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Federal Reserve Director on the CRA

Saturday, October 04, 2008 | 02:00 PM

in Federal Reserve | Taxes and Policy | UnScience

From the Federal Reserve:

"Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner." (emphasis added)

What about mergers or acquisitions -- did the CRA get in the way of that?

"Since 1988, there have been more than 13,500 applications for the formation, acquisition, or merger of bank holding companies or state-member banks reviewed by the Federal Reserve Board. Over this time, twenty-five applications have been denied, with eight of those failing to obtain Board approval involving unsatisfactory consumer protection or community reinvestment issues."

Wow, just 8 out of 13,500. That's less than one tenth of 1%.

What about the methods of forcing compliance?

"The CRA is one of several laws enacted to ensure that consumers and communities have access to financial services and products regardless of location or demographics. Congress sought to achieve that goal not by imposing rigid, prescriptive rules but by charging regulators to use flexible standards that could change, as needed, over time."

Gee, this doesn't sound too onerous; What was all the brouhaha about?

"The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail."

What are the requirements of the CRA?

The CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:

• to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;
• to assess their records of performance under the CRA during examinations; and
• to take those CRA records into account when evaluating proposals for expansion.

Hey, that sounds pretty flexible. What sort of discretion exists in applying the CRA:

The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets. This flexibility has contributed to CRA's relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.

Wow, this stuff makes the wingnuts and gasbags look pretty foolish. What's your source for all this?

All quotes are come from the testimony of Sandra F. Braunstein, Director, Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System, before the Committee on Financial Services, or from the Federal Reserve website.

Source:
The Community Reinvestment Act
Sandra F. Braunstein, Director, Division of Consumer and Community Affairs
Before the Committee on Financial Services, U.S. House of Representatives
February 13, 2008
http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm

See also:
The Community Reinvestment Act: Its Evolution and New Challenges
Chairman Ben S. Bernanke
Community Affairs Research Conference, Washington, D.C. March 30, 2007
http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm

Community Reinvestment Act
http://www.federalreserve.gov/DCCA/CRA/default.htm

The Performance and Profitability of CRA-Related Lending
Robert B. Avery, Raphael W. Bostic, and Glenn B. Canner
Federal Reserve Bank of Cleveland, November, 2000
Economic Commentary
http://www.clevelandfed.org/research/commentary/2000/1100.htm

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Comments

Obviously sourced by one of those Commie Red Analyst types that want the government to run everything......wait, I mean...

FIRST!!!!!!!

Posted by: TulsaTime | Oct 3, 2008 7:04:19 PM

TulsaTime:
Do you think Charlie Gasparino will believe the Fed? Since BR's word wasn't good enough for him.

Posted by: Joe Klein's conscience | Oct 4, 2008 1:45:03 PM

Barry sorry for this off topic thing, but i am totally lost as to the future of the economy hence looking for some directios.

(i had posted this comment on other thread but unable to find it)

i have been reading everywhere that now we are heading towards a great depression and not much can be done to make the pain less.

by great depressions, people are predicting that unemployment(official) will shoot up as much as 10%.
housing will fall another 30%(panic sales and foreclosures) and will stay there for 4-5 years.
businesses are going to now start laying off preparing for a long recession and consumers are already maxed out and scared hence they will pull back sharply, sending the consumption on a cliff dive.

but i feel that if the government wanted it can definitely lessen the pain by doing the below:

1. backstop housing by buying and removing from market all default/foreclosure property(will the current bailout plan do it?)
2. FED interest rate lowered to 0.5%, and mortgage interest lowered to 5%(fannie and freddie are gov entities and can loan money infinitely)
3.more benefits given to home buyers to help housing(how about increasing the short term tax break from 7500 to 25000, which can also be financed from IRA or 401k with no penalty)
3.stimulus checks every three months to help consumer income
4.Faciliate interbank lending by being the middle man(use the trust of the government).
5. Massive infrastructure projects to support job.
6. Homeland security is still hiring though.

in other words...fight deflation and debt with inflation to stave off the sharp pain.

i think these are doable....but will they do it?

