("anti-redlining"). Like Ness using tqx evasion to go after Capone, old laws were put to new use.
There really is copious documentation of all of this in Ms Morgenson's book; if you're as interested in the topic as I am, it may be worth reading even if you end up rejecting her line of argument.
(FWIW, National Review spent the 00s telling people about how Iraq was so important to US security. They had and have as little interest in exposing Bush's complicity in this as, say, MSNBC has in going after Obama. Morgenson is unusual in that she has penned a damning bipartisan indictment.)
The Justice Department alleged that Chevy Chase violated the federal Fair Housing Act and the Equal Credit Opportunity Act by declaring black areas off-limits for mortgage lending, a practice otherwise known as redlining. The complaint, filed together with a settlement in U.S. District Court in D.C., claimed that the bank underwrote approximately 97% of its loans from 1976 through 1992, in predominantly white areas.
"You can't be refused service, if there is no service being offered," said Assistant Attorney General for Civil Rights Deval L. Patrick.
The document makes it clear that the bank engaged in an illegal activity (red-lining), they got caught, and they settled the case with the government.
Nowhere does the document state that the bank was at any time before or after required to even loosen their lending standards in "black areas", let alone make "ultra high risk loans" as you have asserted.
I likewise find nothing in the second document you cited that proves your assertion.
I'm going to close this out with a tip - two years ago, Barry Ritholtz issued the following challenge:
"Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate."
The challenge is for any amount between $10,000 - $100,000.
In the two years since he issued that challenge, nobody has stepped forward to claim what should be an easy payout for those making the same argument as you.
Also, Deval Patrick is the Governor of MA, not the mayor.
The CRA is a favourite scapegoat for some conservative types, but I have yet to hear any of them put actual numbers to their assertions. If you have any, I would honestly love to hear them.
For instance, I have yet to see any evidence that mortgages originated under CRA authority have had higher default rates than higher income mortgages, and in fact I have heard plenty of anecdotal reports that the opposite is true.
> I have yet to hear any of them put actual numbers to their assertions. If you have any, I would honestly love to hear them.
As would I. Unfortunately, actual numbers seem hard to come by. Performance of CRA loans simply wasn't tracked. From a Fed study some years prior to the crisis:
We received responses from 143 of the 500 institutions to which we sent the survey (a 28.6 percent response rate). These responses and our follow-up telephone contacts revealed that banking institutions generally do not track profitability and performance separately for CRA-related lending... [1] [2]
For this reason, arguments absolving the CRA [3] instead look at high interest rate loans to low income households. If this is a good proxy for CRA lending, then CRA lending was a drop in the bucket.
However, there is evidence to the contrary. Edward Pinto, chief credit officer at Fannie Mae during the 1980s, published a report in 2008 that has some numbers you might be interested in. [4] From another article summarizing them [5]:
While it’s difficult to find data on how these CRA loans have performed, the few bank reports that break out these loans show much higher default rates than prime loans. Pinto’s research indicates that Fannie and Freddie’s affordable housing loans are a good proxy for CRA loans performance. For example, Fannie’s delinquency rate on its $900 billion in high-risk loans, 85 percent of which are affordable housing loans, was 11.36 percent at September 30, 2009—about 6.5 times the 1.8 percent delinquency rate on the GSEs’ traditionally underwritten loans. While the vast majority of CRA loans were fixed rate and did not have higher interest rates like other subprime loans, Pinto’s research has found that most had high risk characteristics such as small downpayments and impaired credit, signaled by a low borrower FICO score. As a result, loans with these high-risk characteristics have performed similarly to fixed rate subprime loans.
Perhaps more important in its implications for the financial crisis, Fannie and Freddie did not report that their mortgages were subprime and Alt-A. So instead of the 12 million prime loans market participants expected, Fannie and Freddie had added 12 million subprime and Alt-A loans to the market...
So, by the middle of 2008, there were almost 27 million subprime and Alt-A loans in the U.S. financial system. This amounted to almost 50 percent of all mortgages. More than two-thirds of these mortgages were held or guaranteed by government agencies like FHA (about 4.8 million), and the GSEs Fannie and Freddie (12 million loans), and by U.S. banks (a residual of about 2.2 million).
But I personally think the real answer is, we just don't know, CRA lending wasn't tracked. Hopefully next time we decide to experiment on this scale, we collect some data. ;)
The whole theory is bizzare. Banks didn't have to be forced to write stupid loans at the lead-in to the crisis. Once securitization made it easy to take a cut up front but sell them off onto someone else's books before they blew up, brokers and banks (including mortgage banks unaffected by the CRA) were eager to push through as many bad deals as they possibly could, with basically any buyer who could fog a mirror. Wall St. was so desperate for stuff to bet on that when the supply of borrowers ran low, they resorted to making new side bets on the outcomes of old loans (through synthetic CDOs made up of credit default swaps).
Blame the credit rating cartel for declaring large tranches of the whole mess to be "AAA investment grade" and thus marketable to huge institutions that had no business being involved, because they didn't think homebuyer defaults would be strongly correlated due to underlying forces.
The actual practice associated with the CRA had nothing to do with safe/sound operation, and everything to do with a system of penalties and incentives intended to artificially juice minority homeownership. Mergers were denied and anti-redlining probes were launched if you didn't make a certain percentage of ultra high risk loans. This was a bipartisan thing, Bush pushed for this just as hard as Frank. Read Gretchen Morgenson's new book; what happened indicts Democrats and Republicans alike.
The textual literalist argument you offer is reminiscent of those who denied that the Soviet Union could be killing people by the million. After all, the Soviet Constitution spelled out all these great rights!