CRA to Blame for Mortgage Mess?

Matt Lewis
Posted: Sep 18, 2008 8:38 AM
This morning on "Morning Joe," Larry Kudlow was asked about some specific reforms that could help the economy. 

He noted that the federal government helped create this financial crisis in the mid-nineties by passing the Community Reinvestment Act.  According to Wikipedia:

"The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.
The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. [1]"

The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions.
... The Clinton Administration's regulatory revisions [1] with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. [2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. [3] [4]

In short, the federal government began forcing banks to make subprime loans to people who couldn't afford them. 

Update:  This is from April 15:

KUDLOW: Would you consider, by the way, rolling back the Community Reinvestment Act, which a lot of people say triggered this, mandating banks and other lenders to make substandard loans in the first place, and the creator of the subprime mortgages back in the middle '90s? Is it time to take a look at the Community Reinvestment Act?

Sen. McCAIN: Absolutely, Larry. There were people who predicted that the Community Reinvestment Act might lead to reckless and unsound lending practices just to sort of fill a--you know, a amount of--I don't like to use the word "quota," but certain percentages of a--of a home--of the bank's lending practices. Yes, it has to be re-examined, it has to be judged by its
effect, and we need to find out how this particular system affected the overall insolvency of the subprime lending issue. And I think it--I'm not saying it needs to be repealed, but it certainly needs to be re-examined and what its effects have been. And we'll be able to figure that out.