This guest column appeared in the Herald Sun (Durham, NC).
During times of economic chaos, there is often a tendency to rewrite history. Today, while nearly everyone agrees that reckless subprime loans started this financial crisis, the questions of how and why these loans were made have triggered a frenzy of finger-pointing.
Unfortunately, too many fingers are pointing in the wrong direction.
Most troubling are accusations blaming the subprime crisis on programs that encouraged responsible homeownership and wealth-building. Some are making the outrageous claim that the government forced lenders to make reckless loans to low- and moderate-income people.
This simply isn't true.
The cause of this crisis is clear. Subprime lenders made irresponsible loans that they knew most families could never pay back and would need to refinance, generating more fee income for brokers and mortgage companies. Now-bankrupt mortgage lenders and Wall Street investment banks put large fees ahead of prudence, and instead of demanding sound lending practices, chose to look the other way. If the refinance loans promised to borrowers were not available in the future -- well, that wasn't the mortgage lender's problem.
Wall Street was the engine; lax supervision from government regulators -- particularly the Alan Greenspan-led Federal Reserve -- greased the wheels. Most subprime lenders were subject to far less regulation and oversight than traditional banks and credit unions.
Over the past 25 years, my organization, Self-Help, has provided more than $5 billion in home loan financing to low- and moderate-income families. Although we lend to borrowers with credit blemishes who often cannot access conventional bank loans, our loss rates remain comparable to conventional lenders.
I say this not to call attention to Self-Help, but to illustrate that lending to low-wealth families can and should be sound business. Our homeowners succeed because we assess loans carefully before approving them, and because our basic goal is the same as the borrowers' -- we both want the outcome to be sustainable ownership.
Those who want to divert attention away from loose lending rules are now making the outrageous claim that today's crisis is somehow connected to the Community Reinvestment Act (CRA). I have seen a lot of spin in recent years, but this is an outright and knowing lie.
Enacted in 1977, CRA simply requires banks to make loans in the communities where the bank takes deposits, and specifically requires that the loans be made with safety and soundness in mind. CRA was a response to the practice of redlining, or refusing to lend in low-to-moderate income communities or communities of color. A 30-year-old law just now causes a mortgage crisis? Give me a break.
CRA has been a positive force in helping ensure access to fair and affordable home loans in low wealth communities. CRA should be extended to other businesses receiving taxpayer assistance, not curtailed. This law was definitely not a cause of today's crisis. CRA requirements didn't even apply to the lenders who made at least 80 percent of the subprime loans in this country. Many of these lenders specifically directed lending to institutions not covered under CRA to avoid CRA coverage.
To a lesser extent, Fannie Mae and Freddie Mac also are targets of overinflated blame. These government-sponsored enterprises (GSEs) are guilty of chasing market share in purchasing loans that were not adequately verified or documented. Fannie and Freddie, however, were not the leaders. In fact, from early 2003 through early 2006, the GSEs' share of new mortgages dropped from 70 percent of the market to less than 40 percent. The most toxic mortgage stew in history occurred during the very years that Fannie Mae and Freddie Mac were losing market share to the reckless and less-regulated mortgage lenders and investors.
The false claims against CRA and the GSEs are not merely absurd, they are dangerous. These claims appear to be part of a concerted effort to deflect attention from the real cause of this meltdown: a systemic lack of government regulation that enabled subprime and other lenders to make abusive loans that had virtually no chance of success long-term.
Aggressive mortgage companies misrepresented the true nature of these loans while government financial and banking regulators failed to implement "rules of the game" that were needed. Together, these two factors created a ticking time bomb that has since exploded. These problems must be addressed. We are now experiencing the worst rate of foreclosures since the Great Depression. It will likely get worse before it gets better. If we are to achieve a full economic recovery, the number one priority should be stopping the epidemic of home losses. Blaming CRA or the GSEs distracts attention away from finding real solutions that will help families in trouble and prevent this kind of abusive lending from happening again.
For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.