Posted by: techy | Oct 4, 2008 1:47:56 PM

While I hope you keep fighting the good fight, Barry, I think this has already become an wingnut urban legend, joining the ranks of "jack-booted thugs" and "welfare queens".

Posted by: PeakVT | Oct 4, 2008 1:49:07 PM

Bottom line is you point out many flaws in the "no regulation" espoused by libertarians but are missing an enormous piece with your defense of the CRA flaws.

Having traded many billions in whole loan and MBS assets I can tell you the banks paid up bigtime for CRA loans and that generally meant big buys of subprime and especially "Alt-A" pools. The biggest buyers however were Fannie and Freddie. I'm sorry but your focus on comments from the same regulators who failed us all to defend the CRA is laughable. Do some research in the Agency Housing Goals. If you follow the money (always the most efficient path to understanding these issues) you'll see bonuses were tied to these housing goals and they were satisfied by buying outright or only guaranteeing loans. I'd bet half that target was met with subprime and stated income Alt-A loans over the last 5 years.

~~~
BR: Fannie has been around since 1938, the CRA has been around since 1977 -- suddenly, it all went to hell in 2005? And THATS your explanation for why?

Gee, isn't that rather odd -- after 70 years?

Posted by: Chet | Oct 4, 2008 1:54:29 PM

The theme of central banks abusing their power to control money in order to extract wealth is as old as Moses ...

Thomas Jefferson prophesied:

"If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs."

Ask Lincoln how he was treated after issuing Greenbacks to finance his war. The bankers believe it is their birthright to control our money.

To this generation: welcome to the party.

Sound money, no fractional reserve banking, and no, I'm not for Ron Paul but he has spoken the truth on this issue.

Posted by: ssm | Oct 4, 2008 1:58:51 PM

Barry, I don't see how this is an effective defense of the CRA. You're asking someone whose job it is to defend it if it was a burden on the banks. What do you expect their answer to be? "Yes, we did put undue burdens on the lenders." It's like quoting Barney Frank in defense of Fannie Mae and saying case closed. Also, "encouraging" lenders is a very vague term, and certainly does not preclude members of congress from witholding positive legislation from the banks in return for lending to risky communities.

Posted by: Zach | Oct 4, 2008 2:06:14 PM

One of the big problems that I have with the characterization of the housing crisis is this notion that it will be devastating to poor Americans. Bullshit. Most poor people, who were smart enough to live in "poor people" neighborhoods, have relatively modest amounts of debt. If you can keep them employed, they will pay their debts. The cost of ownership is still lower than the cost of rent in these areas.

In actuality, the poorest Americans live in $500,000 neighborhoods, with 2 financed SUV's in the driveway, maxed-out credit cards and not a snowball's chance in hell of paying the principle (let alone interest) on their debt. In short, trailer trash who thought they were republicans.

Main street knows this, and that's why most people were dead set against the bailout. Drag these pretenders back to the trailer park first, then we'll talk about who needs to be rescued.

That said, I think the bottom line you were trying to get at is:

Charlie Gasparino's a tool.

Posted by: mark mchugh | Oct 4, 2008 2:18:50 PM

The CRA was a tiny part of the problem, but the idea behind it, that the government should be out there making sure people get loans, is at the heart.

That's why when people tried to point this out or reign in Fannie and Freddie they got pushed aside.

NYT link:

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

------------------------------

There it is right there. Prices are increasing faster then incomes, so it is the governments job to make up the difference with credit. If you question that you hate poor people and the dream of home ownership. Or at least according to Fannie's lobbying efforts.

NYT
One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”

But hey, I'm just a free market fundamentalist. I don't understand why the idea of government trying to increase the housing stock beyond free market levels is a great thing. So questioning the CRA, Fannie, or Freddies very purpose for existing means I'm crazy.

Posted by: Dave | Oct 4, 2008 2:26:00 PM

The propaganda machine is in high gear to deflect blame from their basic tenets and policies.

"The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over”
Joseph Goebbels

Or another way to say it - make sure the bullshit fits on a bumper sticker.

Posted by: Winston Munn | Oct 4, 2008 2:41:09 PM

