Affordable Housing Institute : US

[Continued from yesterday's Part 2 and Part 1.]

 

The previous two parts of this post introduced us to Howard Husock’s argument in City Journal, recapitulating themes he’s sounded over years and years, that the Community Reinvestment Act is the worm in capitalism’s apple that sucked banks into making bad loans.

 

CRA?

 

It’s particularly tough because the CRA’s had gone three decades without creating a crisis.  It was enacted 31 years ago, added tough regulatory teeth (in the form of merger-approval requirements) 20 years ago, and became critical for banks a decade past.  If that is a deadly virus, its infection rate is glacial.

 

While opinions vary on how long the current crisis in our housing and financial markets will last, its principal causes are clear. 

 

Exceptionally low interest rates

High levels of available capital

The advent of mortgage securitization

 

combined to spur overinvestment in housing—and underinvestment in the sort of due diligence that once typified lending.  [Reformatted for clarity – Ed.]

 

What inconvenient drivers?

 

I am mightily impressed with the easy way Mr. Husock leaps over the three principal drivers, none of which have anything to do with CRA, to focus on the lesser ones.

 

But as with most events of such magnitude, a long chain of subsidiary causes also played a part.

 

Mr. Husock would hotly deny that he is a foe of affordable housing.  He argues – wholly wrongly, in my view – that any deviation from rock-ribbed underwriting will ipso facto destroy neighborhoods. 

 

The crucial link was the extension of CRA-type thinking and regulation to the secondary mortgage markets through the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which buy loans from banks in order to provide liquidity.

 

Another bouncing leap of logic – “CRA-type thinking” isn’t CRA.  Guilt by implication and intimation?

 

As one former Fannie Mae official puts it: “Both HUD and many advocates in the early 2000s were anxious for the GSEs to extend credit to borrowers with blemished credit in ways that were responsible.”

 

If Mr. Husock can add emphasis, so can I.  Extending credit responsibly to those with blemished credit is the essence of both financial forgiveness and financial expansion.  To read into that as an endorsement for band lending is absurd.

 

You got a problem with how I interpreted the quote?

 

How were such goals to be met? Crucially, subprime loans didn’t only allow banks to meet their CRA lending requirements; sold to Fannie and Freddie, they could also help the two secondary mortgage giants meet their affordable-housing targets.  

 

The GSEs’ hands aren’t clean here either; for several years, instead of competing with questionable lenders, they enabled them through buying their paper.  For that casual and cynical approach they (and we) have now paid dearly.

 

Not all subprime loans, or even a majority of them, were made for CRA-related reasons—the combination of cheap money and imprudent borrowers clearly made for a tremendous bubble.

 

Here we go again with the false syllogism:

 

Many lenders made risky loans. 

Some lenders were motivated by CRA.

Therefore CRA is the cause of all bad loans.

 

My logic is so graceful you fail to notice I never ground it

 

Don’t try to diagram that logic sequence, folks.

 

Sensors indicate your sequence is totally illogical

 

If CRA were to blame, then why did the world create all that subprime not bought by banks?  Why are foreign markets (e.g. England, Ireland, China) showing the same ills?

 

Every one of us is a sick economy

 

But such loans, bundled into asset-backed securities, were purchased (according to a June 2007 HUD report) especially by Freddie Mac to help fulfill its affordable-housing goals.

 

As recently as April of this year, Fannie actually boasted about “mortgage products and options,” which included “reduced requirements for down payment and closing costs, choices for borrowers with less than perfect credit and flexibility to provide loans to home buyers with no traditional credit history.”

 

In 2005 alone, Fannie Mae purchased some 3.8 million loans that could help them achieve affordable-housing targets.

 

I’ll give him that; I commented on it in Who’s next?

 

How many of the troubled Fannie/Freddie loans were also used for CRA purposes by banks that originated them? It’s impossible to know; regulators haven’t done a rigorous assessment.  

 

Nor have CRA advocates pushed for any performance tracking.  

 

Why would they?  That’s the regulators’ job.

