In the midst of all the blowing of smoke over the causes and cures for the nation’s current deficit woes, one of the Right’s favorite arguments–that it was all the fault of lending money to poor people to buy houses–has popped up again. Most recently, that unctuous little pecksniff George Will pulled this vampire out of its coffin in the Washington Post on July 3rd.
It is a lie.
Since I’ve written about this before, I’ll just summarize below, but one thing to keep in mind when you hear this crap: the whole idea of getting low-income Americans into owner housing was a George W. Bush initiative. He called his scheme “the ownership society.” He pushed and pushed on Fannie Mae and Freddie Mac (which are now being tarred by Republicans as villains) to meet higher and higher lending goals. And, of course, the recently unfettered financial industry started churning out securities that bundled mortgages together and, as we discovered later, under-sold the risk.
As I noted once before, “While subprime lending served as the match that lit the fuse, that market wasn’t being driven by the requirements of the Community Reinvestment Act nor by Fannie and Freddie. Data from the Federal Reserve indicate that subprime lending was not being done by regulated lenders. In 2006, according to the Fed, more than 84 percent of subprime mortgage loans were made by private financial institutions. Of the 25 largest subprime lenders that year, only one was subject to the Community Reinvestment Act. When subprime lending was booming, Fannie and Freddie’s share of subprime loan purchases on the secondary market dropped by half.”
About a month after I first published that, the Fed announced the results of a study of the Community Reinvestment Act, a program aimed at getting banks to increase borrowing opportunities for low-income people.
“The long-term evidence shows that the CRA has not pushed banks into extending loans that perform out of line with their traditional business,” said Fed Governor Randall Kroszner.
A grand total of 6 percent of high-priced mortgage loans originated during the housing boom were extended to poor borrowers by finance companies required to meet CRA.
About the same time, Michael S. Barr, a professor of law at the University of Michigan, and Gene Sperling, the national economic adviser to President Bill Clinton from 1997 to 2001, both Senior Fellows at the Center for American Progress, published a piece in the NY Times debunking this myth at length – Barr and Sperling: Don\'t blame affordable housing
A couple of highlights from the piece, which I encourage you to read whole:
“It is not tenable to suggest that the Community Reinvestment Act, which was enacted more than 30 years ago, suddenly caused an explosion in bad subprime loans from 2002 to 2007. During the 1990s, enforcement under the reinvestment act was strong, prime lending to low-income communities increased and it was done safely. In 2000, a Federal Reserve report found that lending under the act was generally profitable and not overly risky.
“By contrast, in the 2002 to 2007 period, the act’s enforcement was weak and its advocates had little influence with Congress. In 2003, President Bush’s chief thrift regulator — holding a chainsaw in his hands as a prop — boasted of his plans to cut banking regulations, including the scope of the reinvestment act and his enforcement staff, which he carried out over the next two years.
“Instead, the bad subprime loans were predominantly made by financial firms not covered by the act. According to recent Fed data, 75 percent of higher-priced loans during the peak years of the subprime boom were made by independent mortgage firms and bank affiliates that were not covered by the act . . . .
“The subprime boom was led by investment banks and mortgage brokers, not by government-sponsored enterprises. Fannie and Freddie became unhinged in the middle of this decade when they tried to play catch-up. Their shareholders and managers pushed them to recover the securitization market share they had lost to unregulated investment banks getting absurd AAA ratings for packaging subprime dross. From 2005 to 2008, Fannie Mae purchased or guaranteed $270 billion in loans to risky borrowers — triple the amount in all its earlier years combined. That was a serious mistake in risk management, but it was not driven by the desire to fulfill affordable housing goals set in the 1990s or by the Community Reinvestment Act.”
We’re in this because of tax cuts and de-regulation, two of the pillars of the Right’s economic theosophy. They will never admit that, and they will go on spinning lies about how it’s all the fault of social spending, affordable housing, Bill Clinton, liberals, anyone but themselves.