Skip to comments.CRA to Blame for Mortgage Mess? (How Government created the problem that they now must solve)
Posted on 09/19/2008 7:16:55 PM PDT by Eric Blair 2084
This morning on "Morning Joe," Larry Kudlow was asked about some specific reforms that could help the economy.
He noted that the federal government helped create this financial crisis in the mid-nineties by passing the Community Reinvestment Act. According to Wikipedia:
"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. "
The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions.
... The Clinton Administration's regulatory revisions  with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns.  The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.   In short, the federal government began forcing banks to make subprime loans to people who couldn't afford them.
Update: This is from April 15:
KUDLOW: Would you consider, by the way, rolling back the Community Reinvestment Act, which a lot of people say triggered this, mandating banks and other lenders to make substandard loans in the first place, and the creator of the subprime mortgages back in the middle '90s? Is it time to take a look at the Community Reinvestment Act?
Sen. McCAIN: Absolutely, Larry. There were people who predicted that the Community Reinvestment Act might lead to reckless and unsound lending practices just to sort of fill a--you know, a amount of--I don't like to use the word "quota," but certain percentages of a--of a home--of the bank's lending practices. Yes, it has to be re-examined, it has to be judged by its effect, and we need to find out how this particular system affected the overall insolvency of the subprime lending issue. And I think it--I'm not saying it needs to be repealed, but it certainly needs to be re-examined and what its effects have been. And we'll be able to figure that out.
I don’t know much about this. Perhaps the Libertarian ping list can provide some information.
In 1995, as a result of interest from President Clinton’s administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators’ attention on institutions’ performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. Thus in 2002, the regulators opened up the regulation for review and potential revision.
Racial inequities in mortgage acceptance rates (as reported by Inner City Press, the National Community Reinvestment Coalition, ACORN and other groups) are cited as a primary reason to maintain or even increase the scope of the CRA.
The thousands of mortgage defaults and foreclosures in the “subprime” housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they might not otherwise make based on purely economic criteria.
The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various “neighborhood organizations,” as they like to call themselves, such as “ACORN” (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.
So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.
A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the “Neighborhood Assistance Corporation of America.” He once boasted to the New York Times that he had “won” loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one “community group” operating in one city Boston.
Dont expect to read about this in the “mainstream media,” however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants
September 6, 2007
Thomas J. DiLorenzo professor of economics at Loyola College in Maryland and the author of The Real Lincoln:
I own a bank and the Gubmint coerces me to loan money to this man through the Carter Era Community Reinvestment Act which was strengthened in 1995 under Bill Clinton.
Otherwise, they will look unfavorably on me when it comes time for them to approve a bank merger. I'll give him the money. Why do I care? I'll just sell the loan to a company who will package it into a CDO if it's not conforming and FNMA and FHLMC won't buy it and get it off my books.
I wonder if these revisions required an act of Congress or if Clinton was solely responsible.
Sort of. They are not without blame, don’t get me wrong. But there is more to it than that.
low- and moderate-income communities and minority borrowers have not historically enjoyed full access to credit. The Community Reinvestment Act (CRA) was enacted in 1977 to help overcome barriers to credit that these groups faced. Scholars have long leveled numerous critiques against CRA as unnecessary, ineffectual, costly, and lawless. Many have argued that CRA should be eliminated
During the mid 1970s, the notion that banks contributed to theeconomic decline of inner cities gained popularity among government officials andcommunity activists. Lenders allegedly redlined these neighborhoodsdrawing a redline, both literally and figuratively, around areas with perceived undesirablecharacteristics and systematically refusing credit to residents, regardless of individualcreditworthiness. Because these neighborhoods were predominantly low- and middle-income (LMI), as well as minority, activists and leaders condemned redlining as unlawfuldiscrimination.
To make it simple for my simple mind...
DON’T LEND MONEY TO PEOPLE WHO CAN’T AFFORD TO PAY IT BACK!
(no matter what color they are)
The Subprime Mortgage Mess and the Carter-Era Community Reinvestment Act of 1977
Larry Kudlow Show WABC -AM Radio | March 29, 2008 | Larry Kudlow and Steve Moore
Posted on Saturday, March 29, 2008 10:33:45 AM by Aristotelian
As a source of the current subprime mortage mess, economist Larry Kudlow and Wall Street Journal editorial board member Steve Moore point to the Carter-era Community Reinvestment Act (CRA) of 1977, which purported to prevent “redlining” — that is, the denial of mortgages to minority borrowers — by pressuring banks to make home loans in “low- and moderate-income neighborhoods.”
