The Failed Community Reinvestment Act – The Catalyst Behind The Economic Meltdown Of 2008

March 24, 2013 10:30 pmViews: 10380

Community Reinvestment Act CRA Caused economic collapse


This article was originally published in Gold Coin and Economic News on March 22, 2011.

Sometimes the obvious is hidden in plain sight, but the obvious is cloaked by a noble name disguising a grandiose scheme. The scheme? It is referred to as the Community Reinvestment Act and if you don't know about it you should because it played a significant part in the economic meltdown back in 2008 and if it is allowed to continue on its collectivist trajectory, it will spell disaster on a much larger scale than what we experienced just three years ago.

The Community Reinvestment Act or CRA was meant to encourage banks to invest in real estate and lend to people that are otherwise passed over because of their poor economic situations. The main gist of the law was to get home loans to those that would not normally qualify for a mortgage. Innocuous sounding enough, the CRA was born in 1977 and largely unenforced and ignored until President Bill Clinton's overhaul of the anti-redlining rules under the act in 1993. (Redlining is a practice of banks not investing in an area of a city or charging more for financial services in that area because they determine it to be hazardous to business) At that point, the CRA was systematically used to begin to terrorize banks into giving out loans not only to people who could not afford them but, who had no intention of paying them back. Thus began the first ripples in the pond that would eventually nearly sink the economy some 15 years later.

You may be thinking, "What did an obscure law revamped back in 1993 have to with an economic crisis 15 years later?" and my answer is, everything. While many would, and do, suggest this is an absurd notion, it is important to understand the unfolding of the economy is a slow process in most cases. Bad financial laws implemented and enforced on a small scale, take time to do their damage as they grow and and are enforced on a much larger scale. As in the case of the CRA, it was originally used by Attorney General Janet Reno after the Clinton revamping in 1993 to prosecute many banks for supposedly racist lending policies against blacks even though there was zero evidence to back up these charges. As time progressed and more cases were brought into the courts and more banks were intimidated (read terrorized) by thug organizations such as ACORN, this sent a chill into the banking industry and many banks simply rolled over and made risky loans to avoid prosecution.

It is important to note that many of the banks sued during the Reno tenure and beyond had already passed CRA inspections that found no such discriminatory lending practices. While statistically it was true that blacks and other minorities were in fact not getting loans at the rate white people were, the reason this was happening was not racist at all, it was based on the borrowers ability to pay and their past credit history. The only criteria used in determining whether an applicant could have a loan was based on their credit score and income statements. For the most part, if your credit score and ability to pay was good, you got a loan regardless of your ethnicity. While blacks got fewer loans as a percentage than did whites, Asians received many more loans as a percentage than did whites, yet there was no outcry of racism or lawsuits on the parts of whites who felt they were being discriminated against because Asians got more loans than they did.

To make a very long story shorter, the ensuing result of such practices of suing banks on behalf of blacks and American Indians took some $6.1 trillion, yes that's trillion, out of the hands of banks and gave it to the housing market to build hundreds of thousands of homes over the course of 10 or so years that could not afford to be paid for. While this was a serious problem in and of itself, former President Clinton further exacerbated the situation through Housing And Urban Development (HUD) by requiring that Fannie May and Freddie Mac guarantee these risky mortgages from default. Also, under threat of further regulations and investigations, the nation's largest subprime lender Countrywide Financial also played a part in the game by agreeing to lower their standards for obtaining a mortgage for minorities who were not deemed creditworthy.

It gets worse. The problem again gets compounded when HUD lets Fannie Mae And Freddie Mac purchase mortgage backed securities of subprime loans as credit for their HUD implemented goals of lending to more minority and unqualified mortgage borrowers. Freddie and Bear Stearns then create more securitized loan investment products that are just CRA mortgages supposedly guaranteed by Freddie Mac via the US Treasury. Finally, other banks then buy these risky mortgage backed securities because they get CRA credits (to avoid being investigated or sued) for investing in low income mortgages. See how complicated this gets?

So what you have now is hundreds of thousands of mortgages going to people that can little afford to pay them back, that came from bank money which was forced out of their vaults by lawsuits, fines and threat of lawsuits. All this is then backed up and secured by the federal government through mortgage giants Fannie Mae and Freddie Mac. Is any one starting to see a recipe for disaster? If you are, then let's proceed to the next step where we're going to place this mess in an oven and cook up a near full fledged economic meltdown. It should be fun.

Because of the enforcement of the CRA by the justice department at the hands of Janet Reno, lending standards across the mortgage industry are starting to be relaxed to try and be competitive with the institutions that have been forced to lower their standards. The result in all this is that between the years 2001 to 2005 just about anyone could qualify for a loan, even if you couldn't afford it. To make matters worse (is there no end in sight?), President George W. Bush in 2002 directed his HUD Secretary, good old Republican, Mel Martinez to "help families who have bad credit histories to qualify for home-ownership loans."

At this point you would think someone with half an economic brain would say, "Why are we giving home loans to people with bad credit histories in the first place?" Unfortunately, anyone who did that, at any time in this journey, was branded a racist by champion class hate instigator Jesse Jackson, Barney Frank and a whole host of organizations such as ACORN which once employed our Organizer In Chief, Barack Obama.

