The role of the CRA

by Russ Roberts on September 21, 2008

in Government Intervention

The Community Reinvestment Act was signed by Carter in 1977. Some suggest that proves it can’t have been a cause of the current mess. But the Act has changed dramatically over time. Read this account from the City Journal from 2000 (HT: Zev Fredman and Svetozar Pejovich):

The Clinton administration has turned the
Community Reinvestment Act, a once-obscure and lightly enforced banking
regulation law, into one of the most powerful mandates shaping American
cities—and, as Senate Banking Committee chairman Phil Gramm memorably
put it, a vast extortion scheme against the nation’s banks. Under its
provisions, U.S. banks have committed nearly $1 trillion for inner-city
and low-income mortgages and real estate development projects, most of
it funneled through a nationwide network of left-wing community groups,
intent, in some cases, on teaching their low-income clients that the
financial system is their enemy and, implicitly, that government,
rather than their own striving, is the key to their well-being.

The article details how the new provisions empowered community activists to pressure banks, enriching non-profit organizations and dramatically increasing the number of homes financed with little or no money down:

There
is no more important player in the CRA-inspired mortgage industry than
the Boston-based Neighborhood Assistance Corporation of America. Chief
executive Bruce Marks has set out to become the Wal-Mart of home
mortgages for lower-income households. Using churches and radio
advertising to reach borrowers, he has made NACA a brand name
nationwide, with offices in 21 states, and he plans to double that
number within a year. With "delegated underwriting authority" from the
banks, NACA itself—not the banks—determines whether a mortgage
applicant is qualified, and it closes sales right in its own offices.
It expects to close 5,000 mortgages next year, earning a $2,000
origination fee on each. Its annual budget exceeds $10 million.

Marks,
a Scarsdale native, NYU MBA, and former Federal Reserve employee,
unabashedly calls himself a "bank terrorist"—his public relations
spokesman laughingly refers to him as "the shark, the predator," and
the NACA newspaper is named the Avenger. They’re not kidding: bankers
so fear the tactically brilliant Marks for his ability to disrupt
annual meetings and even target bank executives’ homes that they often
call him to make deals before they announce any plans that will put
them in CRA’s crosshairs. A $3 billion loan commitment by Nationsbank,
for instance, well in advance of its announced merger with Bank of
America, "was a preventive strike," says one NACA spokesman.


 

Marks
is unhesitatingly candid about his intent to use NACA to promote an
activist, left-wing political agenda. NACA loan applicants must attend
a workshop that celebrates—to the accompaniment of gospel music—the
protests that have helped the group win its bank lending agreements. If
applicants do buy a home through NACA, they must pledge to assist the
organization in five "actions" annually—anything from making phone
calls to full-scale "mobilizations" against target banks, "mau-mauing"
them, as sixties’ radicals used to call it. "NACA believes in
aggressive grassroots advocacy," says its Homebuyer’s Workbook.

The
NACA policy agenda embraces the whole universe of financial
institutions. It advocates tough federal usury laws, restrictions on
the information that banks can provide to credit-rating services,
financial sanctions against banks with poor CRA ratings even if they’re
not about to merge or branch, and the extension of CRA requirements to
insurance companies and other financial institutions. But Marks’s
political agenda reaches far beyond finance. He wants, he says, to do
whatever he can to ensure that "working people have good jobs at good
wages." The home mortgage business is his tool for political
organizing: the Homebuyer’s Workbook contains a voter
registration application and states that "NACA’s mission of
neighborhood stabilization is based on participation in the political
process. To participate you must register to vote." Marks plans to
install a high-capacity phone system that can forward hundreds of calls
to congressional offices—"or Phil Gramm’s house"—to buttress NACA
campaigns. The combination of an army of "volunteers" and a voter
registration drive portends (though there is no evidence of this so
far) that someday CRA-related funds and Marks’s troop of CRA borrowers
might end up fueling a host of Democratic candidacies. During the
Reagan years, the Right used to talk of cutting off the flow of federal
funds to left-liberal groups, a goal called "defunding the Left";
through the CRA, the Clinton administration has found a highly
effective way of doing exactly the opposite, funneling millions to NACA
or to outfits like ACORN, which advocates a nationalized health-care
system, "people before profits at the utilities," and a tax code based
"solely on the ability to pay."

Whatever
his long-term political goals, Marks may well reshape urban and
suburban neighborhoods because of the terms on which NACA qualifies
prospective home buyers. While most CRA-supported borrowers would
doubtless find loans in today’s competitive mortgage industry, a small
percentage would not, and NACA welcomes such buyers with open arms.
"Our job," says Marks, "is to push the envelope." Accordingly, he
gladly lends to people with less than $3,000 in savings, or with
checkered credit histories or significant debt. Many of his borrowers
are single-parent heads of household. Such borrowers are, Marks
believes, fundamentally oppressed and at permanent disadvantage, and
therefore society must adjust its rules for them. Hence, NACA’s most
crucial policy decision: it requires no down payments whatsoever from
its borrowers. A down-payment requirement, based on concern as to
whether a borrower can make payments, is—when applied to low-income
minority buyers—"patronizing and almost racist," Marks says.

