Can someone please explain to me what the Community Reinvestment Act is ...?

1999 NY Times Article Predicted Current Financial Bailout

October 3rd, 2008 by Kenneth Long

A NY Times article written by Steven Holmes on September 30, 1999 documented the changes at Fannie Mae that may be the root cause of the current financial crisis. What began as a pilot program to help encourage homeownership from somewhat less qualified applicants exploded into a subprime buffet by mortgage lenders using exotic mortgages that initially increased profits. The warnings in the article are eerie predictors of the collapse of the U.S. financial sector.

We know that there were merits in the pilot program, and in the subsequent rollout to other lenders. By relaxing the standards on the mortgages it bought, Fannie Mae allowed for homeownership among borrowers that did not meet traditional guidelines for a conventional mortgage.

The problem was that Fannie Mae and Freddie Mac both were pressured into buying mortgages that included terms that were predatory in nature. Widespread use of exploding ARMs, negatively amortizing mortgages and interest only mortgages caused many homeowners to soon find themselves in dangerous situations. They are unable to afford their mortgage payments and they are unable to sell due to a lack of equity.

Now that the mortgage crisis has carried over into our nation’s financial institutions, it is important to reflect on how we got to this point of crisis. Additionally, it is important to find out why we ignored the warnings before we created this disaster. Steven Holmes made the following ominous statement in his article:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

The Times article also made reference to a statement by an economist that studied the potential impact of easing credit restrictions:

“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

These statements summarizes the increased risk and the consequences that could result from the easing of credit criteria prior to the subprime frenzy and subsequent meltdown. However, I doubt that even Holmes or Wallison could have predicted the levels of abuse surrounding exotic loan products.

The types of mortgages pushed on ignorant borrowers were unconscionable. Some homeowners had zero possibility of affording the mortgage payments beyond a couple of years. Others fell delinquent almost immediately.

Some homeowners were tricked into mortgages that resulted in huge balloon payments. They would have no money to pay these, and their credit situation would make a refinance impossible.

Other lenders encouraged flipping of mortgages, so that new fees could be added each time. The result was the fleecing of any equity from the home.

One of the most blatant causes of the subprime collapse was the use of “no doc” loans. Famous for requiring no substantiation of income or assets, these have since been nicknamed NINJA loans.

The government failed to protect homebuyers by allowing abuses by lenders and brokers. Additionally, they fostered an environment for such abuses by pressuring Fannie and Freddie to buy those mortgages. Eventually, these mortgages became the toxic base for today’s collateralized debt obligations (CDOs). There is no definitive answer as to the value or risk of many CDOs, and it appears that government intervention will be necessary to contain the damage made possible by its initial intervention.

This Act was passed in 1977 by Congress to address the so-called discrimination by banks, which would not lend money to most minorities. The act provided that banks have “an affirmative obligation to meet the community’s needs.”

The banks were not giving the loans out to minorities because most of them just didn’t have the money to pay them back-but the liberal congress under President Carter thought differently. But this Act was not enough to force the banks to give loans out to everyone. So in 1989, Congress amended the Home Mortgage Disclosure Act which required banks to collect racial data on mortgage applications.

This started a major trend in bills which forced the banks, in the long run, to give out sub-prime loans. Like the following acts/bills:

Federal Housing Enterprises Financial Safety and Soundness Act

Community Development Financial Institutions Fund

The CRA or Community Reinvestment Act was instituted under Carter as a means to rebuild inner cities and poor communities. IT was expanded under Clinton to include affordable housing for minorities. Minority groups threatened to sue banks and lending institutions if they were not allowed access to Tax dollars for housing . Clinton's Attorney General also threatened Federal law suits against individuals and corporations for not lending to people with poor credit . The Banks relented and given guarantees by the Feds began to give home loans to anyone and everyone without rhyme or reason . President Bush and Conservatives attempted on over 6 occasions to investigate and rein in bad home loans made by Fannie and Freddie but they were silenced by Democrats.

In a nutshell this was an act of Congress that said that banks had to make mortgage loans in the areas where their branches were located. This meant that banks that were located in or near lower class (slum, or ghetto) neighborhoods were forced by the Federal government to make loans to people with bad credit an/or insufficient income. Failure to do so would result in a lawsuit against the banks for racial discrimination. The result was that trillions of dollars in bad loans were made by banks to people who would never pay them back. In the late 1990s the CRA was expanded to allow these mortgages to be bundled into mortgage-backed securities and sold to investors on Wall Street. The result was a meltdown on Wall Street.

All these bad loans are still trickling through the system, resulting in high foreclosure rates. Not only low-income minorities were able to get these loans, but anyone else who could not or did not want to verify income or assets. Thousands upon thousands of these loans were written, and when adjustable rate mortgages adjusted upwards, huge numbers of people could not make the payments. As a result, they had less money to spend on other things, so the companies they did not buy from had to fire employees and in many cases go out of business. So as a result of these bad loans unemployment increased drastically.

It was the demands of the Federal government that mortgages be given to people who could not afford them plus the greed of the banks that together led to the economic crisis we face today. So the federal government plus the banks are the cause of the crisis.

It doesn't. That change into merely the finest Democrat led initiative in charge the housing crash on. CRA or the different regulation also did not rigidity banks to push 80/20 mortgages, risky hands with ridiculous teaser expenses, or any of the different techniques that filled their stability sheets with poisonous resources. yet, if people were to actual blame banks for the mess, it would want to justify sensible regulation it truly is frowned upon by some even with the actuality that if it makes acceptable experience for all in contact.

It was a bill that urged banks to lower their lending standards so that low-income people could purchase a home. The problem is that those people were not getting loans because they were not meeting the financial standards for credit.

So these people are buying homes they can barely afford, and then when the cost of living went up they could no longer make their mortgage payments.

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