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In recent months numerous critics have unfairly blamed the current financial crisis on efforts to increase lower-income home
ownership.
Most frequently mentioned is
the Community Reinvestment Act (CRA), the balanced, but oft-criticized, set of regulations
designed to ensure that financial institutions are meeting the credit needs of
both upper-income and lower-income consumers.
Critics suggest that CRA required banks to weaken underwriting standards
and make loans to persons who could not afford to repay them.
Simply put, only about 25 percent of subprime mortgage
loans were made by institutions covered by CRA.
These institutions were subject to considerably more regulatory
oversight than those made by unregulated mortgage companies––many of which are
now out of business due to reckless, irresponsible and unsustainable
lending. The additional oversight
provided by CRA sets out clear penalties for banks making reckless
loans––something that, to our detriment, few other regulations have offered.
The rapid growth of subprime lending did not occur until
20 years after the passage of CRA: the
nearly doubling of subprime lending activity seen between 2001 and 2006 was a
period which saw no major changes to CRA.
It is unlikely that a rush to qualify new home owners in
previous years, CRA-related or otherwise, resulted in the credit crunch we are
facing today. Whereas over half of
subprime mortgages were refinances between 1998 and 2006, less than 10 percent
of subprime mortgage originations went to first-time home buyers. Less than ten percent.
The state of our credit markets will be the definitive
conversation for the next several years.
Balanced regulation, like CRA, should be a subject of that conversation
as it will undoubtedly play a role in the solution even though it clearly
played little role in the problem.
Dory Rand
President
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