George W. Bush then continues to pour gas on the fire of the coming economic collapse by signing into law the American Dream Down Payment Act which sets aside $200 million a year for poor minorities to help them get into starter homes, by making their down payments for them. Again, almost everyone in government who voted for this nightmare thinks that giving down payment money to people who can't come up with it themselves is a good idea. Lawmakers who agree with what will become the American Nightmare Down Payment Act also fail to realize that requiring these borrowers to have an actual stake in their home by putting their own money into it provides an incentive to actually keeping their home.

But wait, since our lawmakers fail to see impending doom and House and Senate Banking Committee Chairmen Barney Frank and Chris Dodd think that everything is just rosy at Freddie Mac and Fannie Mae, HUD raises the bar on its minority home ownership program to require that Freddie and Fannie make 52% of their loans to low or moderate income buyers. Subsequently, Fannie Mae pumps another $350 billion into risky subprime mortgages and sews the seeds of its own eventual demise and takeover by the government.

Finally in 2008, under the weight of trying to provide loans to thoroughly unqualified borrowers as mandated by the government following the guidelines of the good old Community Reinvestment Act, Fannie Mae and Freddie Mac collapse when to everyone's surprise, low income borrowers do in fact default on their loans en masse. The Treasury then takes over Fannie and Freddie and they become wards of the state. Countrywide Financial also becomes a casualty of mass loan defaults by low income borrowers and is purchased by Bank of America. Not even bending to HUD extortion and trying to avoid being sued by the Justice Department can save Countrywide as they become the bad boy scapegoat of criminal government policy gone mad.

While Countrywide CEO Angelo Mozilo must take plenty of blame for assuring everyone in his organization all was fine despite the coming collapse he was well aware of for nearly 4 years, nevertheless this problem would have not existed at all had it not been for HUD's extortion and intimidation of the mortgage giant to relax its underwriting standards.

Equally, none of the real players in the entire mortgage debacle have been asked to account for their actions. The Financial Crisis Inquiry Commission's investigation and 576 page report failed to mention actions taken by Janet Reno, Bill Clinton, HUD Charimen Henry Cisneros, Mel Martinez and Andrew Cuomo, George W Bush, Janet Reno deputy Eric Holder (our present Attorney General), Alicia Munnell (whose thoroughly discredited report on lending while at the Boston Fed lead to the strengthening of the CRA), Roberta Achtenberg, Barney Frank, Chris Dodd and a whole host of other government criminals who used every means available to extort money from private banking institutions all in the name of fairness.

Further, none of these individuals were called before the commission to testify of their knowledge of, their destructive policies and their ultimate roles in the financial crisis. It seems as though the organized, bureaucratic criminals that truly lead us into this mess have been able to completely insulate themselves from even any implied wrongdoing much less investigation and subsequent prosecution.

Rather than take the blame for the crisis their direct policies were instrumental in creating, amazingly, many of the same players have been asked to help fix the problem. Barney Frank and Chris Dodd who were tasked with knowing what was going on at Fannie and Freddie and then completely missed the boat have now written and sponsored the new financial reform bill passed in July of 2010. Barney Frank even adamantly exclaimed that there were no problems and the "two entities" back in 2003.

What is most alarming abut the new financial reform bill and its 2,319 pages of obfuscation is that it does nothing to address the problems of Fannie Mae and Freddie Mac. Instead of letting these 2 now Treasury owned organizations fail and their assets be sold off, they are now essentially protected by the the new Dodd-Frank reform bill. Even though they failed miserably to implement the so-called affordable housing dreams of Democrats in Congress we will probably see these beasts rise again. Democrats still need a financing vehicle for their ever wilder social experiments and Freddie and Fannie played their part in buying constituent's votes for nearly two decades.

Because the Financial Crisis Inquiry Commission completely failed to mention that it was radical government policy that was mostly responsible for the housing collapse and resulting financial fallout, the Dodd-Frank act actually increases government meddling in banking institutions and on Wall Street. Instead of reforming the way government makes policy and looking deeply into the books of Fannie and Freddie to see where the money came from, where it went and who benefited from the transactions and profit of this mortgage behemoth gone bad, our leaders have expanded their borders and created even more bureaucratic government agencies such as the Financial Services Oversight Council and the Consumer Financial Protection Bureau. Heaven help us all.

No matter the government's destructive ways, the billions (or now, trillions) spent, the thousands of pages of regulations and the coercive ways of the fed that eventually end up giving little to zero results and are even proven harmful, the answer is always we didn't spend enough, regulate enough or take enough in taxes therefore, we need more.

When will we realize that the we need more answer is not the answer? Will it happen when members of Congress in their infinite wisdom ask for 50%, 70%, 90% or 99% of our earnings to finance more of their schemes just to keep themselves in power? While enforcement of the CRA did not require that tax money be used to pay for the risky mortgages (the American Dream Down Payment Act was at taxpayers expense), banks were extorted into giving up the money they loaned and the bailout of Fannie and Freddie did obviously involved your tax money.

If someone comes up to you on the street and demands your money, they are referred to as a thief, yet we are forced to obey those that legislate this same thievery, calling it social justice, from the halls of Congress.

It is time to start thinking of our government as the despotic parasite that it is.

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