As with zombies, just when you think you've knocked off the last one, conservatives wishing to blame the housing crisis on a heady combination of poor people and the government rise up again and again. Thus, Howard Husock makes an argument in today's New York Times that was discredited back in October .
Similarly, under the past two administrations the Department of Housing and Urban Development pushed the secondary mortgage market to buy loans based on criteria other than the creditworthiness of borrowers. These affordable-housing goals became more demanding over time. By 2005, HUD required that 45 percent of all the loans bought by Fannie Mae and Freddie Mac be loans to borrowers with low and moderate incomes. HUD required further that Fannie and Freddie buy 32 percent of the loans in their portfolios from people in central cities and other underserved areas and that 22 percent of the loans they buy be to “very low income families or families living in low-income neighborhoods.”
One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and ratings agencies. There can be no doubt, however, that both contributed. With that in mind, the best way to make sure that we don't repeat our mistakes is to examine -- and change -- both.
Obviously, if the government was demanding that these departments make bad loans, this would be bad. But that's not what CRA or any other regulations required. They merely targeted groups who had a history of being discriminated against in the loan market. As Robert Gordon points out in this piece, CRA only fully covered about a quarter of all mortgage lenders, and covered maybe half partially. It also has existed since 1977, which leads to the conclusion that maybe another factor led to the housing crisis -- something like the ratings agencies, exploding derivatives markets, loosened SEC regulations, or an excess of investment capital -- thanks to growing income inequality -- with nowhere to go but into real estate.
Meanwhile, a majority of people holding sub-prime loans were non-hispanic whites, suggesting that CRA is not at fault for failing loans. Against the other point of Husock's argument -- that CRA forced lenders to make bad loans -- a study found that, controlling for other factors, blacks and hispanics who qualified for standard loans were more likely to be steered towards sub-prime. This wasn't as a result of the government mandating bad loan practices, this was because lenders engaged in bad loan practices.
More anecdotal reporting puts this in perspective. Listen to this excellent "This American Life" report on the crisis and how mortgage mills aggressively marketed and sold mortgage after mortgage to people who didn't need them. Husock's argument is typical of conservatives who can't decide if regulations are too restrictive or if they encourage risk-taking, but know they're always wrong. But when the balance sheets are tallied, the responsibility for business decisions lies with the management.
--Tim Fernholz