The two economists, speaking today on Larry Judlow’s weekly radio show, noted how the CRA was the creation of the same liberal political establishment that is now blaming banks and Wall Street for the subprime mortgage crisis.
The connection between bad loans and the CRA was noted in an earlier FreeRepublic thread: How government makes things worse Boston Globe ^ | March 9, 2008 | Jeff Jacoby http://www.freerepublic.com/focus/f-news/1982895/posts
The article stated:
The subprime mortgage collapse is another tale of unintended consequences.
The crisis has its roots in the Community Reinvestment Act of 1977, a Carter-era law that purported to prevent “redlining” - denying mortgages to black borrowers - by pressuring banks to make home loans in “low- and moderate-income neighborhoods.” Under the act, banks were to be graded on their attentiveness to the “credit needs” of “predominantly minority neighborhoods.” The higher a bank’s rating, the more likely that regulators would say yes when the bank sought to open a new branch or undertake a merger or acquisition.
Sowell wrote a good article a couple of weeks ago and broke it down:
Wikipedia even acknowledges that it played a role.
They made a hell of a lot of money from what amounted to hot air and now that the entire card house has collapsed the taxpayers are left holding the bag.
Pardon me for mixing metaphors and going populist, but I'm pissed!
Here's another thing to consider: We're now looking at $1 trillion dollar deficits in the coming years because of these bailouts, and that gives a potential President Obama and his rubber stamp Democratic congress carte blanche to raise taxes to the skies. If that doesn't sober us up nothing will.
Once upon a time H. Ross Perot heard a giant sucking sound. Now I hear a giant toilet bowl flushing on our economy and our whole gosh darned nation.
The bottom line is given the current alignment in congress, the problem is more likely to be exasperated than alleviated.
The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American citiesand, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were “redlining” inner-city neighborhoods, refusing to lend to their residents
In addition, the Act’s backers claimed, CRA would be profitable for banks. They just needed a push from the law to learn how to identify profitable inner-city lending opportunities.
A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.
The Federal Reserve Bank of Dallas had it right when it saidin a paper pointedly entitled “Red Lining or Red Herring?””the CRA may not be needed in today’s financial environment to ensure all segments of our economy enjoy access to credit.” True, some householdsthose with a history of credit problems, for instance, or those buying homes in neighborhoods where re-selling them might be difficultmay not qualify for loans at all, and some may have to pay higher interest rates, in reflection of higher risk. But higher rates in such situations are balanced by lower house prices. This is not a conspiracy against the poor; it’s how markets measure risk and work to make credit available.
But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalitiona foundation-funded umbrella group for community activist groups that profit from the CRAissued a clarion call to its members in a leaflet entitled “The New CRA Regulations: How Community Groups Can Get Involved.” “Timely comments,” the NCRC observed with a certain understatement, “can have a strong influence on a bank’s CRA rating.”
The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved. To deal with such groups and to produce CRA compliance data for regulators, banks routinely establish separate CRA departments. A CRA consultant industry has sprung up to assist them. New financial-services firms offer to help banks that think they have a CRA problem make quick “investments” in packaged portfolios of CRA loans to get into compliance.
The result of all this activity, argues the CEO of one midsize bank, is that “banks are promising to make loans they would have made anyway, with some extra aggressiveness on risky mortgages thrown in.” Many bankersand even some CRA advocatesshare his view. As one Fed economist puts it, the assertion that CRA was needed to force banks to see profitable lending opportunities is “like saying you need the rooster to tell the sun to come up. It was going to happen anyway.”
There is no more important player in the CRA-inspired mortgage industry than the Boston-based Neighborhood Assistance Corporation of America. Chief executive Bruce Marks has set out to become the Wal-Mart of home mortgages for lower-income households. Using churches and radio advertising to reach borrowers, he has made NACA a brand name nationwide, with offices in 21 states, and he plans to double that number within a year. With “delegated underwriting authority” from the banks, NACA itselfnot the banksdetermines whether a mortgage applicant is qualified, and it closes sales right in its own offices. It expects to close 5,000 mortgages next year, earning a $2,000 origination fee on each. Its annual budget exceeds $10 million.
