The CRA... Still Not Causing the Meltdown

From comments on an economics blog, it appears that the financial fraudsters who cause this recession are still trying to blame poor people. So another post on the reality of the CRA.

http://obsidianwings.blogs.com/obsidian_wings/2009/06/the-cra-still-not-causing-the-meltdown.html

The CRA... Still Not Causing the Meltdown


by publius

Megan McArdle cheers on John Carney in a misguided attempt to once again blame the housing meltdown on the CRA -- i.e., a 1970s law intended to limit loan discrimination. She writes:

[T]he role of the CRA in the financial meltdown [has been] understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences. . . . Regardless of how much causal blame you assign it, the financial crisis has certainly proven that the CRA seems to have been a very, very bad idea.

Essentially nothing in that excerpt is true. Felix Salmon and Ryan Chittum hopefully put the stake through this argument, but it keeps appearing (the Chittum post is more comprehensive). To sum them up -- the bad loans at the heart of the meltdown came overwhelmingly from unregulated, non-bank lenders who weren't even covered by the CRA. In addition, the CRA loans did very well. And there's basically not a shred of evidence that the CRA led to the meltdown. And you can't evade that 100% lack of evidence by citing vague "mentalities" and drawing imaginary causal lines constructed entirely of ideology.


http://www.ritholtz.com/blog/2009/06/most-subprime-lenders-werent-covered-by-cra/

Most Subprime Lenders Weren’t Covered by CRA
By Barry Ritholtz - June 27th, 2009, 9:00AM

The CRA brouhaha last year led the Orange County Register to run an analysis of “more than 12 million subprime mortgages worth nearly $2 trillion” in late 2008.

What did their data based analysis discover?

“Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made.”

Among their research conclusions:

* Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law.
* State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in.
* Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren’t subject to the CRA law, though some were owned by banks that could choose to include them in their CRA reports.
* Among lenders that were subject to the law, many ignored subprime while others couldn’t get enough.
* Among those standing on the sidelines: Bank of America, which made no subprime loans in 2004 and 2005; in 2006 and 2007 subprime accounted for just 2 percent of its loan portfolio. Washington Mutual, meanwhile, raised its subprime bet by 20 times to $5.6 billion in 2006 – on top of its already huge exposure through its ownership of Long Beach Mortgage.