From the very beginning prudential regulators used poor grades on CRA assessment reports based on HMDA data to withhold approval for branching and merger applications in response to political advocacy group pressure to extract easier terms for select borrowers. How this got out of hand leading to $3.8 trillion of CRA-related commitments coming due between 2000 and 2007 is explained in a prior BankThink column.
These new CRA commitments – the majority agreed to by the "too-big-to-fail” banks – required that banks unleash their mortgage banking subsidiaries. Bank mortgage holdings doubled from $2.5 to $5.0 trillion, but almost $1 trillion of that were second mortgages. Banks could originate loans for CRA certification then sell "servicing retained" in pools of private-label mortgage securities, many of which were then sold to Fannie Mae and Freddie Mac to meet their affordable housing goals. Banks also bought about $0.5 trillion in PLS, likely for CRA credit with less than half the capital required of whole loans.
Holding the second loan while retaining servicing of the first probably continued to allow the loan to count for CRA, and second mortgage loans had a 100% risk weighting except when combined with a first mortgage lien, in which case it was only 50%., which would explain why the four CRA-driven TBTF banks held a disproportionate 45% of the stock of second mortgages.
Hence the bulk of CRA-related losses are likely found in CDO securities and second mortgage portfolios. That doesn't prove CRA was the cause, but CRA proponents have offered no convincing evidence of innocence or a need that justifies the risk. The Fed, our erstwhile systemic regulator, and the Federal Deposit Insurance Corp., our erstwhile prudential regulator, both shared CRA enforcement responsibilities and both failed massively and chronically in the last financial crisis.
I would amend the FDIC mission statement to "as an independent regulator, we will protect the FDIC insurance fund from the errors of bankers, the overconfidence of borrowers and the folly of politicians, political advocacy groups and other bureaucracies such as HUD and the CFPB" and hold them to it.
Proponents support the status quo.
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates and an executive scholar at the Burnham-Moores Center for Real Estate of the University of San Diego.
The author echoes the big lie that the financial crisis was caused by the Community Reinvestment Act. Look here, CRA loans are not sub-prime loans, which were the root of the problem. CRA loans met standards for Fannie and Freddie. Unlike subprime loans, CRA loans were not 'no doc' and 'pick-a-pay' mortgages. They did not get securitized privately by the Wall St. houses like Bear Stearns and Lehman. Moreover, subprime loans were originated by mortgage companies not (CRA-regulated) banks e.g., Countrywide, HSBC Finance, New Century Financial, Countrywide Financial, WMC Mortgage (GE sub), First Franklin Financial Corp. (Merrill Lynch sub). How about 2006 top 10 subprime originators Ameriquest and Option One (H&R Block sub)?
Other top subprime originators, like Saxon, Litton and EMC, were owned by Wall Street, Morgan Stanley, Goldman Sachs and Bear Stearns, and fed their toxic subprime securitization engines. Finally, in 2006, 1.5 trillion in non-agency mortgages was originated versus 1 trillion by the GSEs. The non-agency originations included jumbos, Alt-A and 600MM in subprime!
Enough already with putting a political spin on on history. Face the facts.