COMMUNITY REINVESTMENT ACT AND THE HOUSING MARKET CRISIS OF 2008
In
his 2011 book, Back
to Work,
former president Bill
Clinton
attributed the housing-market crisis of 2008 to the greed of banks
that “were over-leveraged, with too many risky investments,
especially in subprime mortgages and securities and derivatives that
were spun out of them.” In Clinton's calculus, “the crash
occurred because there was too little government oversight of, and
virtually no restraint on, risky loans without sufficient capital to
back them up.” President Barack
Obama,
for his part, attributed
the crisis to the “failed
policies” of “the days when Wall Street,” unencumbered by
government regulators, “played by its own rules.” But in reality,
the housing crisis was caused by too
much
government interference in the economy, and by government-mandated
policies that actually prevented
Wall Street from playing “by its own rules.”
The earliest
roots of these government policies can be traced back to the
mid-1970s,
when progressive Democrats in Congress began a campaign to help
low-income minorities improve
their economic condition through homeownership. At that time, the
homeownership
rates
of blacks and Hispanics alike were just a shade above 40%, while the
white rate hovered near 70%. Seeing these inequalities as prima facie
evidence of America's persisting racial injustice, many Democrats
pushed for measures to rectify the situation.
Spearheading
this endeavor was one of the leading
progressives
in Congress, Henry Reuss—an anti-war, pro-McGovern Democrat and
chairman of the House Banking Committee—who sponsored the Housing
and Community Development Act of 1977. Title VIII of this bill, known
as the Community
Reinvestment Act (CRA),
“required
each appropriate Federal financial supervisory agency to assess …
[each] bank's record of helping to meet the credit needs of its
entire community, including low- and moderate-income neighborhoods.”
This was a mandate for banks to make special efforts to seek out and
lend to minority borrowers—particularly mortgagors—of meager to
modest means. The
bill was ultimately passed with near-unanimous Democratic support and
was signed into law by Democrat President Jimmy
Carter
in 1977.
Like many government policies, the CRA began small
but grew in scope and severity over the years.1
The
law was
founded upon a planted axiom
with far-reaching implications—that
government
intervention is necessary to counteract the fundamentally racist and
inequitable nature of American society generally, and of the free
market specifically.
The
profound implications of that premise began to hit critical mass in
the early 1990s, when studies showing disparate mortgage-loan
approval rates for blacks and whites made sensational headlines in
the media.2
In 1992 researchers at the Federal Reserve Bank of Boston released
the results of the seminal
study
in this regard, most commonly known as the Boston Fed Study, which
found
that whites and blacks with equivalent incomes had been denied
mortgages at rates of 17% and 38%, respectively.3
In
reaction to the study, Attorney
General Janet Reno warned
in 1994 that “no bank” would be “immune” to an aggressive
Justice Department campaign to punish discrimination in lending
practices. In a similar vein, Comptroller of the Currency Eugene
Ludwig told
the Senate Banking Committee: “We have to use every means at our
disposal to end discrimination and to end it as quickly as
possible.”
The
media, too, were quick to cite the Boston Fed Study as proof of
discrimination in lending. According to the Boston
Globe,
the “landmark
study”
provided “the most damning evidence to date of racial hurdles
facing minority homebuyers.” A headline
in BusinessWeek
read, “There's No 'Whites Only' Sign, But ...”; the accompanying
article characterized the study as “definitive.”
Notably,
such critics carefully avoided assessing the weighty implications of
a second 1992 study that was done for the Federal Reserve Bank of
Boston, showing
that black loan applicants not only had greater debt burdens and
poorer credit histories than their white counterparts, but also
tended to seek loans covering a higher percentage of the property
values in question.4
The later study found that after correcting for these and other
standard credit criteria—income,
net worth, age, education, and probability of employment—the
loan-rejection gap between racial groups dwindled to 11%
for whites and 17% for blacks.5
(Conversely, the approval rates were 89% and 83%, meaning that both
whites and blacks were approved for loans most of the time.)
Economist
Thomas Sowell observes: “The … differential can be expressed by
saying that there was a … difference of 6 percentage points in loan
approval rates, or that minority applicants were turned down 60
percent more often than white applicants with the same
characteristics, since a 17 percent rejection rate is 60 percent
higher than an 11 percent rejection rate. The Boston Federal Reserve
Bank report chose the latter way of expressing the same facts,”6
and thereby tacitly implied that racism had played a role.