 

“Don’t torture yourself, Gomez.  That’s my job.”

 

But they were certainly implicated in our present situation. One chief executive of a significant New York bank recently told me that Fannie Mae “scooped up” all of the CRA loans he originated.

 

That means ‘bought at a favorable price,’ not ‘deliberately bought bad loans.’ 

 

But the CRA advocates, including the New York Times [Damned by the company they keep? – Ed.], continue to claim that CRA-qualified loans made by regulated financial institutions performed well and shouldn’t be implicated in our current troubles. They point to the results of an evaluation of CRA loans by North Carolina’s Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall.

 

A moment ago Mr. Husock was griping that CRA advocates were uninterested in performance tracking; now he cites a study by a group I presume favors CRA.  Which is it?

 

What they don’t mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act.

 

Just out of curiosity, why would one expect a North Carolina group to study loans outside of North Carolina?  A huge sample in a reasonably representative state must be meaningful, and statistically relevant in its state, even if not nationally valid.

 

Follow again the leaps of logic:

 

No national data proves my assertion.

The only available statewide data disproves my assertion.

Therefore the available data is useless.

 

It’s easy when you defy logical gravity!

 

There has been no systematic study, by either the Government Accountability Office or the Federal Reserve, of the performance of loans cited by banks in their CRA filings.

 

From a policy perspective, this would be very worthwhile.  It would be great if the GAO or Fed would undertake such a study. 

 

Many such loans weren’t even underwritten by the banks themselves, which often purchased CRA-eligible loans (advertised in such publications as American Banker) and then resold them.

 

Good God, advertising loans for sale.  Is nothing sacred?

 

Advertising?  Like, so ga-ross!

 

Again, the emphasis was on showing regulators that loans were being made—not how they were performing.

 

CRA inspectors aren’t looking at safety and soundness; other bank regulators do that.  When OSHA comes to check your factory, do they ask to see your financial statement?

 

Bank examiners began using federal home-loan data—broken down by neighborhood, income, and race—to rate banks on their CRA performance, standing traditional lending on its head. In sharp contrast to the old regulatory emphasis on safety and soundness, regulators now judged banks not on how their loans performed, but on how many loans they made and to whom.

 

Banks are subject to two sets of regulatory reviews!  One for safety/ soundness, one for CRA!

 

He must be trying to be obtuse, mustn’t he?

 

As one former vice president of Chicago’s Harris Bank once told me: “You just have to make sure you don’t turn anyone [Qualified – Ed.] down. If anyone applies for a loan, it’s better for you just to give them the money. A high denial rate [Relative to credit scores or peers -- Ed.] is what gets you in trouble.”

 

There’s no way this unverifiable quote can mean what Mr. Husock wants it to mean – loans without qualifications, loans without underwriting.  Notice how the addition of a few implicit qualifiers [At your service – Ed.] defangs it entirely.  Mr. Husock also drags in recent Republican bogeymen ACORN and the Neighborhood Assistance Corporation of America (NACA), whose tactics I have found deplorable, whose credit-taking I have found implausible and self-aggrandizing, and whose pugnacity I have found counterproductive – but these are only one player; they neither stand for the whole nor represent any significant fraction of the aggregate loan volume.

 

How could such a system not lead to problem loans and high delinquency and foreclosure rates?

 

It’s called “underwriting.”  It’s also called “the profit motive.” 

 

Both political parties are guilty. Democrats were largely responsible for the Fannie and Freddie affordable-housing goals, but the Bush administration promoted the idea of letting holders of Section 8 rental-housing vouchers—very poor households—use their housing subsidy as a down payment on a mortgage.

 

This is a complete non-sequitur; people who got into homeownership using Section 8 vouchers are a minuscule fraction of all households.

 

Let’s allow these market mechanisms to operate, rather than relying on regulatory mandates and the political risk they introduce into financial markets.

 

There’s only one problem with that laissez-faire approach: Slums are economically rational, and slums are unacceptable.

 

The South Bronx, 1975: two years before CRA

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