Tom Hamilton, an associate professor of economics from St. Thomas University in St. Paul, Minn., said there is a link between the Community Reinvestment Act and current economic troubles. Responding to my question at a symposium on Friday, Hamilton said the original 1977 law was well-intentioned, but changes made to in the early 1990s created incentives for banks to make loans to borrowers who otherwise would have been considered unqualified. Underwriting standards at Fannie Mae and Freddie Mac were rewritten to further accelerate mortgage lending to non-traditional borrowers.
This argument has come up as pundits look back and try to figure out how we got into the current economic mess. U.S. Rep. Barney Frank, (D-Mass.), who heads the House Banking Committee, says it is racist to connect the current problems with CRA.
An important player in the drama is Bill Dedman, who in 1988 authored a series of articles for the Atlanta Journal-Constitution that charged banks were not making loans to certain minority groups. He analyzed data from the Federal Home Loan Banks and found that far more loans went to white neighborhoods than to neighborhoods populated by Asians, Blacks and other minorities. The articles drew an enormous amount of attention, in addition to a Pulitzer Prize. Newspapers in Detroit, Minneapolis and elsewhere replicated Dedman’s methodology and drew similar conclusions about the lending institutions in their own regions. Pressure from the media influenced banking committee heads Rep. Henry Gonzalez (D-Texas) and Sen. Don Riegle (D-Mich), and others, laying the groundwork for changes to CRA.
As a fellow journalist, I admire Dedman’s work in the 1980s, but I think his conclusions were greatly exaggerated and often misinterpreted to accommodate self-interested political agendas. Activists and politicians who wanted change for a lot of other reasons, latched onto Dedman’s work to support their causes.
It think it is fair to say, however, that the genesis of the current economic mess represents the congruence of several factors, including an active press corp., congressmen who wanted to open up lending, and technology that facilitated the creation of complicated new investment products. One point that cannot be overlooked when considering the CRA/economic mess connection is that most of the subprime mortgages made in the last decade came through mortgage companies, which are not subject to CRA. Regardless, banks got a loud-and-clear message in the 1990s that they were expected to make more loans. Made through both their mortgage subsidiaries and directly from their commercial banks, the additional loans were made and it has caused a big problem.