Carter-Era Housing Policies Helped Spark Sub-Prime Crisis, Expert Says

By Josiah Ryan | October 24, 2008 | 6:42pm EDT

Former President Jimmy Carter (AP Photo)

( - The Community Reinvestment Act (CRA) – a Carter-era policy that requires federal financial supervisory agencies to encourage banks to grant loans to people with low income and little credit – played a major role in sparking the sub-prime mortgage crisis the nation now faces, according to economist Russell Roberts, who spoke at a forum on the issue Thursday at the Hudson Institute.
“I see the [current financial] mess as an example of the government’s attempt to engineer housing outcomes,” said Roberts, an economics professor at George Mason University. “People spend other people’s money much less carefully than they spend their own.”
“When politicians ran up against budget constraints of deficits, taxation, or borrowing, they regulated,” said Roberts. “By doing so they were able to spend other people’s money, without giving up the projects they already had going.”
Barry Zigas, who also spoke at the forum, “The Community Reinvestment Act and the Sub-Prime Mortgage Crisis: Is There a Connection?” disagreed with Roberts.
The number of CRA loans was few, said Zigas, and most did not perform too badly. They also had a positive impact in the communities in which they were granted,” he said.
“These loans that were made did not perform spectacularly badly,” said Zigas. “They performed weaker than prime loans, but they did not perform anything like sub-prime loans.”
Zigas added that the number of CRA loans were not enough to cause a crisis on their own.
“When I worked at Fannie Mae, we averaged $700-billion a year in financing,” said Zigas. “In that scheme of things, $3 billion [in CRA] loans is a relatively small amount. To suggest that banks just gave up the keys to the kingdom is just incorrect.”
But by allowing individuals to take loans for which they were not qualified, the CRA was forcing banks to fail, which was at the root of the crisis, said Roberts.

Sen. Richard Shelby (R-Ala.), ranking Republican on the Senate Banking Committee

“We created an unsustainable system where banks are expected to be charitable,” said Roberts, noting the fact that the federal government encouraged banks and lending agencies to make loans that they otherwise likely would not have made.
“Banks are designed to be businesses and make money, and charities are designed to be charities,” he said.
 “If we want to reach social goals, I would argue we should do it through charity instead of explicit government subsidy,” said Roberts.
On Oct. 1, Sen. Richard Shelby (R-Ala.), ranking Republican on the Senate Banking Committee, spoke on the Senate floor in opposition to the $700 billion financial bailout. In his remarks, he addressed the Community Reinvestment Act.
“In 1995, I opposed the expansion of the Community Reinvestment Act,” said Shelby. “I did not take this position because I am against lending to minorities or low-income individuals. My concerns were based on the simple fact that credit can not be safely extended on any basis other than risk, and risk can not be mitigated through social engineering.
“The appropriate allocation of credit is not political, it is based on merit. Those with good credit receive the best terms and lowest rates. Those with bad credit receive the worst terms and the highest rates, or in some cases, no credit at all,” he said.
“The CRA was an attempt to get around this fact and it failed. I remind my colleagues of this as we prepare to buy assets backed by the very same mortgages born of this flawed policy,” Shelby added.
“Mr. President, I find it ironic that many of those who supported the legislation that upended the basic concept of risk-based lending are now saying that our present circumstances are an indication that the free market failed,” he said. “Federal policy, not free market decisions, fueled risky loans to unqualified borrowers.”

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