Blame the victim

Since the credit crisis has gone into complete basket case mode; a number of right wing commentators believe they have found the reason for the whole thing - the US Government forcing banks to lend to poor people.

This argument allows such commentators to stick to their belief that the free market is a wonderful thing that only fails when that damn bleeding heart government gets involved. It also allows them to criticise Kevin Rudd for saying bankers are greedy, and rather say it's poor people who were the real greedy ones for borrowing beyond their means.

The crux of their argument lies with a thing introduced by Jimmy Carter in 1977 called the Community Reinvestment Act (CRA). This was legislation designed to stop banks and lending agencies essentially ruling out lending to people on the basis of where they lived - ie people who lived in poorer areas were often unable to get a loan regardless or their financial situation. The Act mandated that

all banking institutions that receive FDIC [federal deposit] insurance be evaluated by the relevant banking regulatory agencies to determine if the institution has met the credit needs of its entire community in a manner consistent with safe and sound operations.

The act does not require the banks to make high risk loans, in fact it emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner.

And yet there has to be some reason for the credit crisis - it must be this 30 year old law. To whit Janet Albrechtsen in The Australian writing:

The US has a long and undistinguished history of populist politicians stacking the cards against lenders and in favour of risky home ownership. Proving that good intentions are no guarantee of good policy, Jimmy Carter’s 1977 Community Reinvestment Act, which required banks to make loans to low-income people, was just another legislative leg-up for high-risk borrowers. Socially laudable but economically reckless laws led to entirely predictable problems for lenders. And it’s no surprise that taxpayers are left holding the bill.

Which sounds like a great argument, except it's total horsesh*t. Let's check the facts. A study done on institutions covered by the CRA found that such banks were

• substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis.
• significantly less likely than other lenders to make a high cost loan; and
• more than twice as likely as other lenders to retain originated loans in
  their portfolio (ie not engage in selling off the loan to other banks etc to "balance the risk - a major cause of the crisis).

The authors of the study concluded:

Without the CRA, the subprime crisis and related spike in foreclosures might have negatively impacted even more borrowers and neighborhoods.

Compared to other lenders in their assessment areas, CRA Banks were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio.

Moreover, branch availability is a key element of CRA compliance, and foreclosure rates were lower in metropolitan areas with proportionately greater numbers of bank branches.

In other words the CRA actually worked well because of the Government's meddling - it forced banks to engage is safe lending practices (just not be discriminatory about it), and it wasn't economically reckless.

So sorry guys, it wasn't the Government's meddling that was at fault, and it wasn't (to quote Alexander Downer) the poor and largely, but by no means exclusively, African-Americans and Hispanics who took out such loans.

Nope when you talk about sub-prime mortgages, you aren't for the large part talking about any done under the CRA. Most of those bad loans were made by unregulated mortgage lenders with no CRA obligations or oversight - yes they may have been to "poor people", but they weren't being done because the government was forcing them to - they were being done because the banks and lenders were treating such high-risk loans as low risk (in much the same way junk bonds in the 80s were treated as low risk), because they were chopping up the loan and selling it off to other banks and investors (known as "securitization").

Now I'm not saying that none of the government initiatives to free up the lending market in the US were misguided (I'll probably write more on the financial crisis later - suffice to say it's a complicated mess), but let's not just pick out a 30 year old law and simplistically say that the government forced banks to lend to poor people who couldn't afford to repay.

It's wrong, it shields the banks from blame, it argues that no regulation is required, and instead puts all the blame at the feet of lefty government policy (which of course is the aim of such commentators).