Some Follow-Up Regarding The Bailout

Posted: September 29, 2008 in Economy, Politics

This is a foreclosure map (circa 2007). For an updated map, click here. I live in the very hot zone in the west.

The following bit of history was something left out from my response to a reader some time ago regarding the current “bailout”.

Community Reinvestment Act (Wikipedia)

The CRA was passed into law by the 95th United States 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including mergers and acquisitions after the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed restrictions on interstate banking. However, until 1995 the Act was laxly enforced and banks only were required to advertise in local minority newspapers or sit on the boards of local community groups.

[…]

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to target to groups to collect a fee from the banks.

The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were “risky mortgages.” Banks set up CRA departments, a CRA consultant industry was created and new financial-services firms helped banks invest in packaged portfolios of CRA loans to ensure compliance. Established and new community groups began marketing such mortgages. The Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. As of that time such groups also had received tens of billions of dollars in multi-year commitments from banks, including ACORN Housing $760 million; Boston-based Neighborhood Assistance Corporation of America $3 billion; a New Jersey Citizen Action-led coalition $13 billion; the Massachusetts Affordable Housing Alliance $220 million. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

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.

(more…)


From Policylink.org

The Community Reinvestment Act (CRA) was established by Congress in 1977. The Act requires that deposit-taking financial institutions offer equal access to lending, investment and services to all those in an institution’s geographic assessment area-at least three to five miles from each branch. In the case of large banks with many branches, the geographic area may encompass an entire county or even a state.

Before the CRA, many bankers excluded low-income neighborhoods and people of color from their lending products, investments, and financial services – a practice known as “redlining”. Community activists coined the term when they discovered that the failure of banks to make loans in some low-income neighborhoods was so geographically distinct, that it was easy to draw red lines on maps to delineate the practices.

In the 1970s, activists in Chicago and across the country brought strong pressure on banks to lend equitably to all those in their communities. Since its passage, the CRA has been used across the United States to win tens of billions of dollars in new lending, investments, and services for communities. The National Community Reinvestment Coalition tracks more than $1 trillion dollars in community reinvestment pledges nationally. These pledges are explicit investments in equitable development goals, and finance many tools in this toolkit. (Search under “Community Reinvestment Act” for the rest…)

From the article “The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities” by Howard Husock written back in 2000.

“But keeping these neighborhoods forever poor is the CRA vision. CRA will help virtually any lower-income family that can come close to affording a mortgage payment to purchase a home, often in a non-poor neighborhood. Thanks to CRA-driven bank investment, poor neighborhoods would then fill up with subsidized rental complexes, presumably for those poor families who can’t earn enough even to get a subsidized, easy credit mortgage. The effects of all this could be to undermine lower-middle-class neighborhoods by introducing families not prepared for home ownership into them and to leave behind poor neighborhoods in which low-income apartments, filled with the worst-off and least competent, stand alone—hardly a recipe for renewal.”

Those evil guys on Wall Street, right?

Fannie’s Perilous Pursuit of Subprime Loans
As It Tried to Increase Its Business, Company Gave Risks Short Shrift, Documents Show
By David S. Hilzenrath
Washington Post Staff Writer

In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers. (more…)

Video that covers all of this and more [link]

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