Where Were Foreclosures Most Concentrated: Countering CRA as the Cause of the Mortgage Meltdown

In a previous post, I countered the argument that the community reinvestment act

The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.

The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. [1]

was a major contributing factor to the mortgage crisis. I am really sick and tired of rank partisan opportunism using the mortgage crisis as some sort of a platform to reinforce their world view. Deregulation is the liberal's main partisan target, and the CRA is the conservative's main target. The theory goes that Congress demanded that banks lend in poorer community and so banks loosened their standards in order to lend there.

Now, first, I am no fan of the CRA, and I do believe that it had the effect that its attackers say it had, however, the effect is significantly more limited than any of the conservative partisan make it out to be. As such, while it may have had a corrossive effect on lending standards, this effect was a small blip compared to other factors.

I bring this up because I have noticed that some conservatives are once again making a play to blame the CRA for the crisis. Here is Hot Air quoting from Investor's Business Daily.

Sounds a little like the Democratic denial of problems in Social Security, doesn’t it? Nothing to see here, no crisis on the horizon. Everybody just move along, now. The Democrats had forced lenders to assume more risk at lower interest rates in the 1990s, as IBD points out today, and they didn’t want to countenance an end to their populist policies:

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

Here is Charles Krauthammer yesterday on Special Report.

Look, given the fact that Obama is blaming it on Republicans and Bush policy, I'm heartened that McCain is joining in the mindless populism, blaming it on Wall Street greed. What does he think happens on Wall Street?

The causes of this are not obscure, and there are several of them. One of them is that the Federal Reserve under Alan Greenspan kept the punch bowl open for a long time with low interest rates after 9/11, which led to a wild borrowing spree of Wall Street and Main Street.

Secondly, for two decades you've had Republicans and Democrats in the presidency and also in Congress who pushed to expand lending for housing to people who hadn't had it before, particularly African-Americans, who had been denied it because of discrimination and racism, and encouraged subprime loans, which in the end collapsed in a fury and in a wave.

And, thirdly, what we had was a kind of an advance in computers in which people that derived these esoteric instruments of debt, which was understood not as a way to cheat and hide but as a way to spread the risk of mortgages.

But, ultimately, because it was obscured, it had the opposite effect of spreading the liability in a way that people aren't even sure how much they own.

Now, ironically enough, Charles is dead on with points one and two. Each of those were major contributing factors, however I couldn't disagree more that CRA was one of the three main reasons for the crisis.

To really prove that CRA was an insignificant factor, what one really needs to do is identify those areas most helped by the real estate boom and also those areas with the most foreclosures. If all these Conservatives are correct, then the real estate boom would have centered most of all in most of the poorest areas of the country and the current crisis in foreclosures would also be the same. In other words, the years 2003-2007 should have then seen an explosion in areas like Bedford Stuyvesant in New York, Englewood in Chicago, and Compton in California, and on the flip side those areas should be leading the pack for foreclosures now.

Instead, the biggest concentrations of foreclosures can be found in well to do areas like Boca Raton, Riverside County near San Diego, and of course Las Vegas. Does anyone really believe that there was an explosion of lending in Vegas because banks were attempting to meet some sort of quota of lending to poor folks? In fact, the real estate boom had a fairly negligible effect on the poorest areas of the country. In fact, the same areas Boca, Phoenix, Miami, and Vegas that boomed the most during the height of the real estate market are also now the ones suffering the most now that it is over. We aren't have a mortgage meltdown because there is an explosion of foreclosures in Englewood, though foreclosures likely exploded there, but in Phoenix and Las Vegas. To attributed the mortgage meltdown to the CRA is to assign altruism to the mortgage meltdown. We don't have a crisis because banks were trying too hard to lend to the downtrodden. We have a mortgage crisis because banks were trying too hard to lend in booming areas.

Don't get me wrong. The CRA likely did explode foreclosures in poor areas and this article clearly provides evidence of such. In fact, a more appropriate thesis might be that the CRA wound up being detrimental to the very areas it was meant to service. That doesn't mean that it was a major contributing factor to the mortgage crisis. As such, this idea that the mortgage crisis was created because banks responded to government regulation to lend more to poor folks is simply not supported by any facts. Yeah, it is a nice sounding idea, and I hate regulation as much as just about anyone. Still, facts can be inconvenient, and a thesis has to be backed up by facts. While there maybe a certain logic to this theory, it just simply is not rooted in reality, and I hope my conservative brethren will cease peddling it.

For a full summary of how we got here take a look at this piece.