The CRA, Fannie Mae, and the Democrats: A Conspiracy Too Good To Pass Up

I first heard about the Community Reinvestment Act sometime in late 2008. When I first heard commentators come on major networks like Fox News and assign it as the most significant blame for the mortgage crisis I was stunned. I have spent the last nearly seven years in the mortgage business. If the CRA was such a factor, why hadn't I heard of it before? As I learned more about it, I started to understand why it became such a popular cause celebre.

The CRA hits almost all conservative so called erogenous zones. First, it is exactly the sort of social engineering that conservatives hate. The CRA set up a quota system for banks to follow for providing loans in the inner cities. Furthermore, the CRA was created under Jimmy Carter. It gets even better for Republicans. It was updated and made more powerful under Bill Clinton. That was the politically philosophical trifecta. Not only could conservatives blame the entire financial crisis on government interference and social engineering but they could also tie it two of their least favorite leaders, Bill Clinton and Jimmy Carter. This wasn't merely a chance to wage a philosophical battle over the issue of the day, but it was a chance to bloody up the legacy of two hated presidents.

Things only got better from there. Next we found out that the CRA was used by the federal government toward mortgage giants Fannie Mae and Freddie Mac. We found evidence that CRA pushed both into "sub prime". This was absolutely marvelous because we soon learned that Fannie/Freddie were much more tied to Democrats than Republicans. We further learned that John McCain and George Bush tried to reform Fannie/Freddie in 2004-2005. This now infamouse Youtube video was discovered.



As if there wasn't enough for conservatives to get excited about, they finally had the clincher. Who was a major recipient of CRA...ACORN, La Raza, and other demonized left wing groups.

The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. "To avoid the possibility of a denied or delayed application," advises the NCRC in its deadpan tone, "lending institutions have an incentive to make formal agreements with community organizations." By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."

In addition to providing the nonprofits with mortgage money to disburse, CRA allows those organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved. To deal with such groups and to produce CRA compliance data for regulators, banks routinely establish separate CRA departments. A CRA consultant industry has sprung up to assist them. New financial-services firms offer to help banks that think they have a CRA problem make quick "investments" in packaged portfolios of CRA loans to get into compliance.

It's absolutely true. For years, ACORN would shake down local and regional banks in order to get them to do more low income loans in "compliance with the community reinvestment". In fact, ACORN turned compliance enforcement of this act into a major cottage industry for itself and a source of serious funding. We even found out that George Soros had ties to the CRA. The conservatives had found their holy grail of blame for the crisis. Every single enemy, ideological and personal, could be blamed all at once for the crisis.

So, you have folks like Karl Rove, Dick Morris, Thomas Sowell, and Thomas Woods all in unison blaming the CRA. Sean Hannity brings up the CRA everytime the crisis is discussed. They state it as fact, and it has become an almost cult like narrative among conservatives.

For instance, I was at a gathering of conservatives late last year when this subject was brought up. One individual insisted that the Fannie/Freddie were responsible for the sub prime crisis. The problem with this hypothesis is that it takes a rudimentary view of "sub prime". Back in the beginning of 2007, the sub prime crisis swept through the niche and caused banks like New Century, First Franklin, WMC, and Fremont (among dozens of others) to fail nearly all at once. None of these banks had anything to do with Fannie/Freddie. In fact, they were called sub prime because they sold their loans to entities other than Fannie/Freddie (who's loans we all called prime) How could Fannie/Freddie be responsible for their failure? What media referred to as "sub prime" and what the industry referred to as "sub prime" were two entirely different things. The banks that all failed at the beginning of 2007 all sold their loans to entities that had nothin to do with fannie/freddie. More than that, banks like Fremont, First Franklin, etc. weren't even under the guidance of the CRA. None of these entities created any loans to meet that criteria because they weren't under its control. That was of little consequence because the narrative had already formed for conservatives.

Conservatives were also not to be bothered with little insignificant issues like numbers and logic. For instance, at its height the CRA accounted for 3% of all loans. How could it have such an effect if it accounted for so little of the overall pool. Second, the CRA applied to retail banks. (the banks you walk into) The crisis was mostly created at wholesale banks. (the banks that use mortgage brokers) Wholesale was the nexus of most of the "toxic" loans that were created and lead to the crisis. Remember, a lot of folks put most of the blame on mortgage brokers. Well, mortgage brokers work exclusively in wholesale. Those institutions weren't under the perview of CRA. Keep in mind, some banks have both a wholesale and retail department, but they are totally separate. So, it's hard to imagine that the policies of one would have much of an effect on the other.

Of course, logic and raw numbers are entirely unimportant in a conspiracy theory. That's what this is. In order to believe that the CRA is responsible for all this, one would have to believe that this obscure law brought the entire financial system down all while no one noticed. One would have to believe that it influenced the decisions of mortgage professionals all over the universe of mortgages even though it itself accounted for only a fraction of the total loan pool. The financial crisis was largely caused by financial institutions that weren't even governed by the CRA and yet it still somehow influenced their behavior. This conspiracy is like most conspiracies. It makes sense on the surface. It's only once the facts are fully examined that holes are found all over. Don't tell conservatives though because it makes for a great story.

Here is my white paper on the crisis.