The less obsessed side (see- Obsessive Housing Disorder -) explains how the CRA was used - along with accusations of racism - to create a lending environment that practically begged to be abused.
In the article, Steven Malanga, goes back to the Hoover era to show the unintended consequences of government housing programs. Here's how Hoover did it:
in 1922 Hoover launched the Own Your Own Home campaign, hailed at the time as unique in the nation’s history. “The home owner has a constructive aim in life,” Hoover said, exhorting Americans to buy property.
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Hoover also called for new rules that would let nationally chartered banks devote a greater share of lending to residential properties. Congress responded in 1927, and the freed-up banks dived into the market, despite signs that it was overheating.
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But beneath the surface were disquieting signs. For as homeownership grew, so did the rate of foreclosures. From just 2 percent of commercial bank mortgages in 1922, they rose to 9 percent in 1926 and to 11 percent in 1927.
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The Own Your Own Home campaign had trapped many Americans in mortgages far beyond their reach. New homeowners who had heard throughout the initiative that “the measurement of a man’s patriotism and worth as a citizen” was owning a home, wrote housing policy expert Dorothy Rosenman in 1945, had been “swept up by the same wave of optimism that swept the rest of the nation.” Financial institutions were exposed as well. Their mortgage loans outstanding had more than doubled between the early twenties and 1930—from $9.2 billion to $22.6 billion—one reason that about 750 financial institutions failed in 1930 alone. Construction firms, too, were ensnared, since they had heeded the government’s call and shifted to residential building. Housing starts jumped from about 250,000 new homes a year in the early 1920s to nearly 600,000 after the housing campaign—before slumping more than 80 percent after the crash. Construction jobs fell 70 percent from 1929 to 1933.
Sound familiar? Skipping past the intervening examples, let's get to the present.
This time, the government’s spur to action was claims by housing and civil rights activists that banks were “redlining”—intentionally not lending in minority neighborhoods. In April 1975, a new group of activists, the National People’s Action on Housing, brought the concept to a national audience at a Chicago conference. Over the next few years, a series of studies by advocacy groups and local newspapers purported to prove that redlining was real. Black neighborhoods, the studies showed, received far fewer mortgages than mostly white areas did, and black applicants had their loans shot down more often than whites with similar incomes. Banks and academic experts responded that the studies didn’t include information about the creditworthiness of borrowers in black neighborhoods, a more important factor than income. Nevertheless, the media worked themselves into a frenzy, pillorying government officials who dared object to the studies’ conclusions.
Congress passed a bill in 1975 requiring banks to provide the government with information on their lending activities in poor urban areas. Two years later, it passed the Community Reinvestment Act (CRA), which gave regulators the power to deny banks the right to expand if they didn’t lend sufficiently in those neighborhoods. In 1979, the Federal Deposit Insurance Corporation (FDIC) rocked the banking industry when it used the CRA to turn down an application by the Greater New York Savings Bank to open a branch on the Upper East Side of Manhattan. The government contended that the bank didn’t lend enough in Brooklyn, its home market.
Bankers recognized that a fundamental shift in regulation was taking place. Previously, the government had simply made sure that banks’ practices were safe and that depositors’ funds were protected. Now, it would use its power over banks to shape their lending strategies. Soon after the Greater New York ruling, for instance, the Federal Home Loan Bank Board told a Toledo, Ohio, bank that it had to eliminate its practice of lending only to its current customers during times when funds were tight; the maneuver might be discriminatory. The FHLBB also cast a dubious eye on other bank actions to tighten credit in a downturn, such as raising the minimum down payment on mortgages.
And then there's ACORN
The next stop on the road to 2008 was a fateful campaign to lower lending criteria, which, the housing advocates argued, were racist and had to change. The campaign began in 1986, when the Association of Community Organizations for Reform Now (Acorn) threatened to oppose an acquisition by a southern bank, Louisiana Bancshares, until it agreed to new “flexible credit and underwriting standards” for minority borrowers—for example, counting public assistance and food stamps as income.
And there's more...
The campaign gained further traction with the election of Bill Clinton, whose housing secretary, Henry Cisneros, declared that he would expand homeownership among lower- and lower-middle-income renters. His strategy: pushing for no-down-payment loans; expanding the size of mortgages that the government would insure against losses; and using the CRA and other lending laws to direct more private money into low-income programs. Shortly after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to begin buying loans under new, looser guidelines. Freddie Mac, for instance, started approving low-income buyers with bad credit histories or none at all, so long as they were current on rent and utilities payments. Freddie Mac also said that it would begin counting income from seasonal jobs and public assistance toward its income minimum, despite the FHA disaster of the sixties.
To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.
Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.
The lenders were not blameless victims. Like the woman with low morals who's down on her luck and needing some money, they quickly became whores; promoting the policies initially with reluctance and finally with enthusiasm.
Congress later took up where Clinton left off. Not content that nearly seven in ten American households owned their own homes, legislators in 2004 pressed new affordable-housing goals on the two mortgage giants, which through 2007 purchased some $1 trillion in loans to lower- and moderate-income buyers. The buying spree helped spark a massive increase in securitization of mortgages to people with dubious credit. To carry out this mission, Fannie Mae turned to old friends, like Angelo Mozilo of Countrywide, which became the biggest supplier of mortgages to low-income buyers for Fannie Mae to purchase.
Executives at these firms won hosannas. Harvard University’s Joint Center for Housing Studies invited Mozilo to give its prestigious 2003 Dunlop Lecture. Subject: “The American Dream of Homeownership: From Cliché to Mission.” La Opinión, a Spanish-language newspaper, dubbed Countrywide its Corporation of the Year. Meantime, in Congress, Waters praised the “outstanding leadership” of Fannie Mae chairman Franklin Raines.
The final proof of the validity of critics of government housing policy, including the CRA, is the fact that
...the storm has fallen with a special ferocity on black and Latino homeowners, the analysis shows. Defaults occur three times as often in mostly minority census tracts as in mostly white ones. Eighty-five percent of the worst-hit neighborhoods — where the default rate is at least double the regional average — have a majority of black and Latino homeowners.
Lending money to people who can't afford to pay does not seem - to them - to be one of the reasons.
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