Community Reinvestment Act Did Not Cause Mortgage or Credit Crises, Data Show

Relaxing with friends this weekend in the Texas hill country, I discovered that the bogus argument that loans to poor people caused the mortgage and credit crises--debunked here last October--is still making the rounds. Getting back to my regular reading this morning, I came upon the following editorial in the March 20th print edition of the National Catholic Reporter (posted online March 13th). It explains quite succinctly what other media sources have said repeatedly for several months: the Carter-era Community Reinvestment Act, which encouraged banks to lend in neighborhoods where they do business, was responsible for less than 10% of the subprime loans. The blame-worthy lenders and borrowers were those involved in the 90% of the subprime loans that were not made to the poor.

Each week, in our depressed economy, another 40,000 U.S. homeowners face foreclosure (see story, Page 1). So who is to blame for the implosion of the U.S. housing market, the engine that drove our false sense of prosperity over the past decade?

It's the poor. They, with a little help from the government, did it to themselves.

That, at least, is the emerging consensus of free marketer pundits who dare not place blame where it truly belongs: on the false god of a freewheeling and virtually unregulated subprime mortgage marketplace.

The villain in this fictitious but ideologically convenient tale is something called the Community Reinvestment Act (CRA), a Carter-era initiative that put some mild requirements on federally insured depository institutions (banks and thrifts) to lend in neighborhoods where they do business.

"Beginning with the Community Reinvestment Act of 1977, the political system helped create this mess," Michael Novak, a one-time supporter of CRA and other community-based efforts to support neighborhoods, wrote in First Things earlier this year. Novak argued that government programs like CRA ultimately forced lenders to make loans to people who could not afford them, resulting in a worldwide economic meltdown of Depression-era proportions.

Similar sentiments have been voiced by Lawrence Kudlow of CNBC, Neil Cavuto of FOX News (who placed the blame on banks that lent to "minorities and risky folks"), syndicated columnists Charles Krauthammer and George Will, and many others over the past few months.

The central problem with this argument is that there is no data, absolutely none, tying CRA in any significant way to subprime lending practices now fueling the foreclosure crisis.

Former Federal Reserve Gov. Randall Kroszner, speaking late last year, used actual facts, data even, to explain the situation.

More than half of subprime loans went to middle-class or higher-income borrowers, while fewer than 6 percent of loans made by CRA-covered lenders to low-income borrowers in recent years were of the subprime variety, said Kroszner.

Based on research (imagine that!), Kroszner concluded, "The loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis."

Meanwhile, Comptroller of the Currency John Dugan, a Bush appointee, noted, "CRA is not the culprit behind the subprime mortgage lending abuses or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA."

For 30-plus years, CRA has been a modest but useful tool in providing capital and credit to individuals and community-based organizations trying to improve neighborhoods through homeownership, affordable rental housing and economic development programs.

It is part of the solution, not a cause of the problem.