The Thought Refuse

A Virtual Repository for the Mind

Was The CRA A Hungry, Hungry Hippo?

with 2 comments

Courtesy of the Freakonomic blog, a 1999 NY Times article was dug up detailing Fannie Mae’s ease in credit requirements for low and middle income individuals.  Our good friend Frank Raines has the best line in the entire article.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

It’s astounding to hear the manager of the largest home mortgage entity in the country to ever utter the words “a notch below what our underwriting has required.”  Can I call into question Frank Raines and Fannie Mae’s risk management model?  I might not be a quant, but don’t a lending institution expose itself to more risk when it removes lending standards?

Even the Department of Housing and Urban Development encouraged lax underwriting.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

Quiz question – who bought up and now holds nearly 6 trillion of the 12 trillion outstanding in home mortgages in this country?

Sarcasm aside, I’m once again reexamining the CRA issue.  One of the changes in the CRA in 2005 was to redefine what lending institutions fell under the three levels of CRA review.  Any bank with assets below $1.06 billion did not fall under the strict CRA requrement which was a hike from the previous definition.  It set up a three tier level of federal review.  The three tiered asset levels stood at those above $1.06B, those between $1.06B and $250M, and those below $250M.  Regulations became more relaxed as you worked down the asset ladder.

In testimony by Professor of Law at the University of Michigan, Michael Barr…

…subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.

Without other additional data, this cannot be said to be a complete view of the picture.  It is alarming to discover that nearly half of all subprime mortgages issued qualified as CRA compliant to some level of supervision.  This would be another example that, just like Fannie Mae, a reduction in regulations leads to exposed risk.  I’d like to know what percentage of the 30% of lending institutions that were removed from “comphrehensive federal supervision”, and into less stringent oversight.

Minus the numbers, shifting the qualifications upwards reduced the amount of banks which fell under CRA review.  Undoubtedly, implementing a law requiring that banks meet a criteria in lending to low income individuals and then not providing proper government oversight is irresponsible.  It would akin to a supervisor at work who gave out his instructions to his employees every day then went home for the remainder.

Given the small amount that CRA loans accounted for in the subprime lending market, it wasn’t a hungry, hungry hippo.  It did suffer from a poor diet of oversight though.


Written by huxbux

October 1, 2008 at 12:52 am

2 Responses

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  1. The following article lays out the reasons your post is off base. To see the entire article, go to

    Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

    The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”


    October 1, 2008 at 8:57 am

  2. Thanks for the comment Aaron.

    I’m not sure you actually read this post or my previous posts concerning the CRA.


    October 1, 2008 at 12:28 pm

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