The Mainstream Comes On Board--CRA Didn't Cause the Current Mess

Those who, like me, believe that CRA not only did not cause the current mess but has been a positive force, are gratified that the mainstream press has finally started to pick up the theme. For example, this morning the New York Times ran an editorial pointing up both the fallacies of the anti-CRA argument and the good CRA has done. And last week Forbes carried a piece by Luis Ubinas, the new President of the Ford Foundation, pointing out that the crisis was caused by risky mortgages (by risky, non-CRA-regulated lenders), not risky borrowers, and in particular not poor borrowers.

Perhaps even more important for countering the effects of the "blame CRA" campaign in middle America, the McClatchy papers have distributed a news item blasting the myth, noting, "What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans. These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans."

Ubinas' piece builds on an extremely timely and compelling study by the Center for Community Capital at the University of North Carolina. The study is also referenced in the Times editorial. Using matched samples of sub-prime borrowers who got well-underwritten, conventional, fixed-rate loans from banks and credit unions and those who got adjustable rate loans with prepayment penalties from brokers, the study found that the borrowers with good loans had significantly lower default rates than those with the bad loans. And nothing else accounted for the difference. As the study states: "all other characteristics being equal, borrowers are three to five times more likely to default if they obtained their mortgages through brokers. When the feature broker-origination channel is combined with the adjustable rate and/or prepayment penalty, the default risk is even higher."

So, enough already. Let's put the blame where it's due: on bad products sold by people with no interest in repayment to investors who didn't understand what they were buying in an unregulated market run amok. Good products sold by lenders with an interest in success to borrowers who understood what they were getting did much, much better.