The Community Reinvestment Act, Another Culprit of the Economic Meltdown
Fannie and Freddie were not the only culprits in the economic meltdown.
There are others to come.
The Community Reinvestment Act is one more to blame.
Fannie and Freddie not only pushed for looser lending requirements, so did other Government agencies.
They pressured lenders to make riskier loans all in the name of "racial equality.
" Lenders, fearing lawsuits of hundreds of million dollars in damages, followed their orders.
In 1992, the sloppy and error ridden study by the Federal Reserve Bank of Boston claimed to establish evidence of racial discrimination in the banking industry.
Hailed as proof of American banking industry's guilt in discriminating against minorities (although Asians had higher rates of mortgage loans than whites), the interests groups had their bludgeon and intended to use it to get banks to offer credit to disadvantaged minorities in inner-city neighborhoods.
Bill Clinton's administration gave new support to the Community Reinvestment Act (CRA), a law from Jimmy Carter presidency and now receiving much attention and criticism since the housing crisis began.
The law threatened banks with crushing discrimination suits if they did not offer loans to a sufficient number of minorities to satisfy government authorities.
However, the CRA was not only pushing for lower standards, so was the entire political establishment.
According to Stan Liebowitz of the University of Texas at Dallas, a scan of the housing literature from 1990 until 2006 will not show any suggestion that "perhaps these weaker lending standards that every government agency involved with housing tried to advance, that Congress tried to advance, that the presidency tried to advance, that the GSEs tried to advance - and with which the penitent banks initially went along and eventually supported with enthusiasm - might lead to high defaults, particularly if housing prices should stop.
" After publishing the new found proof of discrimination, the Boston Fed released a manual for banks on nondiscriminatory mortgage lending.
It warned against "arbitrary or unreasonable measures of creditworthiness.
" Evidently, bank standards were "arbitrary and unreasonable" if a significant percentage of minorities did not receive loans.
The manual maintained that credit history, down payments, and traditional sources of income as unimportant or dispensable obstacles to homeownership for society's poor and disadvantaged.
Easy AdSenser by Unreal The banks, of course, obeyed the government regulators.
"Banks began to loosen lending standards," says Liebowitz, "and loosen and loosen, to the cheers of the politicians, regulators, and GSEs.
" Bear Sterns, a major underwriter of mortgage-backed securities, argued for the soundness of the mortgages in their literature.
Explaining that the credit rating of the borrower should not be important, it stated that, "CRA loans do not fit neatly into the standard credit score framework.
" Typical of government officials, they never look beyond the first consequences of their policies to see the later and most likely dangerous outcomes of their "good intentions.
" Inspired by Meltdown by Thomas E.
Wood Jr.
There are others to come.
The Community Reinvestment Act is one more to blame.
Fannie and Freddie not only pushed for looser lending requirements, so did other Government agencies.
They pressured lenders to make riskier loans all in the name of "racial equality.
" Lenders, fearing lawsuits of hundreds of million dollars in damages, followed their orders.
In 1992, the sloppy and error ridden study by the Federal Reserve Bank of Boston claimed to establish evidence of racial discrimination in the banking industry.
Hailed as proof of American banking industry's guilt in discriminating against minorities (although Asians had higher rates of mortgage loans than whites), the interests groups had their bludgeon and intended to use it to get banks to offer credit to disadvantaged minorities in inner-city neighborhoods.
Bill Clinton's administration gave new support to the Community Reinvestment Act (CRA), a law from Jimmy Carter presidency and now receiving much attention and criticism since the housing crisis began.
The law threatened banks with crushing discrimination suits if they did not offer loans to a sufficient number of minorities to satisfy government authorities.
However, the CRA was not only pushing for lower standards, so was the entire political establishment.
According to Stan Liebowitz of the University of Texas at Dallas, a scan of the housing literature from 1990 until 2006 will not show any suggestion that "perhaps these weaker lending standards that every government agency involved with housing tried to advance, that Congress tried to advance, that the presidency tried to advance, that the GSEs tried to advance - and with which the penitent banks initially went along and eventually supported with enthusiasm - might lead to high defaults, particularly if housing prices should stop.
" After publishing the new found proof of discrimination, the Boston Fed released a manual for banks on nondiscriminatory mortgage lending.
It warned against "arbitrary or unreasonable measures of creditworthiness.
" Evidently, bank standards were "arbitrary and unreasonable" if a significant percentage of minorities did not receive loans.
The manual maintained that credit history, down payments, and traditional sources of income as unimportant or dispensable obstacles to homeownership for society's poor and disadvantaged.
Easy AdSenser by Unreal The banks, of course, obeyed the government regulators.
"Banks began to loosen lending standards," says Liebowitz, "and loosen and loosen, to the cheers of the politicians, regulators, and GSEs.
" Bear Sterns, a major underwriter of mortgage-backed securities, argued for the soundness of the mortgages in their literature.
Explaining that the credit rating of the borrower should not be important, it stated that, "CRA loans do not fit neatly into the standard credit score framework.
" Typical of government officials, they never look beyond the first consequences of their policies to see the later and most likely dangerous outcomes of their "good intentions.
" Inspired by Meltdown by Thomas E.
Wood Jr.
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