Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

 

Yesterday’s post introduced us to the seductive argument, advanced by Howard Husock in City Journal and enthusiastically embraced by a wide range of affordable-housing foes, that the Community Reinvestment Act is the primum mobile of our current financial mess.

 

Which, when you think of it, is a tough claim to make for a statute that’s been around for 31 years.

 

When CRA was enacted, this was a new car

 

The CRA was enacted in 1977, just after the brutal recession of 1974-76, when the cities were just about scraping bottom.  It was the right move because it made manifest the government’s expectation that banks would serve the public, not just take their deposits.

 

Until the Clinton years, CRA compliance wasn’t a difficult matter for banks, which could get an A for effort simply by advertising loan availability in certain newspapers. Then the Clinton Treasury Department changed matters in 1995, requiring banks that wanted “outstanding” CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households.

 

In other words, they put teeth into the law.

 

Can’t do much enforcement here

 

Under CRA, regulated institutions would earn a rating of Outstanding, Satisfactory, Needs to Improve, or Substantial Non-compliance, based on a weighted average of three tests:

 

25% community service.  A combination of having deposit-taking outlets and consumer education/ outreach.

50% lending.  Did the bank lend back to its deposit base?  Was its share of loans in that community proportional to its deposits from that community?

25% investment.  Did the bank invest back?  Same calculation as the lending test, except for equity investments.

 

A bank’s goal is ‘Outstanding.’

 

But this new era of strict enforcement came about in response to conditions that no longer existed.

 

True, but the differences are irrelevant to the issue at hand.

 

The bank deregulation of the 1980s—initiated not by Republicans, but by the Carter administration’s federal Depository Institutions Deregulation and Monetary Control Act—paved the way for sharp competition among mortgage lenders.

 

Which, if harnessed, is a Good Thing.

 

Beginning in 1992, the Department of Housing and Urban Development pushed Fannie and Freddie to buy loans based on criteria other than creditworthiness.

 

This is a fundamental distortion of HUD’s intent.  Not ‘in lieu of’, in addition to creditworthiness. 

 

I think you’re distorting my views

Remember, CRA’s hypothesis, which the legislation essentially requires the banks to disprove, is that banks left to their own devices will lend less back into a community than they take out in deposits.  Nothing anywhere recommends, endorses, incentivizes, or rewards make un-creditworthy loans.  Nothing anywhere asks banks to lower their credit standards.  Rather, the CRA expects banks to apply credit standards evenhandedly.

 

These “affordable housing goals and sub-goals”—authorized, ironically, by the Federal Housing Enterprises Financial Safety and Soundness Act—became more demanding over time and, by 2005, required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.”

 

You forgot about rental

 

Here’s another giant hole in Mr. Husock’s knowledge – these don’t just have to be ownership loans, they can include rental.  In lower income communities, rental is a much higher percentage tenure, and the rental properties have their economics balanced (cost-value gap closed) with a variety of subsidy or hard/ soft debt/ equity resources.  Loans made to LIHTC properties, for instance, qualify on all counts.  So does LIHTC equity investment.

 

Columbus, Ohio, HOPE VI.  This counts …

 

Nasvhille, Tennessee, HOPE VI … so does this

 

Credit scoring—which didn’t exist at the time of the original passage of the CRA—allows lenders to differentiate among households of similar incomes but different levels of frugality and thrift.

 

 

Had credit scores existed in 1977, perhaps the CRA would not have been passed.  But it has been, and with credit scoring, banks should be entirely able to comply with CRA, and demonstrate compliance, without making bad loans.  That’s an argument of lessened need, not of fundamentally perverse incentives.

 

Fair-housing and antidiscrimination laws must be enforced to ensure that prospective borrowers are not turned away for nonfinancial reasons.

 

And that’s the point of CRA, isn’t it, Mr. Husock?

 

Having thus set out to prove CRA is no longer necessary, I think Mr. Husock has unwittingly refuted himself.  CRA is the only fair-housing tool I know to enforce fair housing at a macro level – and it works, a fact which Mr. Husock seems to regard as proof of its iniquity.

 

As I contended in City Journal back in 2000, this was exceptionally poor social policy. Extending lines of credit based on non-economic criteria hurts low-income neighborhoods much more than it hurts banks or other lenders.

 

While I question whether that’s what the banks did – lend on non-economic criteria – there is a straightforward logic to Mr. Husock’s thesis.  People boosted into ownership beyond their means will be unable to afford the homes into which they move, whereupon they will soon be foreclosed, the homes falling vacant, property values plummeting. 

 

In a February 2003 study, Congressional Budget Office analysts Charles Capone and Albert Metz wrote: “Once a neighborhood foreclosure cycle starts … it becomes progressively harder for other households to sell their homes. Abandoned properties and blight can destroy neighborhoods where low-down payment affordable housing programs are prevalent” (emphasis added).

 

Selective quotation and selective emphasis.  The CBO analysts are right, of course, that a downward price cycle can be self-reinforced.  We’re seeing that globally now.  It’s worst when owners (x) cannot pay their mortgage, and (y) have negative equity when they go to sell under compulsion.  Negative equity arises when prices fall, when purchases were recent (no equity buildup through loan principal payments), and when the initial equity was small (low down payments).  Thus the last-in with highest leverage always been whacked first.

 

You ain’t got no more leverage, chum

 

In 2003, a homeowner in Chicago’s blue-collar Back of the Yards neighborhood—where the first wave of subprime foreclosures had already begun—told me: “That hurts values right there. You try to show people that there’s hope for the block and then you get slapped right back down again.” Collateral damage is greatest for lower-income households that pay their bills on time but find themselves living next door to a house in foreclosure.

 

I totally agree.  Nobody makes money making bad loans.  Bad loans, especially when concentrated in particular marginal neighborhoods, are cancerous, destroying not only the home owners but they neighbors.

 

Was there a high enough level of CRA-related lending to spark our current crisis? Not on its own, of course.

 

But let that not take me off my hobbyhorse.

 

I’m having too much fun riding it

 

 

[Continued tomorrow in Part 3.]

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