Mythbusting the right's subprime excuses

It's one of the most brazen and absurd pieces of right-wing propaganda out there: the claim that liberals caused the subprime housing crisis by pressuring Congress to force banks to loan to uncreditworthy borrowers. At the American Progress [1] web site, Robert Gordon explains where the "idea" came from:

The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

Last week, a more careful expression of the idea hit The Washington Post, in an article on former Sen. Phil Gramm's influence over John McCain. While two progressive economists were quoted criticizing Gramm's insistent opposition to government regulation, the Brookings Institution's Robert Litan offered an opposing perspective. Litan suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that."

Then, step by step, he shows was this notion—pushed, shamefully, by a fellow at the "liberal" Brookings Institution—is literally nonsense. First:

CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)... As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

And, of course, as we dramatized here [2], mortgage brokers were the conduits for most of the worst of the fraud, as well.

Second: Gordon establishes that lenders approved bad loans to make money hand over fist, not to comply with the CRA. The dates simply don't line up any other way:

CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Third, it turns out—facts are stubborn things—that CRA-covered institutions tended to practice less risky lending, not more risky lending:

Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Gordon, in this exemplary exercise in progressive intellectual citizenship, concludes by quoting the one Federal Reserve governor, Ned Gramlich, who warned about the risks of the submprime boom while Alan Greenspan was cheering it on:

"banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

That's progressivism for you: enlightened policy-making that makes ordinary people's lives better, does not harm private business in the event—and ends up getting blamed anyway for making ordinary people's lives worse and harming private business.

Meanwhile, there's conservatism—the "Big Con," as we've been known here to call it. Why did conservative policy-makers engineer the deregulation that made the subprime crisis possible? Because they thought they could squeeze a few more Republican voters out of the deal. How do we know? They told us. All quotes from the March 2005 issue of the America Enterprise Insitute's magazine's Bush re-inauguration special issue on the glories of the "Ownership Society" [3]:

Here's Grover Norquist:

Bush's vision also calls for efforts to increase home ownership. Here's a hint of what that could mean: in House Speaker Dennis Haster's Congressional district in Illinois, 75-80 percent of voters own their own homes. In Democratic minority leader Nancy Pelosi's district in San Francisco, the number is 35 percent.... A transition of great political importance is under way. Fifty years from now the move to an Ownership Society will be recognized as a change to America's political landscape as dramatic as the move from farms to factories."

Here's James Glassman:

Bush wants more ownership because he wants to change the shape of America. He understands that people who own stocks and real estate--who possess wealth of their own--have a deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy. (They also have a greater propensity to vote Republican.)...

Actually, it was the Community Reinvestment Act that gave poorer Americans "deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy." But it didn't deliver more Republican votes. So the conservatives have to scapegoat it for a crisis they own lock, stock, and barrel.