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Tuesday, September 23, 2008

Connecting the Dots on the CRA

Sadly, it appears that the narrative that the Community Reinvestment Act contributed in a meaningful way to the mortgage crisis is now becoming a narrative for the media. The narrative goes that the government demanded that Fannie/Freddie make more of an effort to lend in low income areas. Fannie/Freddie complied and the government didn't make sure that Fannie/Freddie didn't go too far with this lending and this in large part caused the two to fail. Just today, there was this.

A big reason for that failure is federal policies aimed at increasing home ownership. Getting more people into homes was a stated goal of the Bush administration and lawmakers of both parties, many of whom received massive campaign contributions from government-sponsored enterprises Fannie Mae and Freddie Mac.

Fannie and Freddie played up their status as GSEs, telling shareholders they were a safe place to invest. Now they’ve been absorbed by the government, meaning investors may indeed be safe, but taxpayers are at risk. Washington needs to get out of the housing business. It shouldn’t be a federal concern whether or not someone owns a home.

At this point, it has pretty much become a given among most in the press that uncontrolled lending practices aimed at providing more lending opportunities in poorer neighborhoods caused this crisis. I have already pointed out that foreclosure data shows that most of the foreclosures did NOT occur in poorer areas.

Now, let's examine the nuts and bolts of how Fannie and Freddie attempted to provide more financing to poorer areas. They did this through two programs. Freddie Mac did a loan called Home Possibles. Fannie Mae's version of the loan was My Community. In other words, to satisfy Federal quotas, each of these two giants created a special loan. As such, this program was totally separate from their other loans. In other words, whatever their guidelines on this particular loan, it was totally separate from their guidelines on the rest of their portfolio. Just anecdotally, I never met an account rep that pushed either of these products, nor did I know a broker that any significant business in either product.

Thus, if the CRA caused Fannie and Freddie to fail, it would have been these two programs specifically that would have failed. Of course, there is absolutely no evidence of this. The areas where most of the loans failed happened in areas in which these two programs would not have been used all that much. There is just simply no evidence that either program contributed in any significant way to the crisis. Of course, that won't stop the partisans and ideologues from blaming the CRA for this crisis.


Chris said...

Interesting take. My question would be, did these programs lower the bar for every other loan pool. In other words, did we create demand where none existed earlier? I'm guessing we did.

mike volpe said...

In my opinion, it did not. Both these programs were relatively small, despite what the media claims. Beyond that, these programs and their regular programs had little to do with each other.

It's like I have been saying all along, Fannie/Freddie failed not because of some sort of an altruistic streak, but because of greed.