Released: October 17, 2008

Good homeowners, bad loans

Source: Michael S. Barr and Gene Sperling (Free Registration)

FOR those who championed a hands-off approach to the supervision of finance, the economic meltdown should have prompted reflection on the value of common-sense regulation. Unfortunately, a growing chorus in conservative circles is trying to shift blame for the current crisis to the poor and the advocates for the poor. Here’s their story line: our current problems were caused not by people in high finance and government over the past eight years, but powerful antipoverty groups and the Clinton administration, which through their advocacy for the Community Reinvestment Act and homeownership goals for Fannie Mae and Freddie Mac bullied a Republican Congress and the titans of Wall Street into bringing global finance to its knees. There’s only one problem with this story: it isn’t true. It is not tenable to suggest that the Community Reinvestment Act, which was enacted more than 30 years ago, suddenly caused an explosion in bad subprime loans from 2002 to 2007. During the 1990s, enforcement under the reinvestment act was strong, prime lending to low-income communities increased and it was done safely. In 2000, a Federal Reserve report found that lending under the act was generally profitable and not overly risky.

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