A high-quality post by Larry Tate over at the "I hate what you just said" blog addresses one of the right-wing Frannie/CRA canards, the Kevin 'Dow 36,000' Hassett "Democrats did it" version, in considerable detail (good comments too); see http://tinyurl.com/3lw9au

Tate and the references he cites make it pretty clear the so-called sub-prime bubble was a complex event but for those who simply can't avoid the compulsion to find a single, major culprit then Frannie would not be a good choice -- too many fingers from all sides of the fence in that pie -- the repeal of the Glass-Steagall Act is much less ambiguous, one could almost say, simple.

The money quote:

"...the repeal of key New Deal-era regulations of the financial markets, most notably the Glass-Steagall Act [whose] explicit intent was to prevent a “repeat of the 1920’s era scams in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank.” Sound familiar?

And guess what law repealed that Glass-Steagall Act? It was the Gramm-Leach-Bliley Act of 1999. Yes, that is ...the same Phil Gramm whose legislation led to the Enron scandal; the same Phil Gramm who is likely the new head of the Treasury if McCain is elected.

And the vote? With one exception, it went straight down party lines: all Republicans voting “yea” and all Democrats voting “nay.”

But hey, I’m not pointing fingers."

Posted by: RW | Oct 4, 2008 2:41:47 PM

The money quote:

And the vote? With one exception, it went straight down party lines: all Republicans voting “yea” and all Democrats voting “nay.”

But hey, I’m not pointing fingers."

Posted by: RW | Oct 4, 2008 2:43:53 PM

to the anti-CRA crowd, from another post:

show me an enforcement action against a bank - any bank. a press release. an indictment. a prsecution. one that says "[banker]/[bank name] failed its obligations under the community reinvestment act"? because surely one bank in the past ten years stood up to the federal government and said "enough is enough with this regulation that forces me to make bad loans".

Posted by: john | Oct 4, 2008 2:56:46 PM

I find it ironic that the roots of this credit crisis can be traced back deep into the "wonderful" Clinton years (with a complicit Republican-controlled Congress). Seems like Slick Willie managed to get his thumbprint on yet another debacle. Having said that, George Bush was no angel in this either. I distinctly recall the State of the Union addresses in which he touted "the home ownership society". So there's plenty of blame to go around, like spreading butter on a piece of toast (the toast being our economy).

Posted by: Frank | Oct 4, 2008 2:57:11 PM

The only people laying this problem at the feet of CRA are those that are politically driven. Gasparino has such visceral hatred for New York Dems that it oozes from him. He is not capable of being fact based in his assessment of this issue. It is pure emotion. Others just want their team to win and will say anything to further same. That is in no way exclusive to either party. What may have been lost in trying to lay this on pressure from Dems on Fannie and Freddie is the "ownership society" bullshit the Bush Administration pushed. What was owned was shitloads of debt and overpriced houses. The majority of blame goes to the dereg., laissez faire, zero oversight, and just plain half-assed lazy efforts of the current occupant. Charlie can get as belicose as we chooses, can have the absolute certitude of a zealot if he chooses, but he is on the incorrect side of this issue. A side question for anyone who may know: Is Gasparino an "I need to seriously compensate" short guy? Just a hunch.

Posted by: Scott in Chicago | Oct 4, 2008 3:05:16 PM

Barry, this was my experience with the CRA. I used to be involved with affordable housing lending (Section 42). I would go to conferences alone, while Fannie and Freddie had armies there, and many banks and utilities (huh?) had small teams there. Fannie and Freddie had 2/3rds of the market share, with the rest of us clamoring for the rest, forcing down yields and underwriting standards.

The banks were there for the tax relief and the CRA credit. Fannie and Freddie were there for the tax relief and meeting the demands of Congress for affordable housing.

Banking regulators use informal pressure to see that CRA requirements are met, the same way they do loan underwriting requirements. The standards, and their enforcement are squishy, but their existence has made many bankers that I have known act, at least in the 90s and early 2000s.

That said, the Bush administration probably took the same approach to regulating underwriting and CRA -- they didn't do it. The bigger problem was not regulating underwriting, which in a fiat money system is poisonous -- it is akin to not caring about the growth of the money supply. That was a key component of how we got to the current mess.

