Community Reinvestment Act Debacle

How good does this sound on paper: "Everyone has the right to own a home."

The above idea of every American having the "right" to own a home was the driving force behind President Jimmy Carter's Community Reinvestment Act. The same idea was the driving force behind President Bill Clinton's beefing up of Carter's Community Reinvestment Act.

In recent testimony for a U.S. House of Representative Financial Services Committee hearing, Edward Pinto, affordable housing expert and former Chief Credit Officer for Fannie Mae, details the danger of pie-in-the-sky ideology. Some excerpts below:

I’d like to remind you of Ms. Cincotta’s (known as the "Mother of the Community Reinvestment Act) repeated warnings to this and other congressional committees. She spent 30 years:

“[f]ighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families’ dreams of home ownership….” Statement by Gale Cincotta before the Subcommittee on Housing and Community Opportunity, April 1, 1998

She repeatedly warned Congress that poor lending practices led the FHA program to have:

“a national default rate 3 to four times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times.”

FHA’s annual percentage of new foreclosure starts has steadily increased over the last 60 years, from 0.06% in 1951 to 2.36% in 1998 to an estimated 4.4% in 2009.

I give you this background because if Gale were here today, she would tell you that the federal bureaucrats have done it again, but this time on a much more massive scale. Because of CRA and Fannie and Freddie’s (the GSEs”) affordable housing goals, “American Nightmare of Foreclosure” has spread to virtually every congressional district of these United States.

There exists a proxy for national CRA performance since approximately 50% of CRA originations since the mid-1990s were acquired by Fannie Mae and Freddie (the GSEs) to help them meet HUD-mandated affordable housing (AH) goals. CRA created the supply and the GSEs created the demand2. We do know both the quantity and performance of the GSEs’ loans that were AH goals rich. There were two types of AH loans that have special bearing on CRA lending – loans with LTVs above 90% (effectively 95% -100%) and loans to borrowers with impaired credit (generally represented by borrowers with FICOs below 660).

Over the period 1997-2007 the GSEs acquired a total of $2.2 trillion in credit impaired loans and private securities backed by credit impaired loans. Again the GSEs were leader in this regard;

Largely as a result of high LTV and credit impaired loans, over the period 1993 to 2008 the GSEs acquired over $2.8 trillion in incremental AH loans over the percentage level achieved in 1992;

As a result of the combined CRA and AH volume explosion that started in 1993, the nation’s homeownership rate, after being level for over 30 years, began to grow rapidly from 1994 when it was at 64.2%, to 68% by 2001, and peaking at 69.2% in 2004;

The GSEs’ delinquency rate on their $1.5 trillion in high risk loans, 85% of which are goals rich AH loans, is 15.5%. at 6.30.09 This is about 6.5 times the 2.4% delinquency rate on the GSEs’ traditionally underwritten loans.

Platitudes are not sufficient. I have presented a prima facia case that CRA is toxic lending which leads to unsustainable loans which leads to an unacceptable level of foreclosures.