Monday, February 16, 2009

Elizabeth Duke - Another CRA Denier

Quoting The Wall Street Journal Real Time Economics Blog:
“A government effort to promote lending in low- and middle-income areas has not been a significant contributor to the nation’s housing woes, Federal Reserve Board Governor Elizabeth Duke said.

An analysis of loan originations shows that only 6% of higher-priced loans - those typically extended to subprime borrowers - were made by lenders covered by the Community Reinvestment Act to borrowers in neighborhoods targeted by the act, Duke told community bankers gathered in Phoenix Monday.”
Click the image & read the rest:
Click the image & read the rest

Here are the two biggest flaws in Ms. Duke’s argument (and all others like it):

1) Ms. Duke has cherry picked her data -

I don’t care what percentage of “higher-priced loans” “were made by lenders covered by the Community Reinvestment Act to borrowers in neighborhoods targeted by the act”. Tell me what percentage of defaults fell under BOTH the CRA and all other associated malfeasance. Actually, Duke inadvertently did so, but WSJ did NOT - we’ll get to that later.

2) Associated Malfeasance -

The real CRA related coup de grâce came in 1999 when Clinton pressured Fannie Mae to lower “the credit requirements on loans that it will purchase from banks and other lenders”.

When Clinton made that move, the New York Times warned:
“In moving, even tentatively, into this new area of [subprime] 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.”
That one move by Clinton shifted to the tax payers ALL moral hazard associated with originating ALL bad subprime loans - whether directly covered by the CRA or not. From that day forward, ANYBODY could originate a bad loan, book the origination profits and then sell that bad loan to Fannie Mae.

I am not defending anybody who originated bad loans. I am saying that government, especially Clinton, created the conditions whereby that bad behavior would be richly rewarded - with little or no risk to those engaged in the bad behavior.

Less than seven months after utterly ignoring the warning from the New York Times, the Clinton Treasury Department boasted:
“The U.S. Treasury Department released a report on Wednesday detailing lending to low- and moderate-income borrowers and low- and moderate-income communities covered by the Community Reinvestment Act. The study found that such lending rose significantly, totaling more than $600 billion between 1993 and 1998.”
So, right there, you have the Clinton Administration crediting the CRA with “more than $600 billion” in CRA loans in a single six year period during their tenure. AND, this six year period PREDATES the coup de grâce which the New York Times warned us about in 1999!

Today, even Ms. Duke agrees that the subprime market - pushed by Clinton - is the epicenter of the housing mess:
“According to the latest data, 25 percent of subprime loans and 13 percent of near-prime loans are now seriously delinquent--that is, more than 90 days past due or in foreclosure. The serious delinquency rate for prime mortgages, at between 3 percent and 4 percent, is much lower than for nonprime loans”
Whether the CRA - in isolation - is solely responsible for the current mess or not, it was clearly the nucleus of a much larger Democrat driven low income housing entitlement folly which, with lots of “help” from an hysterical media and spineless, incompetent (at BEST) knee jerk politicians, wrecked the entire global economy.

Click here to learn more.


Anonymous said...

This argument is a side show. It goes without saying that mal-investment occurred whether government-enabled, government-encouraged, and government-enforced or not and irrespective to what extent. Name your accepted figures, I'll double them if it makes you happy.

Re-focus on the problem source please and burry the partisan hatchet, it serves no purpose other than for you to get even on republican hits you've taken: A boom and bust cannot occur (it is literally impossible) without a non-limiting amount of credit flushing down from excess bank reserves to warehouse lines of credit to primary mortgage banks and then two secondary mortage markets.

The cause of this crisis is 100% Fed and 0% CRA.

SBVOR said...


Normally, I would not have published your comment because you substantiated precisely nothing.

I published your comment mostly to prove my point that most who share your view rarely, if ever, substantiate anything and actually frown upon those who do.

This particular bubble would have been constrained by responsible lending standards - irrespective of the “excess bank reserves” you described. It was CRA related social engineering housing entitlement folly - as I documented in this post - which lowered the lending standards and allowed those “excess bank reserves” to be put to work in a most destructive manner.


Anonymous said...

Here are CRA data for all states in 2007:

Total 2007 community development loan amount: $63 Billion
Total number of loans written: ~32,000

For example, California, the foreclosure capital of the US:

Total 2007 CRA loans: $8 Billion

Here is a delinquency map for reference.

Again, I repeat: CRA is insignificant.

SBVOR said...


1) 2007 is a convenient year - for the dishonest - to select for a snapshot. Why? Just examine this chart from this source.

By 2007 the bubble was already deflating.

2) According to the Clinton Treasury Department, from 1993 to 1998, CRA loans averaged $100 billion per year - for a total of $600 billion.

3) By 2000, the total figure was reported to have exceeded $1 trillion. It grew dramatically from there all the way through 2006 before the bubble began to collapse in 2007.

4) Again, the CRA is the nucleus of a far larger set of a Democrat driven low income housing entitlement follies.

Click here for more citations.

Read the entire post and all associated links.

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