~~~

BR: David, I am sympatico on the issue of fiat money supply.

What I do not understand is how Fannie / Freddie forced banks to write no money down mortgages, 120% LTV, Interest Only loans, and 2/28 Arms ?

Can anyone explain that to me? I cannot find those requirements anywhere in the books, legislation or charter of FNM/FRE/CRA . . .

Posted by: David Merkel | Oct 4, 2008 3:09:24 PM

Chet, Dave, and all trying to defend this POS theory:

Try actually backing up what you say with some facts, and actual links. An "idea", or the fact that a single congressman said something, does not constitute an effective argument that the CRA had *anything* to do with the mess we're in. Demonstrate to us that the number of mortgates that were sold *directly due to the CRA* were large enough, and disproportionately given to un-credit-worthy customers, to cause the problems that we're seeing with widespread mortgage defaults. *You* are the people claiming that the CRA and FM&FM are *the cause* of the problems that we have now, so it is up to you to back it up with some actual facts.

This is revisionism on a grand scale, and a giant effort to cover up the culpability of the upper classes, and their bought-and-paid-for representatives, in causing this mess. I guess "personal responsibility" is only something to scold poor people about.

Posted by: OhNoNotAgain | Oct 4, 2008 3:10:58 PM

When the sub-prime crisis began, the Ben Steinery School of Economics said that sub-prime is such a small part of the mortgage sector, that even if every loan went bad, it couldn't impact Main Street. Of course, he didn't bother to consider that for every inconsequential $200,000 sub-prime loan, Wall Street sold $6 Million in derivatives. The people who took out the loans are no angels...they didn't really qualify to own those homes, and thus I can't worry too much that they lose those homes. They'll go back to renting. It took Wall Street though to take a contained problem and turn the whole financial system radioactive. And Mr. McCain, who said just days ago the economy is sound, is very anti-regulation. The same guy who said he would invade Iraq again, even knowing there were no WMDs...the WMDs, as Buffett once said where here all along in credit derivatives.

The only constant during the building of this bubble, through Reagan, Clinton, Bushes, was one Alan A. Greenspan...you tell me what A stands for.

Posted by: Steve Barry | Oct 4, 2008 3:44:53 PM

I think it's fair to say that while Frannie may not have precipitated this disaster by themselves, they are symptomatic of the lack of oversight and sheer ignorance of economic reality by members of our political class, of all persuasions.

The fact is, the left turned a blind eye to Frannie because they were fulfilling their desire for governmental involvement in housing finance (to provide mortgages to folks private industry ignored or shunned). They didn't want to go poking around in there to see how the short-term-profit side of those GSEs' personality had taken over (we have to be able to hire the best and brightest C-level mgrs, right?). So you have what the British would call quangos (quasi non-governmental organizations) with the profit motive of private companies, without the traditional skepticism of public oversight (as their mission and their operatives knew what the buttons and levers are in gov't as much as any high-powered lobbyist).

So... I guess what I mean to say is that those who called out Frannie should have gone further and called _ALL_ the players in this MBS/CDO catastrophe to account and failed to do so because of their tribal affiliation, and those who stuck up for Frannie due to _their_ tribal affiliation should have looked at it with clear eyes and done the right thing.

At any rate it's too late now, at least childrens' wooden arrows are gonna be cheaper, right??

Posted by: Dr. Kenneth Noisewater | Oct 4, 2008 3:46:31 PM

Frannie and banks paid well thru the market for billions of subprime and AltA loan pools that I saw. If it was year end they might pay a point or more to get it. You can say CRA and Agency Housing Goals didn't impact these institutions, but I know different. At least they sure acted with the belief they mattered. Frannie traders told me bonuses requires hitting the goals.

