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Financial crisis: A law that didn't cause the mortgage meltdown

February 3, 2011 |  5:05 pm

Faithful readers of The Times' letters to the editor may notice that slices of mainstream dialogue on major issues are absent from our page. Consider the unedited submission below, which repeats the mantra that federal regulators browbeat lenders into writing mortgages for borrowers who would otherwise have been unqualified were it not for the Community Reinvestment Act:

According to the Times, the premise that lenders were pressured by Washington to make "bad loans" is "easy to dismiss" because it "runs counter to the facts." Are the editors unfamiliar with the Community Reinvestment Act of 1977?  It's on record as having been used during the Clinton administration to coerce lenders into making billions or even trillions of dollars in subprime loans for the apparent purpose of making home ownership a civil right.  It has been construed as the chief impetus for the financial crisis. Is this so easy to dismiss, or do I sense the rhetorical tactic of deny, deny, deny?

We routinely receive submissions strongly arguing this point with no supporting data, and we don’t publish them. The simple explanation is that this narrative is based on an incorrect reading of the CRA and the subprime mortgage meltdown. Jon Healey, the editorial board's point man on the financial crisis, offers a detailed explanation why after the jump.

-- Paul Thornton

There is a strong sentiment among conservatives and in some quarters of the financial industry that the CRA is the smoking gun behind the financial collapse. The latest example is Peter Wallison's dissent to the FCIC report, which said the collapse would not have happened but for the federal government's effort to expand homeownership, particularly among low- to moderate-income families. In addition to the roles played by Fannie Mae, Freddie Mac and the Federal Housing Administration, he blamed the CRA for forcing banks to throw mortgages at increasingly unqualified borrowers.

But the data paint a different picture. About 80% of the subprime loans were issued by lenders not covered by the CRA or subject to regular CRA-related examinations. See, just for example, this piece based on numbers from the Federal Reserve Board. Or this. Or this

It's also strange to blame the CRA for a meltdown that happened years after bank regulators de-emphasized CRA enforcement  -- first informally, then officially. So even the institutions that were covered by the law were less likely to feel its teeth.

Finally, and most important, nothing in the language of the CRA calls on lenders to abandon such basic underwriting practices as demanding proof of income. Yet that's precisely what they did with such exotic instruments as Alt-A and negative amortization mortgages. If there's one thing responsible for the crisis, it's this: Lenders and investors stopped caring whether borrowers could repay the loans they took out. With housing prices on an escalator that only went up, they didn't have to care -- the collateral would always be worth more than the sum borrowed. Only after housing prices started to fall did it dawn on those who made risky loans, or who bought securities based on those loans, that their assumption about property values was not just hubristic; it was ruinous.

 -- Jon Healey

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