This
policy—"America’s best mortgage program for working people," NACA calls
it—is an experiment with extraordinarily high risks. There is no surer
way to destabilize a neighborhood than for its new generation of home
buyers to lack the means to pay their mortgages—which is likely to be
the case for a significant percentage of those granted a
no-down-payment mortgage based on their low-income classification
rather than their good credit history. Even if such buyers do not lose
their homes, they are a group more likely to defer maintenance on their
properties, creating the problems that lead to streets going bad and
neighborhoods going downhill. Stable or increasing property values grow
out of the efforts of many; one unpainted house, one sagging porch, one
abandoned property is a threat to the work of dozens, because such
signs of neglect discourage prospective buyers.

A
no-down-payment policy reflects a belief that poor families should
qualify for home ownership because they are poor, in contrast to the
reality that some poor families are prepared to make the sacrifices
necessary to own property, and some are not. Keeping their distance
from those unable to save money is a crucial means by which upwardly
mobile, self-sacrificing people establish and maintain the value of the
homes they buy. If we empower those with bad habits, or those who have
made bad decisions, to follow those with good habits to better
neighborhoods—thanks to CRA’s new emphasis on lending to low-income
borrowers no matter where they buy their homes—those neighborhoods will
not remain better for long.

Because
many of the activists’ big-money deals with the banks are so new, no
one knows for sure exactly which neighborhoods the community groups are
flooding with CRA-related mortgages and what effect they are having on
those neighborhoods. But some suggestive early returns are available
from Massachusetts, where CRA-related advocacy has flourished for more
than a decade. A study for a consortium of banks and community groups
found that during the 1990s home purchases financed by nonprofit
lenders have overwhelmingly not been in the inner-city areas where
redlining had been suspected. Instead, 41 percent of all the loans went
to the lower-middle-class neighborhoods of Hyde Park, Roslindale, and
Dorchester Center/Codman Square—Boston’s equivalent of New York’s
borough of Queens—and additional loans went to borrowers moving to the
suburbs. In other words, CRA lending appears to be helping borrowers
move out of inner-city neighborhoods into better-off areas. Similarly,
not-yet-published data from the state-funded Massachusetts Housing
Partnership show that many new Dorchester Center, Roslindale, and Hyde
Park home buyers came from much poorer parts of the city, such as the
Roxbury ghetto. Florence Higgins, a home-ownership counsellor for the
Massachusetts Affordable Housing Alliance, confirms the trend, noting
that many buyers she counsels lived in subsidized rental apartments
prior to buying their homes.

This
CRA-facilitated migration makes the mortgage terms of groups like NACA
particularly troubling. In a September 1999 story, the Wall Street Journal
reported, based on a review of court documents by Boston real estate
analyst John Anderson, that the Fleet Bank initiated foreclosure
proceedings against 4 percent of loans made for Fleet by NACA in 1994
and 1995—a rate four times the industry average. Overextended buyers
don’t always get much help from their nonprofit intermediaries, either:
Boston radio station WBUR reported in July that home buyers in danger
of losing their homes had trouble getting their phone calls returned by
the ACORN Housing group.

NACA
frankly admits that it is willing to run these risks. It emphasizes the
virtues of the counselling programs it offers (like all CRA groups) to
prepare its typical buyer—"a hotel worker with an income of $25K and
probably some past credit problems," says a NACA spokesman—and it
operates what it calls a "neighborhood stabilization fund" on which
buyers who fall behind on payments can draw. But Bruce Marks says that
he would consider a low foreclosure rate to be a problem. "If we had a
foreclosure rate of 1 percent, that would just prove we were skimming,"
he says. Accordingly, in mid-1999, 8.2 percent of the mortgages NACA
had arranged with the Fleet Bank were delinquent, compared with the
national average of 1.9 percent. "Considering our clientele," Marks
asserts, "nine out of ten would have to be considered a success."

The
no-down-payment policy has sparked so sharp a division within the CRA
industry that the National Community Reinvestment Coalition has
expelled Bruce Marks and NACA from its ranks over it. The precipitating
incident: when James Johnson, then CEO of Fannie Mae, made a speech to
NCRC members on the importance of down payments to keep mortgage-backed
securities easily salable, NACA troops, in keeping with the group’s
style of personalizing disputes, distributed pictures of Johnson,
captioned: "I make $6 million a year, and I can afford a down payment.
Why can’t you?" Says Josh Silver, research director of NCRC: "There is
no quicker way to undermine CRA than through bad loans." NCRC
represents hundreds of smallish community groups, many of which do
insist on down payments—and many of which make loans in the same
neighborhoods as NACA and understand the risk its philosophy poses.
Still, whenever NACA opens a new branch office, it will be difficult
for the nonprofits already operating in that area to avoid matching its
come-one, come-all terms.

 
 
 
 
 
 
 
 

                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  

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