Posted by: mbmusings | September 21, 2008

The Shakedown that Brought Down the House

A great article about the aggressive tactics used by the Left in their goal of increasing funding of high-risk mortgages in poor neighborhoods.  The cornerstone of this shakedown is the Community Reinvestment Act, originally passed by the Carter Administration, given teeth by the Clinton Administration. 

Amazingly, this article was published in the winter of 2000.  After the nationalization of Fannie Mae and Freddie Mac, the inevitable negative side effects of these feel-good Leftist policies have to be dealt with by the rest of us.  The Left will try to skate off, unblemished, because they had such good intentions.

The Left’s public relations arm, the mainstream media, is trying to paint the current financial crisis as the fault of greedy speculators and their wall street enablers.  The truth is there were an incredible number of loans made to people with terrible credit, loans that would never be made without the implicit support of the federal government, and the insurance policy of a taxpayer funded bailout.    

Read the whole article from the City Journal, as written by Howard Husock, here:

The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

(Found via Ilkka, at The Fourth Checkraise)

Some highlights from the article:

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

Always remember that banks do not lend their own money.  They loan the money on deposit in their banks.  Because of this huge risk, banks historically have been incredibly conservative when determining if a potential borrower was creditworthy.  With these new, and very risky, loans being demanded, the banks knew that the ultimate risk for these mortgages would be the taxpayers.  Without the deep pockets of Uncle Sam, the banking industry would never allow this incredible amount of money be devoted to such risky investments.

The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were “redlining” inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion.


Nor has the race discrimination argument for CRA held up. A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.

Leaving aside the racial angle that the FDIC studied, I bet that all races in inner-city environments have disproportionate levels of credit problems.  Nobody cares that poor whites can’t get loans.  The US Government only cares if you have a darker skin color.

…until recently, the CRA didn’t matter all that much. During the seventies and eighties, CRA enforcement was perfunctory. Regulators asked banks to demonstrate that they were trying to reach their entire “assessment area” by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department’s 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods?

The Clinton administration’s get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. “To avoid the possibility of a denied or delayed application,” advises the NCRC in its deadpan tone, “lending institutions have an incentive to make formal agreements with community organizations.” By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America [NACA] has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, “CRA is the backbone of everything we do.”

In addition to providing the nonprofits with mortgage money to disburse, CRA allows those organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved.

That last little nugget of information is why Barney Frank and other Democrats in Congress are working so hard to cover-up this activity and bailout the organizations that have been stuck with the fraudulent loans.  Their shakedown scheme is funding a huge network of Left-wing activists. 

the CRA funnels billions of investment dollars through groups that understand protest and political advocacy but not marketing or finance. This amateur delivery system for investment capital already shows signs that it may be going about its business unwisely.

Good thing the taxpayers will be there to pick up the pieces, even after funding this criminal endeavor. 

During the Reagan years, the Right used to talk of cutting off the flow of federal funds to left-liberal groups, a goal called “defunding the Left”; through the CRA, the Clinton administration has found a highly effective way of doing exactly the opposite, funneling millions to NACA or to outfits like ACORN, which advocates a nationalized health-care system, “people before profits at the utilities,” and a tax code based “solely on the ability to pay.”

Democrats in congress fund taxpayer money to groups that actively participate in ‘community organizing’ efforts to get more Democrats elected.  Highly illegal, in my opinion.

[Referring to Bruce Marks] Many of his borrowers are single-parent heads of household. Such borrowers are, Marks believes, fundamentally oppressed and at permanent disadvantage, and therefore society must adjust its rules for them. Hence, NACA’s most crucial policy decision: it requires no down payments whatsoever from its borrowers. A down-payment requirement, based on concern as to whether a borrower can make payments, is—when applied to low-income minority buyers—”patronizing and almost racist,” Marks says

Society may be able to adjust its rules for them, but apparently the financial markets haven’t been able too.  Hopefully society will be able to pick-up the pieces from this rule change.  When you get your next 401k statement, thank Bruce Marks for changing the rules.

Bruce Marks says that he would consider a low foreclosure rate to be a problem. “If we had a foreclosure rate of 1 percent, that would just prove we were skimming,” he says. Accordingly, in mid-1999, 8.2 percent of the mortgages NACA had arranged with the Fleet Bank were delinquent, compared with the national average of 1.9 percent. “Considering our clientele,” Marks asserts, “nine out of ten would have to be considered a success.”

Part of the current problem in the financial markets, if not the problem, is the fact that these bad loans are bundled with normal loans.  But after they are bundled, there is no way to separate the good assets from the bad assets without taking apart the entire bundle.  This problem has eliminated liquidity in the market since mortgage backed securities that were once bought and sold by large investment firms have ceased to be tradeable.  Add a couple of those big ‘turds’ to your balance sheet when you need to raise some capital and you have a huge problem that could sink the entire firm.

The no-down-payment policy has sparked so sharp a division within the CRA industry that the National Community Reinvestment Coalition has expelled Bruce Marks and NACA from its ranks over it. The precipitating incident: when James Johnson, then CEO of Fannie Mae, made a speech to NCRC members on the importance of down payments to keep mortgage-backed securities easily salable, NACA troops, in keeping with the group’s style of personalizing disputes, distributed pictures of Johnson, captioned: “I make $6 million a year, and I can afford a down payment. Why can’t you?” Says Josh Silver, research director of NCRC: “There is no quicker way to undermine CRA than through bad loans.” NCRC represents hundreds of smallish community groups, many of which do insist on down payments—and many of which make loans in the same neighborhoods as NACA and understand the risk its philosophy poses. Still, whenever NACA opens a new branch office, it will be difficult for the nonprofits already operating in that area to avoid matching its come-one, come-all terms.

In the race to the bottom, the outfit with the fewest scruples wins.  When NACA began offering no down payment loans available to poor families, the other community organizations had to follow suit to be competitive.  It’s interesting to note that in the year 2000, a no down payment loan was a controversial financial instrument.  By 2008 it was considered ordinary; somehow everyone forgot the huge risks.

“The bulk of these loans,” notes a Federal Reserve economist, “have been made during a period in which we have not experienced an economic downturn.” The Neighborhood Assistance Corporation of America’s own success stories make you wonder how much CRA-related carnage will result when the economy cools.

Too bad the economy cooled…

There is lots more interesting stuff in the original article.  I hate quoting so much of it here, but the points made are so relevant to the current crisis it needs to be brought up again as evidence.  This crisis was easily foreseen if we were allowed to look at this crooked racket.  Now we are all going to end up much poorer as a result of these feel-good policies and the fraudulent use of public money.  


  1. […] And my favorite, as it ties in so well with a previous post – The Shakedown that Brought Down the House: […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: