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More on the CRA

August 6, 2013 - Harry Eagar
A long-running disagreement, both here at RtO and over at the Post-Judd Alliance where I comment a lot, has been over the role, if any, of the Community Reinvestment Act in the financial collapse of late 2008.

The argument goes that the government forced banks to reduce their requirements for mortgage borrowers, thus flooding the secondary market with bad paper that prudent bankers would never have written except under coercion.

RtO has given numerous examples why this cannot make sense, ranging from mortgage collapses in places where US law does not run, like Spain; to the fact (and it is a fact) that although the CRA is a national law, the distribution of bad paper was nowhere near uniform -- lots of lousy mortgages in Phoenix, very few in South Dakota.

As far as RtO is concerned, the disagreement is settled. But from time to time, a factoid comes along reinforcing the notion that whatever was going on, the CRA wasn't forcing it. Today's example, reported by Bloomberg News, concerns a lawsuit vs. Bank of America alleging (again) misrepresentation to secondary buyers, in this case, of $850 million in debt.

Bad stuff, if true, but down in the story is this graf:

"The company failed to disclose that more than 22 percent of the mortgages in the pool were made to borrowers who were self-employed and that its own standards weren’t followed to verify their income and assets, the department said in its complaint. "More than 40 percent of the 1,191 mortgages in the pool didn’t 'substantially comply' with the bank’s underwriting standards, the Justice Department claimed. Employees who worked on the origination of the mortgages admitted that the bank 'emphasized quantity over quality' and that they were instructed by supervisors that it wasn’t their job to discover mortgage fraud, according to the Justice Department’s complaint."

Since Bloomberg didn't do the math, RtO will do it for you: Those mortgages averaged about $775,000. Even at California prices, hardly entry-level housing for immigrants from Guatemala.

UPDATE: Saturday

Bloomberg has a followup story, which repeats a statement from the first one, one I should have pinpointed in the original post, since it nails down the fact that the bankers did not regard these loans as CRA garbage:

"Federal Home Loan Bank of San Francisco bought about $600 million of the pool while Wachovia Bank purchased about $235 million, according to the complaint."

Little as I regard the smarts of bankers, I think even the dumb ones would know enough to stay away from loans they regarded as legal setups imposed by the Democrats. That they were trading these as good paper just proves that the rightwing narrative about the CRA is hooey.


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