I’ve addressed this before, but it keeps coming up–in e-mails from readers, among many other places–so I’m gonna outsource to Dan Gross:
Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.
He goes on:
The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. There’s much more. As Barry Ritholtz notes in this fine rant, the CRA didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.
Just to reiterate: I know there were big problems with Fannie and Freddie. And I’m sure there were some problems with CRA as well. As one reader e-mailed this morning:
As a mortgage originator for 20 years at Bank of America I know the pressure we faced due to the Community Reinvestment Act. Banks were penalized for not complying.
But banks weren’t at the leading edge of the subprime boom. In the hierarchy of causes of our current debacle, I just don’t think Fannie-Freddie and the CRA make it into the top 5. The CRA probably doesn’t even make it into the top 10. And yes, I know, I should probably get to work compiling that hierarchy of causes.