Conservatives have a new scapegoat to take the blame for the economic meltdown over the last few weeks. Syndicated columnist and supply-side advocate Lawrence Kudlow summed it up during a Sept. 18 morning news talk show.
"It's time for the Congress, Republicans and Democrats to stop encouraging, exhorting and forcing banks to make low-income loans with no documentation. Stop (the regulation) that literally pushed these lenders to make low-income loans," Kudlow announced on Joe Scarborough's MSNBC morning news analysis show, "Morning Joe."
The Community Reinvestment Act, passed in 1977, requires banks to lend in low-income neighborhoods where they take deposits. The act, along with the Fair Housing Act of 1968, was created to fight the long and discriminatory practice of red-lining, wherein lending agencies established zones, often based on the local population's race or ethnicity, that dictate whether or not the populace could qualify for loans. Frequent red-lining caused much of the inner-city decay following the National Housing Act of 1934, which had established the process of red-lining.
University of Michigan law professor Michael Barr testified before the House Committee on Financial Services that the vast majority of bad loans of the last few years were not the kind given under the Community Reinvestment Act, however. He said 50 percent of sub-prime loans were made by mortgage companies that are not subject to federal supervision and another 30 percent were made by bank affiliates that are also not subject to routine supervision or examinations.
Sonya Murphy-Berry, head organizer for the Mississippi chapter of the Association of Community Organizations for Reform Now, also called ACORN, said economists had no business trying to blame a 30-year-old law for the fairly recent mortgage meltdown.
"The government, who relaxed the procedures for qualifying for loans, is what caused this breakdown. The Community Reinvestment Act has been around since the 1970s and the economy has never toppled until now," Murphy-Berry said. Community Reinvestment Act loans "are responsible for loans that meet strict underwriting requirement."
"They're not usually sub-prime loans. They're prime loans with fixed rates. Obligators have found default rates on CRA loans to be pleasantly low," she said, and aimed fault at the largely unregulated derivatives market. "They were buying and selling packaged loans, with no attempt to value them on the basis of the likelihood of getting repaid. They were bought and sold on the face value of the shaky loans," she said.
Conservative New York Post columnist Stan Liebowitz blamed the mortgage meltdown on the government's demand for lending agencies to loosen underwriting standards to end lending discrimination. "From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standardsat the behest of community groups and 'progressive' political forces," Liebowitz wrote as the mortgage issue quickly grew into a crisis.
Liebowitz pointed out that minority mortgage applications were rejected more frequently than other applications, but not for racial reasons. "The overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances," he wrote.
But, according to Liebowitz, the government mandated that lenders update their method for determining eligibility for a home loan.
"Some of these 'outdated' criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, (they) ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt," he wrote.
Often, an overextended borrowers' only means of landing a loan for a home beyond their income was to adopt an adjustable rate mortgage--the kind that starts out with an abnormally low percentage rate but inevitably climbs out of reach after a handful of years. Lenders usually offered this deal with a warning that the borrower was expected to refinance the loan after a two to three-year period--when the borrower's credit improved after steady monthly mortgage payments. Many borrowers learned that lenders were unwilling to refinance their American Dream after the two-year period. The resultant mass surrender of newly unaffordable mortgages resulted in a sub-prime mortgage meltdown.
The nation's growing cache of bad loans arrived just in time to take advantage of emerging deregulation making the selling of those bad loans to other lending agencies. Former Texas senator and Senate Banking Committee Chairman Phil Gramm (currently a member of the Sen. John McCain's presidential campaign) attached an amendment to an appropriations bill in 2000 that triggered sweeping deregulation of investment banks, removing credit derivatives, credit defaults, and swaps from government scrutiny.
"I don't claim to be an economist but I know that sellers could unload junk loans for good money," Murphy-Berry said. "The sub-prime crisis is the result of greed and poor regulation. These lenders approved risky adjustable rate lending mortgages without considering whether the buyer could afford them, and then sold them off to the nearest suckers. That's not the fault of the homeowners," Murphy-Berry said.
Conservatives are not just aiming their attacks at CRA, with ACORN itself drawing fire. House Republican leader John Boehner says on his Web site that many Republicans like himself balked at the House's Sept. 29 Wall Street bailout proposal because of what they described as ACORN-friendly incentives that Democrats added to the package.
Boehner called the insertion a "left-wing giveaway" that Democrats were "pushing to force taxpayers to bankroll ... a discredited ally of the Democratic Party."
The failed bailout bill allowed the federal government to purchase bad loans from businesses like Bear Stearns, with the possibility of gaining limited profits from the loans. The government would transfer 20 percent of those profits to the Housing Trust Fund, Capital Magnet Fund, and the U.S. Treasury.
Quoting The Wall Street Journal, Boehner called the funds "slush funds" that pump tax dollars into the coffers of low-income housing advocacy groups like ACORN (which Obama represented in a 1995 case).
"The rescue package should not become a 'Christmas tree' for the Democratic majority's far-left wing political agenda that seeks to shower taxpayer dollars upon groups like ACORN," Boehner stated. "On behalf of beleaguered taxpayers across the nation, House Republicans will continue to fight to remove the ACORN pay-back and any other Democratic poison pills from the economic rescue package."
Steven Adamske, spokesman for Rep. Barney Frank, D-Mass, chairman of the Financial Services Committee, told Politico that none of the bailout's potential profits are earmarked for ACORN. "All funds would go to state and local governments," Adamske said, explaining that state and local governments could then dole out money as they choose.
Republicans are suspicious of the group, however. ACORN is pushing hard to register voters this year to influence the presidential election, and does not deny Democratic presidential nominee Barack Obama as a former member. Republicans also point out that the organization is being investigated in several states over voter fraud.
An ACORN press release said the organization's voter registration work has made it a target for attacks by partisan activists who "fear that new African American, Latino, and low-income voters may not support their candidates or policy positions and may seek to pass laws that would disenfranchise these voters."
ACORN's home office sent out a press release admitting that it had caught a number of ACORN employees faking registration cards (they get paid based upon the number of cards they produce) and subsequently fired them. The organization also states that it reported the suspects to authorities and encourages the prosecution of the suspects to the fullest extent of the law.
Murphy-Berry said she regretted that employees abused the organization for money.
Also see the JFP's Sept. 30, 2008, editorial, GOP: Watch the Racist Talking Points
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