American Enterprise Institute Has The Mortgage Mess Backward

Our guest blogger is Tim Westrich, a Research Associate at the Center for American Progress Action Fund.

In a front page article in today’s American Banker (subscription required), Peter Wallison, a Fellow at the conservative American Enterprise Institute and a promoter of deregulation, shows that he has a backward understanding of the financial mess.

The root cause of the financial mess is the hands-off approach towards mortgage and finance markets by the Bush administration, and its lack of action when a disaster was imminent. But desperate to point the finger elsewhere, conservatives are blaming the Community Reinvestment Act, a 1977 law that covers banks and thrifts and was intended to reverse the discriminatory lending process known as redlining.

CRA-covered institutions succeed at bringing conventional, prime loans to lower-income communities, while non-covered institutions are the ones that drove bad practices. However, Wallison would have us believe it’s the other way around:

“[CRA] caused standards for mortgages to deteriorate very substantially because it forced banks to find new ways to offer mortgages to people who couldn’t meet the normal standards,” said Peter Wallison, a fellow at the American Enterprise Institute and a member of the Shadow Financial Regulatory Committee. “Then those lower standards spread to the rest of the mortgage markets, so people who could have qualified for prime loans were able to get interest-only or negative amortization loans, and all of those things became more or less the standard for mortgage loans.”

Wallison is not alone among conservatives who are blaming the mess on the poor and advocates for the poor. However, studies show that CRA works at what it was intended to do. And moreover, federal regulators — including Federal Reserve Board Governor Randall S. Kroszner and Comptroller of the Currency John C. Dugan — have said there’s no link between CRA and the mortgage crisis


The real culprits in the mortgage mess are non-bank mortgage companies — not covered by CRA — that originated the lion’s share of bad mortgages at the heart of the crisis. They made an estimated 50 percent of subprime loans in 2005. Another 30 percent of loans were made by non-bank subsidiaries of banks or thrifts, which are allowed — at their option — to use their subsidiaries’ loans to count toward their CRA rating.