But
serious doubt was cast upon the racism theory by the fact that whites
were less
likely
than Asians to be approved for mortgages; that black-owned banks were
even more likely than white-owned banks to turn
down
black applicants; and, most notably, that whites and blacks who were
approved for loans went on to have equivalent default rates. If
lenders had been discriminating against blacks by holding them to
stricter standards than whites (in terms of debt level, expense
level, income, and credit history), white borrowers undoubtedly would
have had a higher default rate than blacks. The fact that the default
rates of whites and blacks were so similar provided strong evidence
that lenders were applying race-neutral standards in awarding loans.
When asked to comment on this point, the principal author of the
Boston Fed Study, Alicia Munnell, acknowledged: “I do not have
evidence [of discrimination].... No one has evidence.”7
The
Federal Reserve Board in Washington later re-examined the original
Boston Fed Study and found
its conclusions “difficult to justify.” Similarly, Nobel
Prize-winning economist Gary Becker found that the first Boston Fed
Study had “serious methodological flaws” that made its results
“of dubious value in formulating social policy.”8
Moreover, in
1998 it was reported
that the data used by that study contained literally hundreds
of errors
vis
à vis such variables as the net worth of the applicants and the
interest rates of the loans they sought. When those data errors were
corrected,
evidence suggesting
that lenders had discriminated against minority
borrowers disappeared.
In
1999 the Journal
of Real Estate Research
likewise concluded:
“[W]e
find no evidence of higher profitability on loans to Black borrowers
but find evidence of lower equity for Black borrowers. These results
are not consistent with racial discrimination in mortgage lending.”
But
none of these facts—the
substance of which,
as noted above, had largely come to light before the end of
1992—prevented
the Clinton administration from essentially transforming the
Community Reinvestment Act from an outreach effort into a strict
quota
system.
Under this new arrangement, if a bank failed to
meet its quota for loans to low-income minorities, it ran a high risk
of failing to earn a
“satisfactory” CRA rating
from the Federal Deposit Insurance Corporation (FDIC). Such a
failure, in turn, could derail the bank's efforts
to open a new branch, relocate a home office, make an acquisition, or
merge
with another financial institution.
From a practical standpoint, then, banks
had no recourse other than to drastically lower
their standards on
down-payments and underwriting, and to approve many loans even to
borrowers with weak credit credentials.
Additional
pressure toward this end was applied by
community
organizations like
ACORN
and the Greenlining
Institute.
By
accusing
banks—however frivolously or unjustly—of having engaged in
racially discriminatory lending practices that violated the mandates
of the CRA, these groups could stall
or prevent
banks from expanding or merging as they wished. Further, the
community groups routinely threatened
to file lawsuits
or negative-publicity campaigns against such banks, which
often responded by signing
“agreements” pledging to increase, by any means necessary, their
lending to undercapitalized nonwhites. Bruce
Marks, executive director of Union Neighborhood Assistance
Corporation and self-described “urban terrorist,” ominously
asserted
that if some banks were reluctant to meet the new CRA standards,
“we’ll have to start making it in their interest [to do so].”
As
a result of such pressures, CRA commitments, which from 1977 to 1991
had cumulatively totaled just under $9 billion, suddenly jumped
to $34 billion in 1992 alone. Then, over the ensuing 16 years, those
commitments would amount to $6
trillion.
The
CRA was by no means the only mechanism designed by government to
impose lending quotas on financial institutions. The
Department of Housing and Urban Development (HUD), under the
leadership of Henry
Cisneros, developed rules
encouraging lenders to increase their approval rates for loans to
minority applicants by a hefty 20% within a one-year period. In 1993
HUD began
bringing legal
actions
against mortgage bankers who had turned down a higher percentage of
minority applicants than white applicants, regardless of their
reasons for doing so. This, too, caused lenders to lower their
down-payment and income requirements for minorities.
Moreover,
HUD pressured
the government-sponsored enterprises Fannie Mae and Freddie Mac, the
two largest sources of housing finance in the United States, to
earmark a rising number of their own loans for low-income borrowers.
