This video, called “Burning Down the House: What Caused Our Economic Crisis” (although, oddly, set to the tune of “Money for Nothing”) is apparently all the rage (at least in my wife’s office). It traces the subprime crisis to the Jimmy Carter era Community Reinvestment Act.
To the extent this view is correct (and I suspect, like anything else complex, there are multiple causes) the irony is that government regulation of the economy — not absence of it — was the problem.
It stands to reason, certainly, that banks have little interest in making loans for people who are poor credit risks or whose incomes are too low to afford a home. Indeed, the Wikipedia entry on the bill’s history begins, “The CRA was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community.” Furthermore, “until 1995 the Act was laxly enforced and banks only were required to advertise in local minority newspapers or sit on the boards of local community groups.”
So, what happened in 1995?
In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.
There’s a longish section entitled “Controversy” that gives both sides of the discussion as to how much CRA contributed to the current mess. But, certainly, the bubble was partly fueled by lending to people who simply would never have been able to get a mortgage without loosened rules.
It should be noted, too, that this was not an unalloyed bad. While the bubble has burst and some of these people are now unable to pay their mortgages, it’s far from clear that they’re worse off than they otherwise would have been. They were renters before and, for all intents and purposes, they were renters while in their homes. That’s especially true if they got in without a substantial down payment. In the interim, they not only got to live in a house but gain the benefits that come with it, including mortgage deductions and better schools. Furthermore, a goodly number of these people have managed to make their mortgage payments and become part of the middle class.
