Wednesday, October 14, 2009
In the continuing debate over What Caused the Mortgage Crisis (was it planners?), many have blamed the 1977 Community Reinvestment Act. Don't expect the debate to die down anytime soon. Here is a new article from Edward Pinto (a former chief credit officer for Fannie Mae) in City Journal entitled "Yes, the CRA is Toxic; So why is Congress Thinking About Expanding It?" Excerpts:
The question of how well CRA loans have performed is of vital importance because of the trillions of dollars in such lending. . . .
Though the feds, again, haven’t collected figures for CRA loans’ performance as a whole, we do have statistics from a few lenders that are troubling indeed. . . .
Taxpayers deserve to know why not one regulator had the common sense to track the performance of CRA loans. . . . Incredibly, the House Financial Services Committee is considering legislation that would broaden the scope of the CRA.
Accoring to Pinto, HR 1479, which I'm not all that familiar with myself (feel free to post a comment if you are), will supposedly expand the CRA from banks to subsidiaries, credit unions, and other financial institutions. I'm not an expert on the CRA nor do I have The Answer to the question of what caused the mortgage crisis, but if Pinto is right in the excerpts I've quoted above, it's unfortunate if no one has been able to collect the nationwide data to make these analyses.
For a counterpoint to Pinto's "toxic" assessment, see Raymond Brescia's (Albany) article Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, forthcoming in the South Carolina Law Review. From the abstract:
The argument that the CRA is to blame for the financial crisis is hard to reconcile under any reading of the statute’s terms and after any assessment of the CRA’s true reach. As this article explains, the CRA was not too strong, but rather too weak. Designed to fight the last war, the CRA became the financial equivalent of the Maginot Line: easily circumvented, lightly defended, and quickly overrun.
An appreciation for the true causes of the financial crisis, together with the fact that the federal government has expended billions to bail out the financial industry, offer strong justifications for expanding the reach of the CRA to cover all financial institutions, not just those that take deposits.
Let the debate continue (hopefully with more data).
- Matt Festa