As Congress crafts new banking rules to beef up the Community Reinvestment Act, the panel it picked to probe the subprime mess is discounting CRA's role in it. How convenient.
The "bipartisan" Financial Crisis Inquiry Commission kicked off its hearings this year by pillorying Wall Street. It also vowed to investigate the impact of housing policy. So far all it's done is farm out a study on the subject to a Berkeley economist pal of Phil Angelides, the commission's Democrat chairman.
Predictably, his 25-page paper concludes that the Community Reinvestment Act had no real role in the crisis, even though the anti-bank redlining regulation was strengthened and enforced like never before starting in 1995.
"I find no evidence that CRA incentives played a significant role in expanding high-risk lending during the housing bubble," said UC-Berkeley economist Dwight Jaffee.
What about the affordable-housing quotas HUD slapped on Fannie Mae and Freddie Mac? They were "secondary to profits" as a factor motivating their investments in high-risk mortgages, Jaffee advised the panel, which will use his study as a baseline for discussion and findings.
That's a shame. His analysis is riddled with flaws and suspicious omissions.
For starters, nowhere in the report does he address the key underlying cause of the easy subprime credit bubble: government pressure to bend underwriting rules. This was central to the Clinton and Bush administrations' campaigns to boost minority home ownership.
In fact, "flexible" lending was codified as part of the new CRA mandates.
Banks that didn't bend their rules to qualify poor and minority loan applicants with bad credit didn't pass the stricter CRA lending test enforced by bank examiners.
Flexible lending soon became the industrywide norm, adopted by CRA-covered banks and noncovered mortgage companies. Fannie and Freddie became models of underwriting "flexibility."
Jaffee tries to make the case that CRA loans pose no more risk than conventional loans. As proof, he claims that delinquency rates on CRA loans are "actually slightly lower." This flies in the face of studies showing the opposite holding true. CRA loans consistently bear higher delinquency rates than prime loans.
How did Jaffee come up with his supporting data? Very selectively. He took a slice of 2008 loans just above the subprime threshold and compared their average delinquency rate to those just below the threshold in CRA ZIP codes. The difference is statistically insignificant: 24.9% vs. 24.1%.
"Slightly" lower, yes, but still outrageously high -- and hardly proof CRA loans are safe and sound. If anything, the analysis seems more a hair-splitting exercise to manufacture a conclusion "slightly" favorable to the CRA.
Jaffee also argues that only 6% of subprime mortgages in 2006 were made to CRA-qualified borrowers or neighborhoods by CRA-regulated banks. This stat, too, is misleading, since it doesn't include:
VVintage subprime mortgages.
VSubprime loans made by mortgage subsidiaries or affiliates of banks indirectly affected by the CRA.
VSubprime mortgage-backed securities purchases, for which banks received "CRA credit."
VHigh-risk loans underwritten by Acorn Housing, Neighborhood Assistance Corp. of America and other CRA shakedown groups using the billions in commitments and other subsidies banks made to them to satisfy CRA "investment" tests.
Jaffee makes no such caveats. Even more suspicious is his pooh-poohing of HUD's role in the subprime mess.
"The HUD programs have long existed," he said, "and I find no evidence that they were focused or recently modified or expanded in a manner that might have particularly encouraged high-risk mortgage lending."
Huh? HUD's fair-lending programs and regulatory powers over independent lenders and Fannie and Freddie were broadened dramatically prior to the recent wave of defaults.
Starting in 2000, HUD required Fannie and Freddie to position fully half their mortgage portfolios in high-risk, low-income loans -- despite a spike in subprime foreclosures at the time. The "affirmative action" credit quotas, raised higher still by Bush's two Hispanic HUD secretaries, drove the mortgage giants into the subprime market -- and eventually into financial insolvency.
Incredibly, Jaffee rationalizes all this away in his report, titled "The Role of the GSEs and Housing Policy in the Financial Crisis." GSEs, or government-sponsored enterprises, refer to Fannie and Freddie.
"That the GSE housing goals are consistent with high-risk mortgage activity does not imply that the housing goals caused the GSEs' high-risk activity," he maintained. "The housing goals were a distinctly secondary priority for GSE management compared to profits as a factor motivating their investments in high-risk mortgages."
Really? That's not what GSE managers say.
The higher goals "forced us to go into that (riskier subprime) market to serve the targeted (uncreditworthy) populations that HUD wanted us to serve," said Freddie Mac spokeswoman Sharon McHale.
Forget that, Jaffee argues. "The consensus of the academic literature" (which happens to include several of his own prior studies) says otherwise.
"Factors other than housing policy played a more fundamental role in creating the crisis," he concludes in his report, citing as the real culprits "lightly regulated bank investment portfolios" and "an unconstrained OTC market for credit default swaps."
In other words, the private sector is to blame.
This is intellectual dishonesty at its worst. The evidence is clear that the subprime bubble was fueled by government-mandated overinvestment in high-risk, low-income areas greenlined by Washington social engineers and bank regulators.
While the Angelides Commission promised it would also examine government's role in the financial crisis, so far its effort looks more like a cover-up.
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