There were plenty of other players with various reasons for loading up on bad assets, but given what I saw and experienced I just don't buy this whitewash of the housing goals pushed by Dems. Plenty of blame and corruption in both parties and private companies, but you're way put to lunch if you don't believe the housing and community activist linkage to Frannie and the Democratic Party wasn't a significant factor.

~~~

BR: I don't say that at all. I have been saying that Fannie and Freddie were cogs in the machine, and there are lots more proximate causes than them.

Fannie has been around since 1938, the CRA has been around since 1977 -- suddenly, it all went to hell in 2005? And THATS your explanation for why?

Gee, isn't that rather odd -- after 70 years?

Posted by: Chet | Oct 4, 2008 4:01:26 PM

I have no problem with blaming the CRA, but I have yet to see any attempt at providing numbers. So I think this is just another bumper sticker slogan.

The covert message seems to be that those worthless bl... um minority people were gaming the system. But a glance at the BR's infoporn maps shows that the worst foreclosure problems are in FL, CA, NV. There's a little peak in OH and MI, probably Cleveland and Detroit, but nothing like the sunbelt. Some of the CA peak may be immigrants. Still, loans that might have been influenced by CRA seem to be a small part of the problem

It shouldn't be difficult to put actual numbers on this. A good first approximation would be the percent in value of defaults and foreclosures in zip codes with high numbers of minority/poor buyers that CRA is supposed to benefit. I'd guess around 10%, but I'd be happy to be corrected. It certainly adds to an already serious problem, but using it for political traction is vile.

Posted by: Roger Bigod | Oct 4, 2008 4:02:35 PM

The Financial Crisis: How a string of bad loans led to a worldwide economic meltdown

Pretty good recap on what's been going on lately... (H/T Ben Jones)

Posted by: Dr. Kenneth Noisewater | Oct 4, 2008 4:02:54 PM

BTW, IMO non-recourse loan laws have caused far more damage than CRA or any other sort of jiggery-pokery.. The fact that hundreds of thousands of Californians can just walk away leaving the house keys on the granite countertop, all by itself, is a massive blow against the economy.

If I were smart and amoral, I'd 'buy' a CA house at 120% LTV, HELOC the shit out of it, stash that $$$ in impenetrable overseas banks, then skip out on the mortgage.

OTOH the laws were there before the loans were made, so bankers, traders and ranking agencies Should Have Known Better(tm) when it came time to sign those contracts and package those securities.

Posted by: Dr. Kenneth Noisewater | Oct 4, 2008 4:10:14 PM

Chet,

That's, again, a lot of talk with zero actual facts. Show me facts. Christ, at least indicate a year when this suppposedly occurred. My understanding is that the Fannie and Freddie didn't start gobbling up sub-prime loans until 2007:

http://www.realestatejournal.com/buysell/mortgages/20070420-hagerty.html

End quote in the article:

"Part of this turnabout is luck. If Fannie and Freddie had to have accounting scandals, they picked the perfect timing, just as the housing market was heading into a speculative binge fueled by aggressive mortgage lending. Those accounting woes forced Fannie and Freddie to reduce their loan purchases when the market was lowering credit standards on subprime mortgages. So other investors, as well as lenders, ended up with most of the worst loans and will absorb the bulk of the losses."

That sounds to me like Fannie and Freddie came in at the tail end of this, and were not the responsible parties at all.

Posted by: OhNoNotAgain | Oct 4, 2008 4:14:49 PM

When Frannie lowered lending standards, and started promoting 80-10-10, 80-20, etc., that certainly fed the beast. FNMA/FHLMC got so HUGE, it boggles the mind.
I'm sure clinton dems (that includes me)(and their influence continued after shrub took office) were behind a lot of the loosened regulations/standards. CRA was more of a by-product. I think we need to get off this CRA discussion. Saying it didn't contribute just validates those who like to blame it.

Dems and Repubs share the blame. There wasn't a problem as long a house prices went up. It was a scandal that we all played, let's face it. How could you turn down a deal on principle when your competitor would take the deal if you didn't?
But there was a ton of fraud, and some players who should have known better. FNMA/FHLMC are at the top of my list; but they could have been reined in. Where was the political will to stop the mania? There were multiple, variable, dynamic inputs on many levels that led to where we are today.

Posted by: cloudy | Oct 4, 2008 4:18:20 PM