As the Wall
Street Journalreports:
“For 1996, HUD gave Fannie and Freddie an explicit target: 42% of
their mortgage financing had to go to borrowers with income below the
median in their area. The target increased to 50% in 2000 and 52% in
2005.” Further, HUD in 1996 required
that 12% of all mortgages that Fannie and Freddie purchased from
banks and other direct-mortgage lenders be “special affordable”
loans, typically to borrowers with incomes at least 40% below the
median for their area. Many of these were subprime mortgages—loans
characterized by higher interest rates and less favorable terms in
order to compensate lenders for the high credit risk they were
incurring. The 12% figure increased
to 20% in 2000, 22% in 2005, and 28% in 2008. Nonwhite minorities,
because
of their comparatively poor credit ratings,
were far likelier than whites to be the recipients of such loans. In
December 2006, The
New York Timesreported:
“The most recent Home Mortgage Disclosure Act data from lending
institutions show that over half of African-Americans and 40 percent
of Hispanics received subprime loans.”
No
one supported such reckless lending practices more fervently than
Democratic Congressman Barney Frank, a ranking member (and later the
chairman) of the powerful House Committee on Financial Services. In
2003 Frank lauded
Fannie Mae and Freddie Mac for having “played a very useful role in
helping make housing more affordable.” Dismissing the
“exaggerate[d]”
warnings of critics who exhorted Fannie and Freddie to stop approving
and purchasing so many high-risk loans, he preferred “to roll
the dice
a little bit more ... towards subsidized housing.” In 2004 Frank
said that the federal government had “probably done
too little
rather than too much” to push Fannie and Freddie “to meet the
goals of affordable housing and to set reasonable goals.” “I
would like to get Fannie and Freddie more
deeply
into helping low income housing and possibly moving into something
that is more explicitly a subsidy,” he declared.
Democratic
Senator Christopher Dodd, chairman of the Senate Banking Committee,
was of a like mind. In 2004 he called Fannie and Freddie “one
of the great success stories
of all time” and
“caution[ed]”
that restricting their activities would do “great damage to what
has been one of the great engines of economic success in the last 30
or 40 years.”
As late as July 2008, Dodd continued to defend Fannie and Freddie as
being “on
sound footing.”
Democrats
were not alone in calling for lower mortgage-approval standards; a
number of Republicans favored such a course of action as well. In
2002 the Bush administration pressed Congress to pass the American
Dream Downpayment Initiative
(ADDI) to subsidize the downpayments and closing costs of low-income,
first-time homebuyers.
After ADDI was enacted in 2003, Bush also pushed
Congress to pass legislation permitting the Federal Housing
Administration (FHA) to make zero-downpayment loans at low interest
rates to low-income people, on the theory that “those
who can afford
the monthly payment but have been unable to save
for a down payment should [not] be deprived from owning a
home.”
These
political pressures entirely restructured the landscape of the
mortgage-lending industry. Subprime loans, which had constituted just
7% of all mortgages in 2001, accounted for fully 19% of mortgages by
2006. During the same period, other nontraditional loans (such as
zero-downpayment loans) rose from fewer than 3% of all mortgages to
nearly 14%.9
Thus the real-estate market became a proverbial
house of cards, destined inevitably to collapse. When the
indebtedness reached a critical mass, the ensuing financial crash
produced a tidal wave of home foreclosures across the United States.
“It
was ultimately the skyrocketing rates of mortgage delinquencies and
defaults,” writes Hoover Institution Fellow Thomas Sowell, “that
were like heavy rain in the mountains that caused the flooding
downstream.... Government was not passively inefficient. It was
actively zealous in promoting risky mortgage lending
practices.”10
The
situation was exacerbated further by the fact that many banks
securitized the risky loans—i.e.,
bundled them together and sold them to third-party
investors.
Indeed, an ever-growing number of loans
were made for the express purpose
of securitization and eventual sale.
From
2000 to 2005, private securitization of home and commercial mortgages
grew
tenfold, reaching a peak of more than $1.5 trillion in 2006. Many of
these securitized loans were subprime
mortgages. Between
2001 and 2006, the
securitized share of subprime mortgages increased
from 54% to 75%. The
result of these ill-conceived lending practices was a full-blown
financial crisis characterized by countless home foreclosures and
skyrocketing unemployment rates.
