"No, Lending To Poor People Did Not Cause The Financial Crisis"
Despite the multiple times the right wing’s arguments have been debunked, they are once again repeating the false narrative that the financial crisis was caused by government policy and lending to low-income borrowers. The latest to weigh in is former-Senator Phil Gramm. On the Wall Street Journal op-ed page, he trots out the idea that government regulators used the Community Reinvestment Act (CRA) to force banks to make loans to undeserving poor people and that Fannie Mae and Freddie Mac purchased doomed subprime mortgage backed securities to meet the affordable housing goals. This, he says, was the main cause of the crisis. But this idea has been thoroughly discredited.
The Community Reinvestment Act requires banks and savings associations to meet the credit needs of all segments of the community in their service areas, consistent with standards of safety and soundness. This legislation counteracted historically widespread “redlining” practices, where banks would deny credit to low-income or minority neighborhoods. The Fannie and Freddie affordable housing goals require them to ensure that a certain percentage of the loans they buy serve low-income homebuyers and neighborhoods. Together, the CRA and the affordable housing goals play a crucial role in meeting the credit needs of low-income communities, although much can be done to strengthen them.
The argument that CRA and the affordable housing goals caused the crisis have been debunked time and time (and time and time and time and time and time) again. The CRA has been in place since 1977, while subprime lending only skyrocketed in the 2000s. Even if one concentrates on the changes in enforcement of the act in 1995 (as Gramm does), the Act does nothing to explain the massive uptick in subprime lending concentrated from 2004 to 2006. What’s more, most subprime lenders weren’t banks and therefore weren’t even subject to CRA. That’s why only 6 percent of the high-cost mortgages at the time (a proxy for subprime) could even potentially qualify for CRA credit.
Similarly, for most of the housing boom, Fannie and Freddie were on the sidelines due to their fairly strict underwriting requirements. By the time Fannie and Freddie lowered their standards in 2006 to buy riskier products, they were too late to the game to cause the subprime frenzy. Moreover, while they also bought private subprime mortgage backed securities for their investment portfolio – an inarguably bad idea – those purchases did little to meet the housing goals. For the most part, Fannie and Freddie-guaranteed loans have performed, and are still performing, remarkably better than the toxic products pioneered by subprime lenders.
The real causes of the financial crisis were predatory mortgage products, out-of-control securitization and derivatives markets, and the failure of government regulators to crack down on the massive risk being taken by our nation’s financial institutions. As chairman of the Senate Banking Committee, Gramm himself championed two pillars of the deregulatory era: the Gramm-Leach-Bliley Act, which repealed the Depression-era wall between commercial banks (those that take deposits and give loans) and investment banks (those that facilitate riskier investment activities), and the Commodity Futures Modernization Act of 2000, which blocked regulation of so-called “over the counter” derivatives. Most notably, the Commodity Futures Modernization act allowed financial instruments such as credit default swaps to expand without oversight, spreading the risk contained in subprime MBS throughout the entire financial system.
The conservative campaign to repeat lies about the financial crisis over and over again does nothing to make their argument any truer (although it does allow those within the right-wing echo chamber to justify their extreme positions on the federal government’s role in our financial and housing markets). Rather than continuing to engage in a fruitless debate, we need to move on to a constructive conversation about the future of housing finance in America and how to create a housing system that serves families and strengthens communities.
David Sanchez is a Research Assistant with the Housing Finance and Policy Team at the Center for American Progress Action Fund.