Marks, a Scarsdale native, NYU MBA, and former Federal Reserve employee, unabashedly calls himself a “bank terrorist”his public relations spokesman laughingly refers to him as “the shark, the predator,” and the NACA newspaper is named the Avenger. They’re not kidding: bankers so fear the tactically brilliant Marks for his ability to disrupt annual meetings and even target bank executives’ homes that they often call him to make deals before they announce any plans that will put them in CRA’s crosshairs. A $3 billion loan commitment by Nationsbank, for instance, well in advance of its announced merger with Bank of America, “was a preventive strike,” says one NACA spokesman.
Marks is unhesitatingly candid about his intent to use NACA to promote an activist, left-wing political agenda. NACA loan applicants must attend a workshop that celebratesto the accompaniment of gospel musicthe protests that have helped the group win its bank lending agreements. If applicants do buy a home through NACA, they must pledge to assist the organization in five “actions” annuallyanything from making phone calls to full-scale “mobilizations” against target banks, “mau-mauing” them, as sixties’ radicals used to call it. “NACA believes in aggressive grassroots advocacy,” says its Homebuyer’s Workbook.
During the Reagan years, the Right used to talk of cutting off the flow of federal funds to left-liberal groups, a goal called “defunding the Left”; through the CRA, the Clinton administration has found a highly effective way of doing exactly the opposite, funneling millions to NACA or to outfits like ACORN, which advocates a nationalized health-care system, “people before profits at the utilities,” and a tax code based “solely on the ability to pay.”
MUCH, MUCH MORE HERE...
Bruce Marks, Chief Executive Officer of the Neighborhood Assistance Corporation of America
As a union activist for the Hotel Workers Union in Boston, Bruce Marks worked with the President of the Hotel Workers union, Domenic Bozzotto, to negotiate the first ever housing trust fund. This resulted in the first amendment to the Taft-Hartley Act in over twenty-five years and the first time a local union changed America's major labor law.
Marks moved from union activist to Executive Director of the Union Neighborhood Assistance Corporation (UNAC), where he used his finance and organizing experience to be the first to expose predatory lending and its devastating impact. Marks led the fight against the predatory lending practices of major New England banks. For two and a half years Marks and UNAC researched their predatory lending practices before releasing the research, which focused on Fleet Bank, to the public. The extensive research in Massachusetts, Georgia, Florida, North Carolina, Michigan and other states documented Fleet's predatory lending practices in which they targeted home owners who were property rich but cash poor. As Marks expanded the advocacy and housing services nationally, the Neighborhood Assistance Corporation of America (NACA) was established.
After a four and a half year war with Fleet, Marks was instrumental in negotiating an unprecedented settlement. Fleet committed to an $8 billion reinvestment program for low and moderate income people, settled lawsuits in Georgia for hundreds of millions of dollars, and provided $140 million in an unprecedented mortgage program to be administered by NACA.
Marks' role as an aggressive crusader for reform of the powerful banking and lending industry has its representatives up in arms. On May 5, 1999 from the Senate floor, Senator Phil Gramm (R-TX), head of the Senate Banking Committee, attempted to portray banks as victims of Bruce Marks. Gramm described Marks as, "... someone who graduates from college, goes to graduate school, and goes to work for the Federal Reserve in acquisitions and mergers, quits and goes into business, spends four years harassing banks and bank presidents, and finally the bank (Fleet Bank) caves and gives them $1.4 million, gives them $200,000 to set up their organization; they now have twenty offices, lending $3.5 billion..." Senator Gramm continued, "There is a CRA protester who calls himself an "urban terrorist" who used those charges against a bank, harassed them for four years, went to a speech of the president of the bank (Fleet Bank CEO Terrence Murray) at Harvard University, disrupted the speech, made this man's life miserable for four long years." Bruce Marks wears this personal attack as a badge of honor.
Under Marks' leadership, NACA has garnered commitments of over $6.7 Billion for the best mortgage product in America. NACA now has 31 offices throughout the country and will double in size within the next 12 to 18 months. NACA has become the largest housing services organization in the United States.