It is notable that the
primary victims of these calamities were nonwhite
minorities of modest means—the very people who ostensibly were the
intended beneficiaries of the CRA, ADDI, and the aforementioned HUD
and FHA policies. From
January 2007 through the end of 2009, some 2.5
million foreclosures
were completed nationwide, the vast
majority of which were on properties whose mortgages had originated
between 2005 and 2008. Of the two-and-a-half million homeowners who
were affected, 56.1%
were whites (who had taken out 65.9% of all mortgages), and 27.8%
were blacks and Hispanics (who together had taken out just 19% of all
mortgages). In June 2010 the
Center for Responsible Lending reported
that
among
borrowers who had taken out mortgages between 2005 and 2008, nearly
8%
of both African-Americans and Hispanics had lost their homes to
foreclosure; the corresponding rate for whites was 4.5%. As of
November
2011,
approximately
one-fourth of all black and Hispanic borrowers had either already
lost their homes to foreclosure or were seriously delinquent,
compared to just under 12% of white borrowers.
These
disparities in foreclosure rates were largely due to the fact that
African Americans and Hispanics―because
of their comparatively poor credit ratings―were
disproportionately represented among those who had fallen into the
financial trap of
the high-priced subprime mortgages encouraged by the CRA and similar
government policies.
For instance, 52% of blacks (vs. only 16% of whites) had credit
scores low enough to classify them as subprime borrowers.11
Among all borrowers in 2006, some 41.5% of blacks, 30.9% of
Hispanics, and 17.8% of whites
were recipients of subprime loans. (The notion that such figures
reflect lenders' bias against nonwhites is derailed by the fact
that the corresponding rate for Asians was only 11.5%.) And
across the United States, the very places where subprime loans were
most prevalent
also
had the highest
foreclosure rates.
As Thomas Sowell observes: “Being
granted loans because the bank needs to meet statistical
targets―quotas―in
order to keep federal agencies off their backs, rather than because
you are likely to be able to repay the loans, is not unequivocally a
benefit to a borrower.”
Prior
to the crash, home
ownership accounted for 63%
of the average net worth of African Americans, as compared to just
38.5% of average white net worth.
By
2009,
as a result of the government policies that had caused the housing
crisis, the median net worth of black households was just $5,677,
a 53% decline from
the 2005 figure of $12,124
(in constant 2009 dollars). The median net worth of Hispanic
households, meanwhile, had fallen by 66%
(from $18,359
to $6,325 in constant 2009 dollars) during the same period.
(For
whites,
the decline was just 16%, from $134,992
to $113,149.)
According to a Pew Research Center report,
“Plummeting house values were the principal cause [of this] erosion
in household wealth among all groups.” The Pew study further found
that by 2009 the wealth gap between white households and their black
or Hispanic counterparts had grown to its widest point since the
government began publishing such data by ethnicity in 1984.
It
should be noted that the declines in black and Hispanic net worth
from 2005-2009 were not just givebacks of windfalls which those
groups had reaped during the housing boom of 2000-2005. In
2000, on the eve of that boom, the median net
worths
(in 2009 dollars) of white, black, and Hispanic households were
$99,250, $9,375, and $12,188, respectively. In other words, the
housing crisis would actually leave blacks and Hispanics (but not
whites) in a significantly worse economic position than they had been
in prior to the five-year boom. In
fact,
blacks and Hispanics (but not whites) were worse off in 2009 than
they had been twenty-one years earlier, when the median
net
worths
(in
2009 dollars) of white, black, and Hispanic households were $78,770,
$7,589, and $10,046. In one fell swoop, progressive “benevolence”
had utterly wiped out decades of black and Hispanic efforts to rise
economically. Nor did 2009 mark the end of the calamity for
nonwhites. From
2009 to 2012,
the African American community collectively lost another $193
billion, and the Hispanic community $180 billion.
The
housing-market crisis cast a heavy cloud over what had been one of
America’s
greatest success stories—the
rise of the black middle class.
Between 1949 and 1994, the proportion of African Americans in the
middle class had nearly
quadrupled,
from 12% to 44%—an
unprecedented advance for any oppressed group in any society on
record. But blacks
were now, along with Hispanics, the chief
victims of the housing disaster that government programs had created.
“These
are people who played by the rules,” observed
National Urban League President Marc Morial. “They built wealth,
went to college and had good jobs. But in a short period of time,
they've fallen back.”
Moreover,
it should be noted that home foreclosures were only part of the
calamity suffered by nonwhite minorities. When the bottom fell out of
the housing market, it inevitably fell out of the jobs market as
well. In January 2007, the respective unemployment
rates
for Hispanics and blacks in the U.S. had been 5.7% and 8.0%. By
December 2009, those figures
spiked to 12.9% and 15.8%. (The
white jobless rate also rose,
from 4.1% to 9.2%.)
