What’s to blame for the 2008 financial crisis? According to Senator Elizabeth Warren, it is not low-income (sometimes called “affordable”) housing reform.
Conservative political factions have targeted low-income housing reform from the 1970s as the fundamental cause of the crisis. The Carter-era Community Reinvestment Act requires lenders to make loans in low-income communities where they also accept deposits. The law is a convenient scapegoat for those who argue liberal government housing policies are to blame for the subprime mortgage crisis.
Senator Warren responded with characteristic poise and vitriol when the Mortgage Bankers Association (MBA) recently regurgitated this argument. She was quoted by the Huffington Post, saying:
“Although Fannie and Freddie purchased securities backed by subprime loans, and some of those purchases helped fulfill their affordable housing goals, the St. Louis Fed economists found that the housing goals had no impact — no impact — on either the number of subprime loans originated or the price of those loans in the private-label market [. . .] Affordable housing goals have been scapegoated by those who have been itching to get rid of the goals for a long time, but I think it’s time to drop that red herring.”
Once again, Warren gets it right. It’s important to rebut this argument for several reasons. Of course we don’t want to go backwards when it comes to low-income housing reform. But the law is more than some sentimental liberal policy for the redistribution of wealth.
Low-income housing, especially in urban city centers, encourages jobs growth, innovation and creates conditions fertile for virtuous market cycles. For a compelling and comprehensive breakdown of how subprime lending spiraled out of control, listen here.
The St. Louis Fed report to which Senator Warren referred is here.
The CRA effect is widely exaggerated by the right, just as the repeal of Glass-Steagall is by the left. The CRA had little direct effect on residential lending. I recall seeing B of A offering a whopping 1/4 point off fees if the home was in a “targeted census tract”. People are confused because the Fannie-Freddie execs kept talking about needing to make changes [or avoid restriction] to promote affordable housing. But that was all a sham, as detailed in “Reckless Endangerment” by Morgenson & Rosner. Fannie-Freddie’s real motive was maintaining market share and using Enron-style accounting to maximize executive bonuses.
In a parallel myth debunking, Gillian Tett’s “Fools’ Gold” explains how wall Street was already doing the derivatives [“financial weapons of mass destruction”] prior to the repeal of G-S. Repeal simply permitted Wall St to do the derivatives domestically instead of using their UK subsidiaries.
So in both cases, myths based on partial information is used inaccurately for political purposes. Nothing new.
Buffalo is right and Elizabeth Warren is completely wrong. The Community Reinvestment Act, started by Jimmy Carter, was put on steroids under the Clinton Administration, and with the repeal of Glass-Steagall (also by Clinton), the seeds were sown for the 2008 debacle. Zero down, liar loans were made possible by CRA and the largess of Freddie and Fannie under the leadership of Democrats like Barney Frank in Congress. John McCain warned us in 2005 of the impending doom, but the democrats had no interest in serious reform. Bush was completely distracted by the war. Inconvenient truths.
@Buffalo, maybe you could explain exactly how “low income housing policy” IS responsible for the 2008 financial crisis. I can assure you that the billions in penalties and settlements that are being levied against the banks has more to do with their criminal activities during the years of 2001-2009 than any low income housing policy.
Greg
Low income housing policy with it’s inherent sub prime lending practices and low down payments IS responsible for the 2008 financial Crisis.