Today, Bruce Marks continues to expand NACA's role as lead reformer of the banking and lending industry. This includes enacting local and state legislation and regulations to address sub-prime and predatory lending. He continues to hold lenders and others who exploit working people accountable. And the fight goes on!!!
bookmark and thank you for explaining just what those penalties were for non-compliance to the quotas.
Doesn't matter whether or not you ever desired to “own property”, or could actually afford to own,and pay the perpetual maintenance,taxes and insurance on your property.
If you didn’t “own” some property, you were the supposed victim of some form of “discrimination”.
But no property is ever truly free and clearly owned, is it?
If my great-grandmother bequeathed to me one acre in Kentucky, that our family had “owned” for several hundred years, it doesn't really matter at all that she “owned” that property.
What matters, is whether or not I can afford to pay taxes on that property.
ping for later
ENTITLEMENT CULTURE GONE MAD
April 2, 2008
LAST week, a mob of screeching protesters invaded the Bear Stearns headquarters in Manhattan demanding more aid for homeowners. As you know, I oppose federal bailouts of every make and model - and that includes both the Bear Stearns deal and the bipartisan stimulus-palooza in Washington.
Here is the face of the entitlement culture gone mad: “We will go to their neighborhood, we will educate their children on what their parents do. They should be ashamed,” said Neighborhood Assistance Corporation of America (NACA) founder Bruce Marks in a nasty warning issued to employees of both banks.
This isn’t an idle threat. Bruce Marks is no harmless lone nut. He has a record of showing up at children’s schools and bullying them because of their parents’ employment. All in the name of “social justice,” of course, and securing loans for every last bad risk on the face of the planet. He’s so proud of his behavior, he calls himself a “bank terrorist.”
It’s all about the money for Marks’ group, which browbeats banks and lenders into billion-dollar deals to allow its activists to arrange mortgages for their high-risk constituents. NACA - with dozens of offices across the country - has a no-down-payment, no-closing-costs, low-interest-rate policy for low-income minority borrowers and takes a hefty fee for each transaction.
Marks had attended the Senate Banking Committee hearing with 400 angry residents from various states, many armed with tales of injustice wrought by Fleet. The protesters, who included gospel singers and Baptist ministers, sang and chanted as they paraded in wearing bright yellow T-shirts depicting a loan shark.
“It was like a gospel revival meeting,” Marks said. “I don’t know if ever there’s been a committee meeting where 400 people just took it over.”
the hearing was a step in a series of actions by Marks and other activists that ultimately led Fleet to agree to an $8 billion initiative for low and moderate-income borrowers.
“CRA says credit is the lifeblood of the community,” Marks continued. “Every individual and community has the right to credit it’s what allows communities to grow and prosper.”
Using the CRA effectively is not rocket science, Marks said, but it requires good organizing and a willingness to dig in for the long haul. The idea is to bombard lenders with the threat of negative publicity until they’re worn down.
“You’ve got to have a long attention span,” Marks said. “Because everybody’s got a breaking point.”
For Fleet, the last straw came when Marks and 15 colleagues infiltrated a speaking engagement by Fleet Chairman Terrance Murray in the fall of 1993. Murray was addressing a reception for leaders of the finance community, sponsored by the Harvard Business School at the Newton, Massachusetts, Marriot. Marks said that after he and several others stood up, confronted Murray, and “educated” the audience on Fleet’s misdeeds, Fleet finally agreed to negotiate.
Not only did Marks end up negotiating a lending agreement, but Fleet also made UNAC administrator of a $140-million loan program for low- and moderate-income homebuyers.
The Boston Globe quoted Senator Wilkerson as calling Marks “the kind of person who would throw a Molotov cocktail and then run in with a fire extinguisher and declare himself the hero for putting out the fire.”
“Let them tell all the people who’ve purchased homes [because of UNAC’s program] that they didn’t deserve homes we’d love to have that public debate,” Marks said, adding that his critics are more interested in their egos than winning real benefits for the community.
Marks added that once banks are forced to offer low- and moderate-income people fair access to credit, they come forward and concede that investing in communities is a good idea, and good for business. UNAC’s role, according to Marks, is to get banks’ attention in order to show that there is a constructive alternative to exploiting and excluding people. “But the way you get their attention,” he said, “is to be in their face all the time.
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