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Tag Archives: Community Reinvestment Act

The hot issue in American politics is the economy. It stems, of course, from the housing boom of the early 2000’s, that inevitably became today’s housing bust. People are angry. They want action. Many of them are calling for tighter regulations and increased oversight of lenders as well as the larger financial sector. Well, the Bush administration has devised a plan. According to this plan, the Federal Reserve would become the great overseer of the financial sector. In fact, the Fed would assume the role of “market stability regulator.” Furthermore,

“The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.”

How interesting. Under this plan the fox would, indeed, be in charge of the hen house. Let’s remember that the Fed slashed interest rates in the aftermath of the 9/11 terrorist attacks in an attempt to spur demand and encourage consumerism. Americans were led to believe that they could spend and borrow their way into prosperity. Many Americans proceeded to buy overvalued homes which they could not afford. The Community Reinvestment Act, which I highlighted here, also forced lenders to issue loans to many subprime borrowers, who normally would not have qualified for those loans.

Everything that transpired after the interest rate cuts, however, would not have happened if the rates were allowed to be determined by the market. So before we blame the market for the mess, it’s important to remember that it was the Federal Reserve that set and held interest rates well below the normal market level. As far as the great borrowing frenzy is concerned, the Fed was the great enabler.

And now were supposed to trust the Fed to oversee the entire financial sector? We’re supposed to trust the Fed to ensure everything remains copacetic?

Here’s what Ben Bernanke, the Chairman of the Federal Reserve, had to say about the housing boom in 2005, just before President Bush nominated him to become Chairman:

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”

And how did he feel about the prospect of the boom in the housing market coming to an end?

“A moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”

In other words he simply told everyone to take it easy. Don’t worry. Everything’s under control. That was the message.

Congressman Ron Paul, on the other hand, issued these prescient statements on the housing situation in May of 2004.

“Federal Reserve manipulation of interest rates and the money supply has created a perilous situation for millions of Americans,” Paul stated. “Rising interest rates may well cause housing prices to fall dramatically, leaving many homeowners who bought at the height of the bubble owing more than their homes are worth. Homeowners with adjustable-rate mortgages are especially vulnerable, as are those who used paper gains in real estate values as collateral for second, third, and even fourth mortgages. The Fed’s easy-credit policies are directly responsible for lowering creditworthiness standards and encouraging millions of Americans to overextend themselves. If trillions of dollars in housing equity disappear, no amount of Fed sorcery will keep record amounts of Americans out of bankruptcy.”

Keep in mind that Paul’s statements were issued more than a year before Bernanke shrugged off the looming debacle. Paul predicted that rising interest rates could cause housing prices to fall dramatically, leaving many homeowners owing more than their homes are worth. And then we see this article from marketwatch.com on March 25, 2008, in which it is stated:

“Home prices in 20 major U.S. metro areas have plunged a record 10.7% in the past year as prices continued to decelerate, Standard & Poor’s said Tuesday.

The 20-city Case-Shiller home price index fell a record 2.4% from December to January, the 18th consecutive decline in prices. For 10 major cities, prices fell 2.3% in January and 11.4% for the past 12 months.”
Furthermore, from Bloomberg.com on February 26, 2008:

“Falling prices have trapped many homeowners who would like to sell or refinance their houses because they owe more money on them than the homes are now worth.”

Dr. Paul also highlighted the risk for homeowners with adjustable rate mortgages. In the same marketwatch.com article we see:
“Falling home values could also trigger higher monthly payments for many homeowners with adjustable rate loans.”
And from Bloomberg.com on those rising rates:
“Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records three years ago.”
So, it would appear that the man who has been labeled by some as a paranoid, crackpot, conspiracy theorist actually had it figured out. And he wasn’t afraid to spell it out, either. The man who is now the Chairman of the Federal Reserve, on the other hand, simply brushed the matter aside.
Now what’s that about the Fed possibly being the “market stability regulator?”

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By now we all are well aware of the crisis in the subprime housing market. Much blame for the mess has predictably been placed on unscrupulous lenders. When do we ever hear that our government may have actually caused the problem? Of course, we just don’t hear that. After all, protocol requires that we blame the private sector for all of society’s problems. To remedy those ills we are told that we need more government regulation of those greedy, blood sucking capitalists lurking everywhere in the business world.

No one ever seems to mention legislation like the Community Reinvestment Act (CRA) which made it mandatory for lenders to issue loans to subprime borrowers. Tom DiLorenzo has written an excellent article on the effects of the CRA here.

In the midst of all of this fallout Democrat wunderkind Barack Obama has been calling for more government regulation to rein in loose lending practices. This seems to be just a tad disingenuous of Mr. Obama, as he has recently been endorsed by the Association of Community Organizations for Reform Now (ACORN). Here’s an excerpt from DiLorenzo’s article that explains how the ACORN doesn’t fall far from the CRA tree:

So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

Are we actually supposed to believe that ACORN would endorse Obama if they believed he was going to put an end to the “lending practices” that have been so lucrative for them?

But what of Mr. O’s challenger, the incorrigible Mrs. Clinton? Well, naturally she understands that it’s standard procedure for a government person to blame the market for every problem we encounter in this country, so that’s what she does regarding the subprime mortgage situation. She criticizes unfair lending practices and talks about holding lenders and brokers accountable in her speech before the National Community Reinvestment Coalition(NCRC). By the way the NCRC offers this explanation of what it is, and what it does:

The National Community Reinvestment Coalition is a national not-for-profit with over 800 membership organizations with constituents in every state in the country. The Coalition has spearheaded a proactive community reinvestment movement with the goal of ending discriminatory banking practices and increasing the flow of private capital and credit into traditionally underserved communities. (emphasis added)

UPDATE: I must thank a reader of this post for pointing out that the NCRC does NOT state that they increase the flow of private capital and credit into “undeserving” communities. Unfortunately, I missed the letter “r” that actually made that word “under-served.” Sorry about that.

This, of course, is not to say that I now find the NCRC more palatable. Since the gist of this post was mainly to highlight the disruptive nature of government regulation like the CRA, I should mention that the NCRC has called for the strengthening of the CRA. At the same time, however, the NCRC has also called for more accountability within the banking industry. But herein lies the problem.  The CRA that is so strongly supported by the NCRC forces banks to be accountable ONLY to federal regulatory agencies, NOT the people who are trying to procure a loan.