The Minority Mortgage Meltdown (cont.): Charting The CRA Crackup

[See also
The Minority Mortgage Meltdown (contd.): How The Community
Reinvestment Act Fits In


You`ve heard
over and over
about how the 1977 Community Reinvestment
Act (CRA) could not
bear any blame for the

mortgage meltdown
that began in 2007 because the time
lag was too vast. As the
New York Times

on October 15, 2008:
“First, how could a 30-plus-year-old law be responsible for
a crisis that has occurred only in recent years?”

That seems like a good question. Three
decades is a long time.

Last Thursday, though, I found an

of cumulative Community Reinvestment Act promises
by banks from 1977 through 2005. According to the September
2005 report
CRA Commitments
by the
National Community
Reinvestment Coalition
(NCRC), which bills itself as "the nation`s
economic justice
trade association of 600 community

As the chart below shows, $4.2 trillion in CRA dollars was committed
from 1992 through 2005. In contrast, $8.8 billion was
negotiated from 1977 through 1991.

When measured in

, the Community Reinvestment Act was negligible
until the 1990s. And it was still small potatoes until the
Clinton “reforms”
of 1995 and the rise of

well-organized pressure groups
of the kind affiliated
with the NCRC.

But the biggest flood of CRA assurances
came during the

George W. Bush,
who repeatedly called in 2002-2004 for

minority homeowners
by 2010. Cumulative bank pledges
(typically doled out over ten years) grew from $1.85
trillion in 2002 to $4.20 trillion in 2004.

Indeed, total CRA commitments increased
by $1.63 trillion in 2004 alone, the first year of the
Housing Bubble.

For the benefit of overseas readers for
whom the words “billion” and “trillion”
mean different things than they do for American readers, let
me spell that last bit out as if I was writing it on a
check. In 2004 alone, banks publicly promised to lend over
the next decade to CRA-qualified

minority and lower income neighborhoods
the sum of

That`s a big number.

And those kind of numbers put a lot of
upward pressure on home prices as they got incorporated into
expectations. Not surprisingly, the subsequent mortgage
defaults that plunged the world into economic crisis are

concentrated in CRA-covered minority
and lower income communities.

Using the

NCRC`s data
, I created this more readable graph to show
CRA agreements by year from 1977-2004:

The CRA gives community organizers
leverage over banks primarily when they request federal
regulatory approval to merge. As the NCRC explains:

1998 was a year of mega-mergers that included the
Bank of America
and Nations Bank merger as well as
Citigroup`s acquisition of Travelers; CRA pledges totaled
$812 billion dollars as a result. … CRA pledges shot up
again in 2003 and particularly in 2004. The year 2004
experienced watershed mega-mergers as Bank of America acquired Fleet, JP Morgan
Chase acquired Bank One, and Citizens gobbled up Charter

Landmark CRA commitments during these
years included:

  • The $430 billion pledged in 1997 by Travelers
    (now part of zombie bank Citigroup—indeed, total pledges
    by various fragments of Citigroup add up to just under
    one trillion dollars).

  • The $375 billion anted up
    when buying Dime Bank in 2001 by

    Washington Mutual
    (which, after a bank run last
    fall, was bought up cheap by the now ailing JPMorgan

  • And the

    billion promised by

    JPMorgan Chase
    upon its acquisition of Bank One in

Some of the $4.2 trillion in the NCRC`s
tabulation is no doubt double-counted. For example, WaMu
shows up three times in the list of CRA commitments:  

  • In
    1997, when it outbid Home Savings in a CRA pledgeathon
    to acquire Great Western by offering

    $75 billion
    in inner city lending over ten years
    (versus Home Savings cheapskate $70 billion CRA offer).
  • In
    1998 when it pledged

    $120 billion
    when buying Home.
  • And
    in 2001 when it proclaimed

    $375 billion
    when buying Dime.

So WaMu accounts for $570 billion in the
NCRC`s list of pledges, but if you prorate the various
amounts, it`s really more as if WaMu promised, say, $418.5
billion over 14 years.

Nevertheless, despite the NCRC`s
double-counting, much is left out of its $4.2 trillion
figure too. For example, CRA commitments have continued
since NCRC`s 2005 report. In 2008, Bank of America, another
walking undead Red Ink Giant, pledged

$1.5 trillion
in CRA lending to get federal approval for
its purchase of Countrywide Financial.

Nor is Countrywide`s 2003 pledge of

$600 billion
counted by NCRC.

In case you are wondering, the $4.2
trillion number does not include the trillions targeted by

Fannie Mae and Freddie Mac
to buy up
minority and lower income mortgages
on the secondary

Please keep in mind, as I explained
weeks ago
in, that the CRA didn`t hold a gun
to the head of

Kerry Killinger of WaMu
or Ken Lewis of Bank of America
and force them to lend hundreds of billions to likely

No, the CRA has contributed to the
mortgage disaster through a more subtle “selection effect”.

Assume there are two distinct kinds of

  • Optimists who think lending more money to CRA-approved
    folks will turn out to be profitable.
  • Pessimists who don`t.

Of course, there are always a lot of
people in the middle without strong opinions who will go
with the flow toward whichever camp seems to be gaining in
money, power, and popularity.

you were a Pessimist who didn`t believe that the
government`s favored borrowers were likely to pay their
mortgages, the CRA couldn`t
make you lend to
them. But if you didn`t play ball with the CRA, you couldn`t
buy other banks, which is the easiest way for a bank to get

And the CEOs of big banks get

paid more

" `There continues to be a high correlation between
CEO compensation and bank asset size, and no correlation
with three-year [earnings-per-share] growth and shareholder
returns,` Citigroup banking analyst Ruchi Madan wrote in a
May 6, 2005 report on bank

executive pay
reforms working? Experts say link between pay, performance
is lacking
, By Len Boselovic,
May 15, 2005]

See how it works?

Not surprisingly, over the years the
CRA`s chokehold on mergers changed the culture of banking.
The most powerful and highest paid executives publicly
saluted the CRA, while the CEOs who thought it was
politically correct nonsense were relegated to the sidelines
in the great game of mergers and acquisitions.

optimists who agreed with Presidents Clinton, Bush, and
Obama that

“underserved” minorities
would somehow come up with the scratch to pay
off their mortgages were allowed to build empires, while the
pessimists were not. Those in the middle camp went with the
flow and started believing the CRA propaganda.


Whom do we want to win: the Optimists or the Pessimists?

A. Neither! We want a financial system in
which the realists succeed and wind up in positions of power. Whether the
realists will turn out to be this moment`s Optimists or the
Pessimists is not something we should decide ahead of time.

But, that`s exactly what the Community
Reinvestment Act does. It puts the

government`s thumb
heavily on the scale

on the side of the Optimists
, with, as we`ve seen,
catastrophic results.

It`s time to repeal the CRA.

And it`s long past time to recognize the
of human differences

In 2006, commenting on Iraq, I

“Not for the first
time, our public class`s

refusal to think rationally
about race and ethnic
differences had resulted in

—in this case, catastrophic—public policy.”

But even I didn`t realize our

public class`s dogma
was about to bring down the entire
world economy.

The bottom line: in the words of science
fiction writer Philip
K. Dick:

"Reality is that which, when you stop believing in it,
doesn`t go away."

[Steve Sailer (email
him) is

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