Go ahead, blame the fucking liberals

The American Prospect has an article trying to debunk the notion that the CRA (Community Reinvestment Act of 1977) has anything to do with the current losses being suffered by mortgage lenders and others who profited from the lending. CRA compels federally insured banks to make loans in communities where they get deposits, especially low income neighborhoods. The author of the article, Robert Gordon, says:

"Rhetoric aside, the argument turns on a simple question:In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?"

It never occurs to him that they may have been doing both. Damn those dastardly bankers! Trying to make money...the nerve! Maybe they approved bad loans because they assumed that Fannie Mae and Freddie Mac (i.e. the federal govt) would guarantee the loans because that was the arrangement and they figured out a way to make money doing it. Wow.

He also notes that only 50% of the financial institutions involved in sub prime were covered by the CRA. Only 50%? Well then, I guess CRA had nothing to do with the meltdown. He then makes the claim:

"Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA."

It's a good thing he included that "perhaps", because his conclusion is conjecture. I can easily say: "Perhaps two in four sub-prime loans were made by instituions fully governed by CRA." based on the same data he uses.

But he misses a larger point. The CRA and many other government policies created a climate where companies received preferential treatment when they adhered to CRA type policies--even the mortgage lenders not covered by the CRA. To insist that the federal government's over-arching policy to extend home ownership to every possible person is not a major cause of the current crisis is disingenuous. A good example of this is the mortgage interest deduction, a policy that incentivizes home purchases and distorts the real estate market. The CRA is just one (large) part of this social engineering project.


Between the CRA and the behavior of Fannie & Freddie the risk was discounted. Still, smart risk analysts should have dreamed up some worst case scenarios. Isn't that what they are paid to do? But maybe they did and they weren't listened to. But think about it: if you had the chance to lend money (and reap interest) and some other very large and rich entity was guaranteeing the loan, wouldn't you do it?

The other problem here are the accounting rules that make the lenders balance sheets look very illiquid, when in fact they may be fine.