In
September
2010,
unemployment in the black community was 16.1%, including 17.6% for
black men and a staggering 49% for black teenagers. The
corresponding rates for Hispanics
and whites,
meanwhile, were 12.4% and 8.7%.
By August
2011,
the black unemployment rate was at 16.7% overall and 19.1% for black
males—figures
comparable to those of the Great Depression. For
Hispanics
and whites,
the figures were 11.3% and 8.0%, respectively.
“Government
agencies, from the Department of Housing and Urban Development to the
Federal Reserve leaned on lenders to lower lending standards, and the
Department of Justice threatened prosecutions for discrimination if
the racial makeup of people approved for mortgage loans did not match
their preconceptions. It worked. In fact, it worked so well that many
blacks got loans that they could not have gotten otherwise. Now the
statistics tell us, belatedly, that blacks lost out, big time, from
this 'favor' done for them by politicians.”
Notwithstanding
the colossal disaster which the Community Reinvestment Act inflicted
on the American people—and
on nonwhite minorities in particular—left-wing Democrats, for
reasons of “economic justice,” tried to resurrect the CRA in
2009. That year, Rep.
Eddie Bernice Johnson (D-Texas) sponsored
(along with 51 fellow Congressional Democrats) the Community
Reinvestment Modernization
Act
“to close the wealth gap in the United States” by increasing
“home ownership and small business ownership for low- and
moderate-income borrowers and persons of color.” Specifically, the
legislation sought
to extend the CRA's strict lending requirements to credit unions,
insurance companies, and mortgage lenders, and to make its mandates
more explicitly race-based by applying lower lending standards not
only to low- and moderate-income borrowers, but to any nonwhite
minorities, regardless of income.
On April 2, 2013, the Washington Postreported that the Obama administration, in an effort to boost the economy, was pushing banks to make more loans to people with weak credit ratings. Said the Post:
President Obama’s economic advisers and outside
experts say the nation’s much-celebrated housing rebound is leaving too
many people behind, including young people looking to buy their first
homes and individuals with credit records weakened by the recession. In
response, administration officials say they are working to get banks to
lend to a wider range of borrowers by taking advantage of
taxpayer-backed programs — including those offered by the Federal
Housing Administration — that insure home loans against default.
Housing
officials are urging the Justice Department to provide assurances to
banks, which have become increasingly cautious, that they will not face
legal or financial recriminations if they make loans to riskier
borrowers who meet government standards but later default. Officials
are also encouraging lenders to use more subjective judgment in
determining whether to offer a loan and are seeking to make it easier
for people who owe more than their properties are worth to refinance at
today’s low interest rates, among other steps....
From 2007 through 2012, new-home purchases fell 30
percent for people with credit scores above 780 (out of 800), according
to Federal Reserve Governor Elizabeth Duke. But they declined 90 percent
for people with scores between 680 and 620 — historically a respectable
range for a credit score.
“If the only people who can get a loan
have near-perfect credit and are putting down 25 percent, you’re
leaving out of the market an entire population of creditworthy folks,
which constrains demand and slows the recovery,” said Jim Parrott, who
until January was the senior adviser on housing for the White House’s
National Economic Council....
The
effort to provide more certainty to banks is just one of several
policies the administration is undertaking. The FHA is also urging
lenders to take what officials call “compensating factors” into account
and use more subjective judgment when deciding whether to make a loan —
such as looking at a borrower’s overall savings. “My view is that
there are lots of creditworthy borrowers that are below 720 or 700 —
all the way down the credit-score spectrum,” [FHA commissioner Carol] Galante said. “It’s
important you look at the totality of that borrower’s ability to pay.”
NOTES:
1Thomas
Sowell, The Housing Boom and Bust (New York: Basic Books),
2009, p. 36.
3Dinesh
D'Souza, The End of Racism (New York: The Free Press, 1995),
p. 280
4Thomas
Sowell, The Vision of the Anointed (New York: Basic Books),
1995, p. 41.
5Dinesh
D'Souza, The End of Racism (New York: The Free Press, 1995),
p. 280; Thomas Sowell, The Vision of the Anointed (New York:
Basic Books, 1995), p. 41.
http://www.urban.org/publications/309090.html
6Thomas
Sowell, The Vision of the Anointed (New York: Basic Books,
1995), p. 41.
