The Soap Box

1977 Community Reinvestment Act, enacted by President Jimmy Carter . The purpose of the act was to “require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.” Banks and other financial institutions were mandated to provide “services” (loans) to people and businesses with low to moderate incomes. The act was very vague and difficult for anyone, including the government, to interpret and enforce. This led directly to the passage of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

1992 The Federal Housing Enterprises Financial Safety and Soundness Act. This act, purportedly passed to ensure the safety and financial stability of Fannie Mae and Freddie Mac, also provided that the goals for the percentage of loans given to those with low to moderate incomes would be established by HUD. HUD (dependent upon congress for its budget) was given the responsibly of overseeing Fannie Mae and Freddie Mac.

Early 1990’s – Congress relaxed the capital requirements for Fannie Mae and Freddie Mac , allowing more loans to be given to low income communities and individuals through the use of additional leverage.

1994 – Congress revised the Community Reinvestment act allowing  those with no money for down payments and or bad credit to be eligible for government backed loans. Fannie Mae’s purchases of sub prime loans skyrocketed from an estimated $18 billion(1995) to $175 billion (2004).

1999 Gramm-Leach-Bliley Act- signed by President Bill Clinton. Allowed commercial and investment banks to consolidate. President Clinton required an amendment to the Gramm-Leach-Bliley Act ensuring that the minority lending requirements as provided by the Community Reinvestment Act were enforced prior to any commercial and investment bank merger.

2003 President Bush attempts to pass legislation reforming the way Fannie Mae and Freddie Mac manage risk and capital. Rep Frank, ranking Democrat on the Financial Services Committee, said “Fannie Mae and Freddie Mac are not facing any kind of financial crisis.” No legislation was passed.

2004-2008 President Bush attempts to reign in Fannie Mae and Freddie Mac (17 times). No reforms received Congressional approval.

Translation

The Community Reinvestment Act put into play the idea that the Federal Government could force financial institutions to provide loans to people who would normally be denied due to money, credit, or income level. The Federal Government lowered the capital requirements of Fannie and Freddie, increasing leverage with a concurrent increase in risk, allowing more sub prime loans to be purchased. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 gave banks a “CRA” score (the more sub primes loans the better the score), which was then used by the Gramm-Leach-Bliley Act to determine if banks could merge. The mergers and consolidations allowed by the Gramm-Leach-Bliley act helped hide the problem of systemic risk related to sub prime loans. Problems in the housing industry were dismissed by Congressional leaders.

Why You Haven’t Heard This

It is evidently considered racist to credit even the slightest responsibility for the sub prime meltdown on the passage of the Community Reinvestment Act. I have never seen a breakdown, by race, of those supposedly helped by the Community Reinvestment Act, and I am not the slightest bit interested in seeing said breakdown. I do happen to know the rate of home ownership for African Americans in 1970 – 42%, and in 2008 – 47.2%. Our government in action.

Nutshell Version

The Federal Government meddled in private business. Wallstreet found a way to have its cake and eat it too. Everybody is busy blaming everybody else (Bush did it-the most popular target for both Democrats and Republicans).  You and I pay the bill. Politics as usual.

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