Oct 6, 2008

Anonymous banker on the Community Reinvestment Act

I am an expert in the Community Reinvestment Act and the Home Mortgage Disclosure Act and related Fair Lending laws. I have been consulting in this specializeed compliance area for 14 years and have worked with hundreds of banks and some community organizations as well. There is a good deal of truth to the allegation that the CRA did contribute to the current financial crisis . . . . There is much good to be said about the CRA, but as the old saying goes, "The road to hell can be paved with good intentions." While the CRA has been around for more than 30 years, it was the changes made in 1995 under the Clinton administration that set the ball in motion for the pressurs that created market premiums for LMI ["low- to moderate-income, or sub-prime] mortgages. In 1995 for the first time, the CRA specified quantitative performance standards specifically related to LMI mortgages. It took 7 or 8 years for the cumulative effect to become too big to ignore.

About 50% of the sub-prime mortgages originated can be ascribed to banks and their affiliates (which itself is still very substantial). Under CRA banks receive credit [by the Fed and other regulators, for making bad loans] not only for loans they originated, but loans they purchase as well. This resulted in a premium value for mortgages to low- and moderate-income [i.e., sub-prime] borrowers . . . . The premium was reflected in the secondary market for these loans [i.e., Fannie and Freddie's operations] I personally saw transactions between banks in which these mortgages were sold and purchased at huge premiums that were driven by the "CRA value" of the credits [i.e., browny points with Fed regulators] for the loan purchaser. I vividly remember one portfolio transaction in which the purchasing bank paid a premium of $15000 per mortgage to effect a transaction just before year end. Some unscrupulous firms went around marketing "CRA mortages" . . . touting the mortgages to borrowers as highly attractive because of the CRA-angle. Lehman Bros. was one of the most acive players in the secondary market purchasing these loans. The reality is that the regulatory pressure exerted by CRA was a factor that should not be ignored. Ironically, at the same time, many banks did offer discounted rates to LMI borrowers that did benefit them. Not all sub-prime loans took advantage of borrower ignorance.

~ Anonymous banker, "A Banker on the Evils of the Community Reinvestment Act," LewRockwell.com Blog, September 29, 2008

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