NCPA - National Center for Policy Analysis


December 12, 2008

If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account, says Howard Husock, vice president for policy research at the Manhattan Institute and author of "America's Trillion-Dollar Housing Mistake: The Failure of American Housing Policy."  We have seen the dangers of too much money chasing risky borrowers; we need not only to fix the system of mortgage securitization but also to repeal unwise lending mandates.

The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods.  But in 1995 the Clinton administration added tough new regulations.  The federal government required banks that wanted "outstanding" ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households.

Similarly, under the past two administrations, the Department of Housing and Urban Development (HUD) 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, says Husock:

  • 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 by 32 percent of the loans in their portfolios from people in central cities and other underserved areas.
  • Also, 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.  But there can be no doubt 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, says Husock.

Source: Howard Husock, "Housing Goals We Can't Afford," New York Times, December 11, 2008.

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